PJT Partners Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. PJT Partners is a global advisory-focused investment bank providing strategic advisory, restructuring and special situations, shareholder engagement, and private fund placement services through Park Hill.
Financial performance and liquidity
Amounts below are in millions of dollars, except per-share data. Interim financial statements are unaudited.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $140.1 | $78.5 | $404.9 | $308.7 |
| Advisory fees | $117.2 | $60.5 | $318.9 | $233.1 |
| Placement fees | $18.2 | $15.9 | $72.5 | $68.9 |
| Total expenses | $128.1 | $94.1 | $380.0 | $324.3 |
| Income before tax benefit | $12.1 | $(15.6) | $24.8 | $(15.6) |
| Consolidated net income | $12.3 | $(2.4) | $30.0 | $0.04 |
| Net income attributable to PJT Partners Inc. | $7.6 | $3.3 | $19.7 | $4.9 |
| Diluted EPS | $0.33 | $0.16 | $0.85 | $0.22 |
- Revenue increased 79% in Q3 and 31% for the first nine months year over year. Advisory fees rose 94% and 37%, respectively; placement fees rose 15% and 5%.
- Q3 pretax margin was approximately 8.6% of revenue; nine-month pretax margin was approximately 6.1%. Q3 and nine-month income attributable to PJT rose 126% and 303%, respectively.
- Compensation and benefits expense was $99.9 million in Q3 and $297.8 million for nine months, increases of 47% and 19%. Management attributed the increases primarily to higher revenue and headcount. Nine-month equity-based compensation expense was $90.5 million.
- Cash from operating activities was $118.3 million for nine months, versus $71.1 million in 2017. Cash and cash equivalents were $166.4 million at September 30, 2018, versus $145.6 million at December 31, 2017; cash plus investments totaled $192.2 million.
- Accounts receivable was $191.8 million, including $68.5 million of long-term placement-fee receivables generally collected over three to four years. Nine-month financing cash outflows included $45.7 million for cash-settled partnership-unit exchanges, $35.8 million for share repurchases, and $3.2 million for dividends.
- No borrowings were outstanding under the revolving facility at September 30, 2018, and the company reported compliance with its covenants. The filing reports no material current liquidity shortfall.
Material changes and unusual items
- Revenue growth reflected expansion in strategic advisory, restructuring and special situations, and secondary advisory. Management cited increased capital-raising activity and real estate placement revenue in Q3; for nine months, real estate growth more than offset lower private equity and hedge fund activity.
- Adoption of the new revenue standard in 2018 changed presentation of reimbursable expenses from net to gross. This added $6.7 million to both revenue and expenses for the first nine months (including $2.3 million in Q3), so reported growth includes a presentation effect. The standard also changed timing for certain fees; reported nine-month net income was $0.4 million lower than it would have been without adoption.
- Tax benefits were $0.2 million in Q3 and $5.2 million for nine months. The effective tax rates were unusual because of the company’s partnership structure, nondeductible compensation, the federal tax-rate reduction, and tax benefits associated with vested share deliveries.
- On October 1, 2018, after quarter-end, PJT completed its acquisition of CamberView Partners. Consideration included approximately 1.73 million shares of Class A stock and partnership units and $65 million in cash, funded with $35 million of cash and a $30 million term loan. Purchase-price allocation was not complete when the filing was prepared.
- Also on October 1, the company amended its bank financing: a $40 million revolving facility (potentially increased to $60 million seasonally) and a $30 million term loan. The term loan matures January 2, 2021; the revolver matures October 1, 2020, subject to extension. These are post-quarter-end borrowings and commitments, not September 30 balances.
Outlook, risks and contingencies
- Management described the M&A environment as constructive, citing worldwide announced M&A volume up 37% in the first nine months of 2018, and expected companies to continue using M&A for growth. Restructuring activity was broadly consistent with 2017, with continued demand across industries; management also cited ongoing global demand for alternative assets. The filing provides no numerical earnings or revenue guidance.
- Advisory revenue depends substantially on successful transaction completion; fees may be delayed or lost if transactions fail, and bankruptcy fees may require court approval. Client receipts and liquidity also depend on collection timing. Management expects incentive-compensation payments to reduce cash around year-end or early in the following year.
- Brexit’s effects on the company’s organization and operations remain uncertain. The company also noted that economic, financial-market and competitive conditions may affect results.
- One client represented 12.3% of Q3 revenue. The company reported no material revenue concentration for the nine-month period.
- Two Caspersen-related lawsuits allege inadequate supervision. The court allowed one apparent-authority fraud claim to proceed to discovery; other claims in that action were dismissed, and appeals were filed. PJT disputes the claims and says it will defend them. Management estimated potential additional Caspersen-related claims at less than $30 million but said other litigation loss ranges could not be estimated; outcomes could be material in the period resolved.
- The company guarantees certain employee loans secured by investments in former parent Blackstone funds; the guaranteed amount was $10.1 million at September 30. It also has an estimated $6.1 million payable under its tax receivable agreement, with actual payments potentially differing significantly.
Important facts for investors to verify
- How much of advisory-fee growth is repeatable, and how exposed results are to transaction closings and a small number of large engagements.
- Cash collection and aging trends for receivables, particularly long-term placement-fee balances, and the seasonal cash impact of incentive compensation.
- The full financing, dilution, integration costs, and operating contribution associated with the CamberView acquisition.
- The impact of gross reimbursable-expense presentation and revenue timing under the new accounting standard when comparing periods.
- Developments in the Caspersen-related litigation, tax-receivable payments, and tax estimates under the Tax Cuts and Jobs Act.
- Changes in debt, covenant headroom, and available liquidity following the post-quarter-end term loan and revolving-credit amendment.