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GHL > SEC Filings for GHL > Form 10-Q on 1-Nov-2012All Recent SEC Filings

Show all filings for GREENHILL & CO INC

Form 10-Q for GREENHILL & CO INC


1-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

In this Management's Discussion and Analysis of Financial Condition and Results of Operations, "we", "our", "firm" and "us" refer to Greenhill & Co., Inc.

This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 and subsequent Forms 8-K.

Cautionary Statement Concerning Forward-Looking Statements

The following discussion should be read in conjunction with our condensed consolidated financial statements and the related notes that appear elsewhere in this report. We have made statements in this discussion that are forward-looking statements. In some cases, you can identify these statements by forward-looking words such as "may", "might", "will", "should", "expect", "plan", "anticipate", "believe", "estimate", "intend", "predict", "potential" or "continue", the negative of these terms and other comparable terminology. These forward-looking statements, which are subject to risks, uncertainties and assumptions about us, may include projections of our future financial performance, based on our growth strategies and anticipated trends in our business. These statements are only predictions based on our current expectations and projections about future events. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements. In particular, you should consider the numerous risks outlined under "Risk Factors" in our 2011 Annual Report on Form 10-K.

Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy or completeness of any of these forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. We are under no duty to and we do not undertake any obligation to update or review any of these forward-looking statements after the date of this filing to conform our prior statements to actual results or revised expectations whether as a result of new information, future developments or otherwise.

Overview

Greenhill is a leading independent investment bank focused on providing financial advice related to significant mergers, acquisitions, restructurings, financings and capital raisings to corporations, partnerships, institutions and governments. We act for clients located throughout the world from our offices in the United States, United Kingdom, Germany, Sweden, Canada, Japan and Australia.


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Our revenues are principally derived from providing advisory services on mergers and acquisitions, or M&A, financings and restructurings, and are primarily driven by total deal volume and size of individual transactions. Additionally, our private capital and real estate capital advisory group provide fund placement and other capital raising advisory services, where revenues are driven primarily by the amount of capital raised.

Greenhill was established in 1996 by Robert F. Greenhill, the former President of Morgan Stanley and former Chairman and Chief Executive Officer of Smith Barney. Since our founding, Greenhill has grown steadily, recruiting a number of managing directors from major investment banks (as well as senior professionals from other institutions), with a range of geographic, industry and transaction specialties as well as different sets of corporate management and other relationships. As part of this expansion, we opened a London office in 1998, opened a Frankfurt office in 2000 and began offering financial restructuring advice in 2001. On May 11, 2004, we completed an initial public offering of our common stock. We opened our Dallas office in 2005 and our Toronto office in 2006. In 2008, we opened offices in Chicago, San Francisco and Tokyo, and we entered the private capital advisory business, which provides capital raising and related services to private equity and real estate funds. We opened our Houston and Los Angeles offices in 2009. In 2010, we acquired the Australian advisory firm Caliburn. In May 2012, we opened our Stockholm office.

Prior to 2011, we also managed merchant banking funds and similar vehicles. We raised our first private equity fund in 2000, our first venture capital fund in 2006 and our first European merchant banking fund in 2007. We completed the initial public offering of our special purpose acquisition company, GHL Acquisition Corp., in 2008, and that entity merged with Iridium Communications, Inc. ("Iridium") in 2009. Effective December 31, 2010, we exited the merchant banking business in order to focus entirely on our advisory business. In 2011, we also began the liquidation of a substantial portion of our principal investments in our merchant banking funds and Iridium. During 2011, we sold substantially all of our interest in two previously sponsored merchant banking funds (Greenhill Capital Partners II ("GCP II") and Greenhill SAV Partners ("GSAVP")) for $49.4 million, which represented the book value of the investments. In October 2011, we initiated a plan to sell our entire interest in Iridium systematically over a period of two or more years. As of September 30, 2012, we have sold approximately 39% of our holdings of Iridium and realized proceeds of $30.7 million since we initiated our plan of sale. As of September 30, 2012 our investments principally consisted of our investments in Iridium and our previously sponsored European merchant banking fund.

Business Environment

Economic and global financial market conditions can materially affect our financial performance. See "Risk Factors" in our 2011 Annual Report on Form 10-K filed with the Securities and Exchange Commission. Revenues and net income in any period may not be indicative of full year results or the results of any other period and may vary significantly from year to year and quarter to quarter.

Advisory revenues were $72.7 million in the third quarter of 2012 compared to $83.2 million in the third quarter of 2011, a decrease of 13%. For the nine months ended September 30, 2012 advisory revenues were $191.2 million compared to $217.3 million for the comparable period in 2011, representing a decrease of 12%. During the same nine month periods, global completed M&A volume decreased by 26% from $1,899 billion in 2011 to $1,401 billion in 2012.(1) Within our business, through the third quarter of 2012 our North American advisory business has been our strongest revenue performer in 2012, with Europe beginning to show some improvement, while activity in Australia has declined from last year's strong pace consistent with general market activity in that region. In terms of type of advice, financing and restructuring advisory work has been a strong contributor alongside M&A, while our capital advisory (fund placement) business is slightly down versus last year as it is still being negatively impacted by continued market volatility and uncertainty.

We often experience significant variations in revenues and profits during each quarterly period. These variations can generally be attributed to the fact that our revenues are usually earned in large amounts throughout the year upon the successful completion of a transaction or restructuring or closing of a fund, the timing of which is uncertain and is outside of our control. Moreover, the value of our principal investments may vary significantly from period to period and depends on a number of factors beyond our control, including most notably public equity and credit markets and general economic conditions. As a result, our quarterly results vary and our results in one period may not be indicative of our results in any future period.

Results of Operations

Summary

Our revenues of $62.7 million for the third quarter of 2012 compare with revenues of $60.4 million for the third quarter of 2011, which represents an increase of $2.3 million, or 4%. Advisory revenues of $72.7 million for the third quarter of 2012 compare to $83.2 million in the third quarter of 2011. Investment revenues of negative $10.0 million for the third quarter of 2012 compare to negative $22.8 million in the third quarter of 2011, with the difference due primarily to the size of mark-to-market losses from our investment in Iridium Communications Inc. ("Iridium") (IRDM - NASDAQ) in each period.

(1) Global M&A completed transaction volume for the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011. Source: Thomson Financial as of October 15, 2012.


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On a year-to-date basis total revenues were $192.8 million compared to $199.5 million for the comparable period in 2011, a decline of 3%. Advisory revenues for the nine months ended September 30, 2012 were $191.2 million compared to $217.3 million over the same year-to-date period in 2011. Investment revenues for the nine months ended September 30, 2012 were $1.6 million compared to negative $17.8 million for the same period in the prior year. The decrease in our year-to-date revenues as compared to the same period in 2011 resulted from a decrease in advisory revenues of $26.1 million offset, in part, by an increase in investment revenues of $19.4 million.

Our third quarter 2012 net income allocable to common stockholders of $8.6 million and diluted earnings per share of $0.28 remained the same as net income allocable to common stockholders of $8.6 million and diluted earnings per share of $0.28 in the third quarter of 2011. On a year-to-date basis, net income allocable to common stockholders was $27.0 million through September 30, 2012 compared to $28.5 million for the comparable period in 2011. Diluted earnings per share for the nine months ended September 30, 2012 were $0.88 compared to $0.92 for the same period in 2011.

Our quarterly revenues and net income can fluctuate materially depending on the number and size of completed transactions on which we advised, the size of investment gains (or losses), and other factors. Accordingly, the revenues and net income in any particular period may not be indicative of future results.

Revenues By Source

The following provides a breakdown of total revenues by source for the three and nine month periods ended September 30, 2012 and 2011, respectively:

                     Revenue by Principal Source of Revenue



                                           For the Three Months Ended
                                     September 30,             September 30,
                                         2012                      2011
                                                % of                      % of
                                  Amount       Total        Amount       Total
                                            (in millions, unaudited)
            Advisory revenues     $  72.7         116 %     $  83.2         138 %
            Investment revenues     (10.0 )       (16 )%      (22.8 )       (38 )%

            Total revenues        $  62.7         100 %     $  60.4         100 %


                                            For the Nine Months Ended
                                     September 30,             September 30,
                                         2012                      2011
                                                % of                      % of
                                  Amount       Total        Amount       Total
                                            (in millions, unaudited)
            Advisory revenues     $ 191.2          99 %     $ 217.3         109 %
            Investment revenues       1.6           1 %       (17.8 )        (9 )%

            Total revenues        $ 192.8         100 %     $ 199.5         100 %

Advisory Revenues

Advisory revenues primarily consist of financial advisory and transaction related fees earned in connection with advising clients in mergers, acquisitions, financings, restructurings, capital raisings or similar transactions. We earned $72.7 million in advisory revenues in the third quarter of 2012 compared to $83.2 million in the third quarter of 2011, which represents a decrease of 13%. The decrease in advisory revenues in the third quarter of 2012 as compared to the same period in 2011 resulted primarily from a decrease in the fees earned from completed assignments, offset in part by an increase in announcement and opinion fees as well as an increase in retainer revenue from strategic advisory assignments.

For the nine months ended September 30, 2012, advisory revenues were $191.2 million compared to $217.3 million for comparable period in 2011, representing a decrease of 12%. This decrease principally resulted from a decline in the number and scale of completed assignments, offset in part by an increase in announcement and opinion fees. During the nine months ended September 30, 2012 we earned advisory revenues from 131 different clients as compared to 134 different clients for the same period in 2011. We earned $1 million or more from 50 clients for the period ended September 30, 2012 as compared to 51 clients for the same period in 2011.


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Completed assignments in the third quarter of 2012 included:

The representation of the Supervisory Board of ASML Holding NV on the establishment of a Customer Co-Investment Program;

the sale of Daily Mail and General Trust plc's remaining 50 percent interest in DMG Radio Australia to Illyria Pty Ltd.;

the acquisition by Hancock Timber Resource Group of timberlands from Forest Capital Partners;

the representation of Inergy, L.P. on the sale of its retail propane assets to Suburban Propane Partners, L.P.;

the representation of Journal Communications, Inc. on the repurchase of all of the outstanding shares of its Class C common stock;

the representation of the Special Committee of the board of Kinder Morgan Energy Partners L.P. on the acquisition of Tennessee Gas Pipeline and a 50% interest in El Paso Natural Gas Pipeline;

the acquisition by Lion Pty Ltd of Little World Beverages Limited;

the acquisition of Merlin Securities LLC by Wells Fargo & Company; and

the acquisition by Sykes Enterprises, Inc. of Alpine Access Inc.

During the third quarter of 2012, our capital advisory group served as global placement agent on behalf of private equity and real estate funds for two interim closings of the sale of limited partnership interests in such funds.

Investment Revenues

In 2009, we announced our exit from the merchant banking business, and since then we have been in the process of seeking to realize value from our remaining principal investments. For 2012 and 2011, our investment revenues consisted principally of investment gains and losses from our investments in Iridium and certain previously sponsored merchant banking funds.

In the third quarter of 2012, we recorded investment revenues of negative $10.0 million compared to negative $22.8 million in the third quarter of 2011. During the third quarters of 2012 and 2011, the quoted market value of our investment in Iridium declined significantly from the market price at the beginning of each period, which resulted in the recording of investment losses of $10.8 million and $23.6 million in the third quarter of 2012 and 2011, respectively.

For the nine months ended September 30, 2012, we recorded investment revenues of $1.6 million compared to negative $17.8 million for the nine months ended September 30, 2011. The increase in investment revenues in 2012 resulted primarily from a smaller decline in the market value of our investment in Iridium for the nine months ended September 30, 2012 as compared to the same period in the prior year.

The following table sets forth additional information relating to our investment revenues:

                                                  For the Three Months           For the Nine Months
                                                   Ended September 30,           Ended September 30,
                                                   2012            2011          2012            2011
                                                               (in millions, unaudited)
Net realized and unrealized gains on
investments in merchant banking funds           $      0.1        $   0.2      $     1.3        $   0.9
Deferred gain on sale of certain merchant
banking assets                                         0.1            0.2            0.2            0.6
Net realized and unrealized loss on
investment in Iridium                                (10.8 )        (23.6 )         (1.2 )        (20.1 )
Interest income                                        0.6            0.4            1.3            0.8

Total investment revenues                       $    (10.0 )      $ (22.8 )    $     1.6        $ (17.8 )


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We recognize gains or losses from our investment in Iridium based on the fair market value of our investment as of the end of any period. At September 30, 2012 we owned 5,939,016 shares of Iridium common stock, or approximately 8% on a fully diluted basis. At September 30, 2011, we owned 9,804,016 shares of Iridium common stock, or approximately 13% of Iridium's common stock on a fully diluted basis, including 880,000 shares of Iridium common stock exchanged in June 2011 for 4,000,000 of Iridium's $11.50 warrants.

At September 30, 2012, we had principal investments of $92.5 million, including our investments in Iridium of $43.5 million and in the merchant banking funds of $49.0 million, which includes $11.1 million of value that has been transferred to third parties subject to put options. As part of our plan to sell our entire interest in Iridium over time, during the third quarter of 2012, we sold 1,000,000 shares of Iridium at an average price per share of $8.24 for proceeds of $8.2 million. During the first nine months of 2012, we sold 2,995,000 shares of Iridium at an average price per share of $8.32 for proceeds of $24.9 million.

Under the terms of the sale of GCP II, the purchasers have the right, exercisable only in December 2012, to cause us to repurchase their interests in either or both of two specified portfolio companies subject to put options for values of $9.5 million and $6.1 million, respectively. At September 30, 2012 the portfolio company with the put options of $9.5 million had an estimated fair value of $3.9 million, or $5.6 million less than the value of the put options. The portfolio company with the put options of $6.1 million had an estimated fair value of $7.3 million at September 30, 2012, or $1.2 million greater than the value of the put options. If the put options with respect to both portfolio companies are exercised in December 2012 there will be no impact to the results of operations other than the fourth quarter 2012 market-to-market valuation adjustments. If the purchasers do not exercise the put option for the portfolio company which has a fair market value in excess of the value of the put options, we will record an investment loss of $1.2 million in the fourth quarter of 2012. See "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources."

Significant changes in the estimated fair value of our investments may have a material effect, positive or negative, on our revenues and thus our results of operations. See "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates
- Revenue Recognition - Investment Revenues".

The investment gains (or losses) from our investment in Iridium and our investments in our previously sponsored merchant banking funds may fluctuate significantly over time due to factors beyond our control, such as performance of each company in our merchant banking portfolio, equity market valuations, and merger and acquisition opportunities. Revenues recognized from gains (or losses) recorded in any particular period are not necessarily indicative of revenues that may be realized and/or recognized in future periods.


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Operating Expenses

We classify operating expenses in two categories: employee compensation and benefits expenses and non-compensation expenses.

Our total operating expenses for the third quarter of 2012 were $48.8 million, which compared to $47.3 million of total operating expenses for the third quarter of 2011. This represents an increase in total operating expenses of $1.5 million, or 3%, and resulted principally from an increase in our compensation expense offset by a decrease in our non-compensation costs as described in more detail below. The pre-tax income margin for the third quarters of 2012 and 2011 was 22%.

For the nine months ended September 30, 2012, total operating expenses were $150.4 million, compared to $155.9 million of total operating expenses for the same period in 2011. The decrease of $5.5 million, or 4%, relates principally to a decrease in our compensation expense, as described in more detail below. The pre-tax income margin for the nine months ending September 30, 2012 and 2011 was 22%.

The following table sets forth information relating to our operating expenses, which are reported net of reimbursements of certain expenses by our clients:

                                                  For the Three Months           For the Nine Months
                                                          Ended                         Ended
                                                      September 30,                 September 30,
                                                   2012             2011          2012           2011
                                                               (in millions, unaudited)
Employee compensation & benefits expenses       $     33.3         $ 30.4      $    102.9       $ 108.4
% of revenues                                           53 %           50 %            53 %          54 %
Non-compensation expenses                             15.5           16.9            47.5          47.5
% of revenues                                           25 %           28 %            25 %          24 %
Total operating expenses                              48.8           47.3           150.4         155.9
% of revenues                                           78 %           78 %            78 %          78 %
Total income before tax                               14.0           13.0            42.3          43.6
% of revenues                                           22 %           22 %            22 %          22 %

Compensation and Benefits Expenses

Our employee compensation and benefits expenses in the third quarter of 2012 were $33.3 million, which reflects a 53% ratio of compensation to revenues. This amount compared to $30.4 million for the third quarter of 2011, which reflected a 50% ratio of compensation to revenues. The increase of $2.9 million, or 10%, resulted principally from a lower charge for the amortization of restricted stock units in the third quarter of 2011 due to the departure of certain employees. The increase in the ratio of compensation to revenues in the third quarter of 2012 as compared to the same period in 2011 resulted from higher compensation costs spread over slightly higher revenues.

For the nine months ended September 30, 2012, our employee compensation and benefits expenses were $102.9 million compared to $108.4 million of compensation and benefits expenses for the same period in the prior year. The decrease of $5.5 million, or 5%, principally resulted from a lower year-end cash bonus accrual in the first nine months of 2012 as compared to the same period in 2011. On a year-to-date basis, the ratio of compensation expense to revenues was 53% as compared to 54% for the same nine month period in 2011. The slight decrease in the ratio of compensation to revenues for the nine months ended September 30, 2012 as compared to the comparable period in 2011 resulted from lower compensation expense spread over lower revenues.

Our compensation costs consist of (i) base salary and benefits, (ii) annual incentive compensation payable as cash bonus awards and (iii) amortization of long-term incentive compensation awards of restricted stock units, the majority of which are charged to compensation expense over five years from the date of issuance. Based upon our headcount at September 30, 2012, which has increased approximately 5% in 2012, we expect our annual 2012 fixed compensation cost, which is the sum of base salaries and benefits and the amortization of previously issued restricted stock units, will be approximately $131.0 million. This will represent a slight increase over our annual fixed compensation cost of approximately $127.0 million for 2011. Our fixed compensation cost may vary period to period based on such factors as headcount, changes in charges for the amortization of restricted stock units and other related matters. The ratio of compensation to revenues for the year ended December 31, 2012 will be largely dependent upon the amount of transaction activity and related revenues we generate in the final quarter of this year. While it continues to be our objective to return towards a ratio of compensation to revenues of no greater than 50%, we will balance that goal with our objectives of retaining our core personnel and compensating our employees competitively in order to maintain our strong franchise, and of continuing to expand our industry expertise and geographic reach.

Our compensation expense is generally based upon revenue and can fluctuate materially in any particular period depending upon the changes in headcount, amount of revenues recognized, as well as other factors. Accordingly, the amount of compensation expense recognized in any particular period may not be indicative of compensation expense in a future period.


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Non-Compensation Expenses

Our non-compensation expenses include the costs for occupancy and equipment rental, communications, information services, professional fees, recruiting, travel and entertainment, insurance, depreciation and amortization, interest expense and other operating expenses. Reimbursed client expenses are netted against non-compensation expenses.

Our non-compensation expenses were $15.5 million in the third quarter of 2012 compared to $16.9 million in the third quarter of 2011, reflecting a decrease of $1.4 million, or 8%. The decrease in non-compensation expenses principally resulted from lower travel costs and general operating expenses.

For the first nine months of 2012 and 2011, our non-compensation expenses remained constant at $47.5 million. For the year-to-date period in 2012 as compared to the same period in 2011, increases in general other operating costs were offset by lower borrowing costs.

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