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GHL > SEC Filings for GHL > Form 10-Q on 1-Aug-2013All Recent SEC Filings

Show all filings for GREENHILL & CO INC

Form 10-Q for GREENHILL & CO INC


1-Aug-2013

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, 2012 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 2012 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 represent clients throughout the world and have offices in the United States, United Kingdom, Germany, Canada, Japan, Australia and Sweden. Our revenues are principally derived from 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 provides 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 second U.S. office in 2005 and we currently have five offices in the U.S. We opened a Canadian office in 2006. In 2008, we opened an office in Tokyo. In 2008, we also entered the capital advisory business, which provides capital raisings advice and related services to private equity and real estate funds. In 2010, we acquired the Australian advisory firm, Caliburn, which has two Australian offices. In 2012, we opened our Stockholm office.
Beginning in 2011, we initiated the monetization of our investments in both our previously sponsored merchant banking funds and Iridium. In 2011, we sold substantially all of our interests in GCP II and GSAVP for $49.4 million, which represented the book value of the investments. In 2012, we repurchased interests in two portfolio companies of GCP II for $15.5 million upon exercise of put rights. Also, in 2012, we sold our entire interest in GCP Europe for $27.2 million, which represented approximately 90% of its book value. In July 2013, we sold our investment in GCP III for $2.0 million, which represented the book value of our investment. In conjunction with that sale we eliminated our last remaining commitment to merchant banking fund investments.


Beginning in October 2011, we initiated a plan to sell our entire interest in Iridium (NASDAQ: IRDM) systematically over a period expected to be two or more years. As of June 30, 2013, we have sold approximately 66% of our holdings in Iridium, which generated proceeds of $48.0 million. The net proceeds of the merchant banking fund and Iridium sales have been used principally to repurchase our common stock and reduce the outstanding amount of our revolving loan facility.

Business Environment
Economic and global financial market conditions can materially affect our financial performance. See "Risk Factors" in our 2012 Annual Report on Form 10-K filed with 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 $83.1 million in the second quarter of 2013 compared to $45.1 million in the second quarter of 2012, which represents an increase of 84%. For the six months ended June 30, 2013, advisory revenues were $164.5 million compared to $118.4 million for the comparable period in 2012, which represents an increase of 39%. During the six month period, worldwide completed M&A volume increased by 5% from $995 billion to $1,041 billion(1). However, much of this year's volume relates to a small number of large transactions. Another indicator of market activity is the number of completed transactions which decreased 17% in the first six months of 2013 as compared to the same period in 2012(1). Over the same period worldwide announced M&A volume declined by 15% from $1,139 billion in the first six months of 2012 to $963 billion in the first six months of 2013 while the number of announced transactions declined by 13%(2). These metrics indicate that the pace of M&A activity has declined from 2012, which was itself a relatively slow period for M&A. Since the majority of advisory revenues are generated upon a completion of an assignment, and there is often a significant lead time between announcement and completion of a transaction, we expect the decline in announced transactions and announced transaction volumes in the first half of 2013 will lead to reduced advisory revenues in the second half of the year, as compared to the second half of 2012, for the M&A industry as a whole.
We believe our business performance is best measured over longer periods of time, and in that regard it is noteworthy that our advisory revenues for the twelve month period ending June 30, 2013 (a measure we refer to as trailing twelve months advisory revenues) was approximately $337 million. In terms of geographic diversity, during the first six months of 2013, North America, and specifically the U.S. M&A business, continues to be the strongest performing region for us, consistent with the global market statistics by region. Our European business showed a modest improvement in the first six months of 2013 compared to the same period in 2012 in what continues to be a difficult economic and transaction environment in that market. Our Australian revenue was flat year-over-year, in what has become a more challenging environment than in previous years.
We generally experience significant variations in revenues and profits from quarter to quarter. 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 not subject to 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 credit and public equity 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.


(1) Source: Global M&A completed volume and number of transactions for the six months ended June 30, 2013 as compared to the six months ended June 30, 2012. Source: Thompson Financial as of July 26, 2013.

(2) Source: Global M&A announced volume and number of transactions for the six months ended June 30, 2013 as compared to the six months ended June 30, 2012. Source: Thompson Financial as of July 26, 2013.


Results of Operations Summary
Our total revenues of $86.7 million for the second quarter of 2013 compare with total revenues of $47.3 million for the second quarter of 2012, which represents an increase of $39.4 million, or 83%. Advisory revenues for the second quarter of 2013 were $83.1 million compared to $45.1 million for the second quarter of 2012. Investment revenues for the second quarter of 2013 were $3.6 million compared to $2.2 million in the second quarter of the prior year. The increase in our second quarter revenues as compared to the same period in 2012 resulted from increases in both advisory revenues of $37.9 million and in investment revenues of $1.4 million.
For the six months ended June 30, 2013, total revenues were $166.3 million compared to $130.0 million over the same year to date period in 2012, which represents an increase of $36.3 million, or 28%. Advisory revenues for the six months ended June 30, 2013 were $164.5 million compared to $118.4 million over the same year to date period in 2012. Investment revenues for the six months ended June 30, 2013 were $1.8 million compared to $11.6 million for the same period in the prior year. The increase in our year to date revenues as compared to the same period in 2012 resulted from an increase in advisory revenues of $46.1 million, offset in part by a decrease in investment revenues of $9.8 million.
Our second quarter 2013 net income allocated to common stockholders of $15.5 million and diluted earnings per share of $0.52 compare to net income allocable to common stockholders of $2.2 million and diluted earnings per share of $0.07 in the second quarter of 2012. On a year to date basis, net income allocable to common stockholders of $29.1 million and diluted earnings per share of $0.96 compare to net income allocated to common stockholders of $18.4 million and diluted earnings per share of $0.60 for the same period in 2012.
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 six month periods ended June 30, 2013 and 2012, respectively:

                                   For the Three Months Ended
                            June 30, 2013                 June 30, 2012
                        Amount        % of Total      Amount      % of Total
                                    (in millions, unaudited)
Advisory revenues   $   83.1               96 %     $    45.1          95 %
Investment revenues      3.6                4 %           2.2           5 %
Total revenues      $   86.7              100 %     $    47.3         100 %


                                   For the Six Months Ended
                          June 30, 2013               June 30, 2012
                      Amount      % of Total      Amount      % of Total
                                   (in millions, unaudited)
Advisory revenues   $   164.5          99 %     $   118.4          91 %
Investment revenues       1.8           1 %          11.6           9 %
Total revenues      $   166.3         100 %     $   130.0         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 $83.1 million in advisory revenues in the second quarter of 2013 compared to $45.1 million in the second quarter of 2012, an increase of 84%. The increase in advisory revenues in the second quarter of 2013 as compared to the same period in 2012 resulted primarily from an increase in the number and size of completed assignments, offset by a decline in announcement and opinion fees.


For the six months ended June 30, 2013, advisory revenues were $164.5 million compared to $118.4 million for the comparable period in 2012, an increase of 39%. This increase resulted principally from an increase in the number and size of completed assignments, offset in part by a slight decrease in announcement and opinion fees and fund placement fees.

During the six months ended June 30, 2013 we earned $1 million or more from 33 clients compared to 26 clients in the same period in 2012. For the year to date period ended June 30, 2013 as compared to the same period in 2012 we generated a greater portion of our advisory revenues from M&A transaction activity compared to other sources of revenue with restructuring and financing advisory and fund placement fees both lower in the first half of 2013. Within M&A, a larger portion of our revenue was derived from completion fees, with announcement fees lower consistent with the level of market activity. Retainer revenue remained relatively constant over the six month periods ending June 30, 2013 and 2012.

Completed assignments in the second quarter of 2013 included:

the representation of Aimia in the renewal process for Aeroplan's financial card portfolio;

the sale by the AMP Capital owned Jeminex of its Industrial & Safety division to Bunzl plc;

the acquisition by ASML Holding NV of Cymer, Inc.;

the representation of Azelis S.A. on the refinancing of its syndicated debt package;

the sale of Coventry Health Care, Inc. to Aetna;

the acquisition by Fifth Street Finance Corp. of Healthcare Finance Group, LLC;

the acquisition by Inergy LP from Crestwood Holdings of Crestwood Holdings' general partner interest and incentive distribution right interest in Crestwood Midstream;

the sale by Mi9 of its 30% holding in iSelect;

the representation of the Special Committee of the Board of Directors of Par Petroleum Corporation in connection with certain aspects of its acquisition of Tesoro Hawaii, LLC from Tesoro Corporation; and

the sale by Transpower New Zealand (The New Zealand Government owned electricity transmission company) of its wholly owned subsidiary, d-cyphaTrade Limited, to the Australian Securities Exchange.

During the second quarter of 2013, our capital advisory group served as global placement agent on behalf of private equity and real estate funds for five interim closings of limited partnership interests in such funds. We also advised on the secondary market sale of two limited partnership interests.

Investment Revenues

Investment revenues primarily consist of our investment gains and losses from our investments in Iridium and previously sponsored merchant banking funds. The following table sets forth additional information relating to our investment revenues for the three and six months ended June 30, 2013 and 2012:


                                                 For the Three Months Ended June 30,     For the Six Months Ended June 30,
                                                    2013                   2012                2013                2012
                                                                         (in millions, unaudited)
Net realized and unrealized gain in Iridium    $      6.7           $            1.4     $         4.6         $      9.7
Net realized and unrealized gains/(losses) on
investments in merchant banking funds                (3.4 )                      0.4              (3.4 )              1.1
Deferred gain on sale of certain merchant
banking assets                                          -                          0.1                 0.1              0.1
Interest income                                            0.3                     0.3                 0.5              0.7
Total investment revenues                      $      3.6           $            2.2     $         1.8         $     11.6

In the second quarter of 2013, we recorded investment revenues of $3.6 million compared to investment revenues of $2.2 million in the second quarter of 2012, or a net increase in revenues of $1.4 million. The increase in investment revenues resulted from a greater gain in the quoted market value of our investment in Iridium in the second quarter of 2013 as compared to the same period in 2012, offset by a loss in our merchant banking fund investments. In the second quarter of 2013, we recognized a gain on our investment in Iridium of $6.7 million as compared to a gain of $1.4 million in the second quarter of 2012. Also, during the second quarter of 2013, we recognized a loss of $3.4 million in the estimated fair value of our investment in previously sponsored merchant banking funds as compared to a gain of $0.4 million recorded in the second quarter of 2012.

For the first six months of 2013, we recorded investment revenues of $1.8 million compared to investment revenues of $11.6 million in the first six months of 2012. The decrease in investment revenues of $9.8 million resulted principally from a smaller increase in the quoted value of our investment in Iridium and a loss in our investment in merchant banking funds in 2013 as compared to a gain in 2012. In the six month period ended June 30, 2013, we recognized a gain on our investment in Iridium of $4.6 million as compared to a gain of $9.7 million in the same six month period in 2012. Also, during the six months ended June 30, 2013, we recognized a loss of $3.4 million in the estimated fair value of our investment in previously sponsored merchant banking funds as compared to a gain of $1.1 million recorded in the same period in 2012. We recognize gains or losses from our investment in Iridium from marking to market our holdings at the end of each period to record unrealized gains or losses. To the extent we sell our holdings in Iridium for a price above or below our mark for the previously reported period, we recognize realized gains or losses on such sales during the period of sale. At June 30, 2013, we owned 3,359,016 shares of Iridium common stock, or approximately 4% of Iridium's fully diluted ownership. At June 30, 2012, we owned 6,939,016 shares of Iridium common stock, or approximately 9% on a fully diluted basis.
We recognize revenue on investments in merchant banking funds based on our allocable share of realized and unrealized gains (or losses) reported by such funds on a quarterly basis. Investments held by merchant banking funds are recorded at estimated fair value. Because of the inherent uncertainty of valuations as well as the discounts applied, the estimated fair value of investments in privately held companies may differ significantly from the values that would have been used had a ready market for the securities existed. At June 30, 2013, we had principal investments of $39.1 million, including our investments in Iridium of $26.1 million and in merchant banking funds of $13.0 million. As part of our plan to sell our entire interest in Iridium over time, during the second quarter of 2013, we sold 885,000 shares at an average price of $6.93 per share for proceeds of $6.1 million. During the first six months of 2013, we sold 1,725,000 shares of Iridium at an average price of $6.81 per share for proceeds of $11.8 million.

In July 2013, we sold our investment in GCP III for $2.0 million, which represented the book value of our investment. In connection with that sale we also eliminated our last remaining commitment to invest in merchant banking funds.
Significant changes in the estimated fair value of Iridium or our investment in merchant banking funds may have a material effect, positive or negative, on our revenues and thus our results of operations.
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.


Operating Expenses

We classify operating expenses as employee compensation and benefits expense and non-compensation expenses.

Our total operating expenses for the second quarter of 2013 were $61.3 million, compared to $43.8 million of total operating expenses for the second quarter of 2012. This represents an increase in total operating expenses of $17.5 million, or 40%, and results principally from an increase in our compensation and benefits expenses consistent with increased revenues, as described in more detail below. The pre-tax profit margin for the second quarter of 2013 was 29%, as compared to 7% for the second quarter of 2012.

For the six months ended June 30, 2013, total operating expenses were $119.2 million, compared to $101.7 million of total operating expenses for the same period in 2012. The increase of $17.5 million, or 17%, relates to an increase in our compensation and benefits expenses consistent with our increased revenues, as described in more detail below. The pre-tax profit margin for the six months ended June 30, 2013 was 28%, as compared to 22% for the same period in 2012.

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 ended June 30, 2013         For the Six Months Ended June 30,
                                                     2013                       2012                 2013                   2012
                                                                              (in millions, unaudited)
Employee compensation and benefits expense                  $45.9                      $28.4              $88.1                  $69.6
% of revenues                                           53 %                       60 %                53 %                   54 %
Non-compensation expense                                     15.3                       15.4               31.1                   32.0
% of revenues                                           18 %                       33 %                19 %                   25 %
Total operating expense                                      61.3                       43.8              119.2                  101.7
% of revenues                                           71 %                       93 %                72 %                   78 %
Total income before tax                                      25.4                        3.5               47.1                   28.3
Pre-tax profit margin                                   29 %                        7 %                28 %                   22 %

Compensation and Benefits Expenses

Our employee compensation and benefits expenses in the second quarter of 2013 were $45.9 million, which reflected a 53% ratio of compensation to revenues. This amount compared to $28.4 million for the second quarter of 2012, which reflected a 60% ratio of compensation to revenues. The increase of $17.5 million, was primarily attributable to the increase in revenues during the period and resulted in an increase in accrued compensation as compared to the second quarter of 2012.

For the six months ended June 30, 2013, our employee compensation and benefits expenses were $88.1 million compared to $69.6 million for the same period in the prior year. The increase of $18.5 million, or 27%, resulted principally from the increase in revenues in the first six months of 2013. The ratio of compensation expense to revenues was 53% for the first six months of 2013 as compared to 54% for the same six month period in 2012.

Our ratio of compensation to revenues for the three and six month periods ended June 30, 2013 of 53% remained consistent with the compensation ratio we incurred for calendar year 2012.

Our compensation expense is generally based upon revenues 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. 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 $15.3 million in the second quarter of 2013 compared to $15.4 million in the second quarter of 2012, reflecting a decrease of $0.1 million. The decrease in non-compensation expenses principally resulted from the benefit of lower amortization of the Australian intangible assets, which were fully amortized in the first quarter of 2013, offset by an increase in travel expenses associated with new business activities.
For the six months ended June 30, 2013, our non-compensation expenses were $31.1 million compared to $32.0 million for the same period in 2012, representing a decrease of $0.9 million, or 3%. The decrease in non-compensation expenses is principally attributable to the aforementioned benefit of the completion of the amortization period of the Australian intangible assets.
Non-compensation expenses as a percentage of revenues for the three months ended June 30, 2013 were 18% compared to 33% for the same period in 2012. The decrease in non-compensation expenses as a percentage of revenues resulted principally from the benefit of spreading our costs over significant higher revenues earned . . .

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