PJT Partners Inc. — Q2 2018 Form 10-Q
Business and period: Unaudited results for the quarter and six months ended June 30, 2018, compared with the same 2017 periods. PJT Partners is a global advisory-focused investment bank offering strategic advisory, restructuring and special situations, and private fund advisory and placement services. The company reports as one operating segment.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $130.7m | $109.3m | $264.7m | $230.3m |
| Income before taxes | $10.1m | $(2.1)m | $12.8m | $0.0m* |
| Net income | $11.0m | $(0.6)m | $17.7m | $2.4m |
| Net income attributable to PJT Partners Inc. | $6.9m | $0.2m | $12.2m | $1.5m |
| Diluted EPS | $0.30 | $0.01 | $0.55 | $0.08 |
| Cash from operations | Not stated for quarter | Not stated for quarter | $20.2m | $(4.5)m |
*Six-month 2017 pretax income was $5 thousand. Q2 pretax margin was approximately 7.8%, versus a loss; six-month pretax margin was approximately 4.8%. Taxes were a benefit of $0.9m in Q2 and $5.0m for the first half of 2018, so reported net income benefited from tax items. Dividends declared were $0.05 per Class A share in Q2 and $0.10 per share for the first half.
- Revenue mix: Q2 advisory fees were $98.3m, up 34%; placement fees were $28.1m, down 16%. For the first half, advisory fees were $201.8m, up 17%, and placement fees were $54.3m, up 2%.
- Expenses: Total expenses rose 8% in Q2 to $120.5m and 9% in the first half to $252.0m. Compensation and benefits were $94.3m in Q2 and $197.9m for six months; travel expense increased notably, partly due to revenue-standard presentation changes and higher activity.
- Cash and liquidity: June 30 cash and cash equivalents were $95.5m and investments were $25.4m, combined $120.9m versus $182.7m at year-end 2017. Accounts receivable was $211.8m, including $76.2m of long-term placement-fee receivables. First-half operating cash flow was $20.2m; capital expenditures were $6.0m.
- Debt: No borrowings under the $60m revolving credit facility at June 30; the company reported covenant compliance. Capital lease obligations were $0.25m. The facility matures October 1, 2019.
Changes versus prior period
- Q2 revenue growth was led by advisory activity across strategic advisory, restructuring and special situations, and secondary advisory. Placement fees declined, principally due to fewer private-equity fund closings.
- First-half revenue increased 15%; management attributed advisory growth to strategic and secondary advisory and placement-fee growth mainly to real estate, partly offset by lower hedge-fund activity.
- First-half operating cash flow improved from a $4.5m use to $20.2m provided. Cash nevertheless declined $50.1m from year-end, with financing uses including $25.7m of share repurchases, $30.9m of cash-settled partnership-unit exchanges, and $2.1m of dividends.
- Revenue-standard adoption beginning January 1, 2018 changed reimbursable-expense presentation from net to gross and affected timing of certain fee recognition. Management reported Q2 net income was $1.1m higher than it would have been without adoption; first-half net income was $0.3m lower. Prior-year figures were not restated.
Outlook, risks and unusual items
- Business outlook: Management described the M&A environment as constructive, noting worldwide announced M&A volume was up 61% in the first half year over year. Restructuring activity remained consistent with 2017 despite low default rates and strong capital markets. Management cited continued global demand for alternative assets and expects Brexit-related circumstances to affect the company’s organization or operations; preparatory steps were underway. No numerical earnings or revenue guidance was provided.
- Revenue variability: A substantial portion of advisory and placement fees depends on transaction completion, fund closings, and other events outside the company’s control. Client receipts and liquidity therefore depend on both transaction success and receivable collection timing.
- Accounting and compensation: The company recognized $12.1m of revenue in the first half relating to performance obligations satisfied in prior periods, mainly when variable-fee uncertainty was resolved. Equity-based compensation expense was $64.2m in the first half; $104.9m of unrecognized RSU expense and $44.1m of unrecognized partnership-unit expense remained.
- Contingencies: Management said potential claims related to the Caspersen fraud matter were estimated below $30m and considered without merit. Other litigation losses could not be estimated and, if resolved adversely, could be material in the period of resolution. Employee-loan guarantees were $9.9m. Net future operating lease payments were $178.3m, after expected sublease proceeds.
- Capital allocation: The company repurchased 478,794 shares for $25.7m in the first half at an average $53.70 per share; $72.0m remained under its $100m authorization at June 30. A $0.05 quarterly dividend was declared for payment September 19, 2018.
- Management stated disclosure controls were effective and reported no material change in internal control over financial reporting. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- How much reported growth reflects underlying fee activity versus the new revenue-standard presentation and timing effects.
- Conversion and collection of the $211.8m receivable balance, including long-term placement-fee receivables, and the resulting effect on cash generation.
- Sustainability of advisory growth and placement-fee trends, alongside rising compensation, travel and technology costs.
- Future cash demands from partnership-unit exchanges, share repurchases, dividends, compensation and the tax receivable agreement.
- Developments in litigation and tax matters, and the eventual balance-sheet impact of adopting the lease accounting standard in 2019.