In this Management's Discussion and Analysis of Financial Condition and Results of Operations, "Greenhill", "we", "our", "Firm" and "us" refer toGreenhill & 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 endedDecember 31, 2021 , the risk factors in item 1A of this Quarterly Report on Form 10-Q and subsequent Current Reports on Form 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", "could", "expect", "plan", "outlook", "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 current views and projections of our operations and future financial performance, 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. These factors include, among other things, uncertainties associated with catastrophes such as the coronavirus ("COVID-19") pandemic and other economic and geopolitical events. You should consider the various risks outlined under "Risk Factors" in our 2021 Annual Report on Form 10-K and this Quarterly Report on Form 10-Q. Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot give assurances that these expectations will be achieved, nor can we 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 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 that provides financial and strategic advice on significant domestic and cross-border mergers and acquisitions, divestitures, restructurings, financings, capital raising and other transactions to a diverse client base, including corporations, partnerships, private equity sponsors, institutional investors, family offices and governments globally. We serve as a trusted advisor to our clients throughout the world on a collaborative, globally integrated basis from our offices inthe United States ,Australia ,Canada ,France ,Germany ,Hong Kong ,Japan ,Singapore ,Spain ,Sweden , and theUnited Kingdom . We were established in 1996 byRobert F. Greenhill , the former President of Morgan Stanley and former Chairman and Chief Executive Officer ofSmith Barney . Since our founding, Greenhill has grown significantly, by recruiting talented managing directors and other senior professionals, acquiring complementary advisory businesses and training, developing and promoting professionals internally. We have expanded beyond merger and acquisition advisory services to include financing, restructuring, and private capital advisory services, and we have expanded the breadth of our sector expertise to cover substantially all major industries. Since the opening of our original office inNew York , we have expanded globally to 15 offices across four continents. Over our 26 years as an independent investment banking firm, we have sought to opportunistically recruit new managing directors with a range of industry and transaction specialties, as well as high-level corporate and other relationships, from major investment banks, independent financial advisory firms and other institutions. We also have sought to expand our geographic reach both through recruiting managing directors in new locations and through strategic acquisitions. Through our recruiting and acquisition activity, we have significantly increased our geographic reach by adding offices inthe United States ,United Kingdom ,Germany ,Canada ,Japan ,Australia ,Sweden ,Hong Kong ,Spain ,Singapore andFrance . During 2022, we have recruited 3 additional client facing managing directors. With these recruits we have expanded our teams focused on coverage of financial sponsors, telecom infrastructure, and private capital advisory. In addition, as previously announced effectiveJanuary 1, 2022 , as part of our annual evaluation and promotion process we named 7 new client facing Managing Directors. We remain focused on adding more senior talent in the months to come. As ofJuly 29, 2022 , we had 80 client facing managing directors, including those whose recruitment we have announced to date. 18
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Business Environment and Outlook /Factors Affecting Our Results
Global and Regional Transaction Activity. Economic conditions and global financial markets can materially affect our financial performance. We are solely an advisory firm and our revenues are derived from fees we earn on advisory services related to M&A, financing advisory and restructuring, and private capital advisory transactions. In the first six months of 2022, market uncertainty and volatility caused by the war inUkraine , inflationary pressures, supply chain issues and rising interest rates slowed the level of M&A announcements from the rapid pace of 2021. While we have continued to have a high level of client engagement, our revenue generation was light in the first half of 2022 due to the relative lack of large transaction completions. However, our backlog of activity continues to suggest that revenue generation this year is likely to play out very much like the three years before it, when we had a weak first half followed by a better second half and particularly a strong fourth quarter. In terms of client activity and revenue, recent economic and market developments are impacting our expected sources of revenue in varying ways. By sector, we expect relatively good performances in consumer, energy, mining and telecom infrastructure. By region, we expect significant improvement inEurope relative to a weak performance last year, and we expect a second year of strong performances inAustralia andCanada given higher commodity prices. By type of advice, the restructuring business is relatively quiet given low default rates, financing advisory is slower given tighter credit markets but M&A remains active even if overall global deal activity is well below last year's level. While our historic focus on M&A advice for public companies is serving us well this year, we remain committed to the three strategic initiatives. First is expanding our coverage of financial sponsors. That client type is one that can make use of all our services, from M&A to financing and restructuring to capital raising and secondary sales of fund limited partner interests. We believe we made good progress on this initiative over the past 18 months. Second is winning more financing advisory roles. This activity is highly complementary to our restructuring advisory businesses for companies that are in financial distress. We made some progress in this area last year, but believe that the tremendous growth in the direct lending market creates a very large opportunity worth pursuing. Third is our private capital advisory business, where in the past 18 months we have built out a global team to raise primary capital for private funds of many types, including private equity, infrastructure, credit and others. That team is already in the market with a number of high quality fund offerings, and we expect that area to be a significant contributor to Firm revenue in years to come. At the same time, we continue to develop the secondary aspect of this business globally. Globally, the number and volume of announced transactions decreased by 19% and 24%, respectively, in the six months endedJune 30, 2022 versus the same period in the prior year. The number of completed transactions globally decreased by 18% while the volume of completed transactions increased by 7% in the same period due to the closings of larger transactions. We believe our business performance is best measured over longer periods of time, as 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 typically earned in large amounts upon the successful completion of a transaction or restructuring, the timing of which is uncertain and is not subject to our control. Accordingly, revenues, operating income 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. Competition. We operate in a highly competitive environment where there are no long-term contracted sources of revenue. Each revenue-generating engagement is separately awarded and negotiated. Our list of clients with whom there are active engagements changes continually. To develop new client relationships, and to develop new engagements from historic client relationships, we maintain, on an ongoing basis, active business dialogues with a large number of clients and potential clients. We gain new clients each year through our business development initiatives, through recruiting additional senior investment banking professionals who bring with them client relationships and expertise in certain industry sectors or geographies, and through referrals from members of boards of directors, attorneys and other parties with whom we have relationships. At the same time, we lose clients each year as a result of the sale or merger of a client, bankruptcy, a change in a client's senior management team, turnover of our senior banking professionals, competition from other investment banks and other similar reasons.
1 Excludes transactions less than
19 -------------------------------------------------------------------------------- Results of Operations
Revenues
Our revenues are derived from both corporate advisory services related to M&A, financings and restructurings, and private capital advisory services related to sales or capital raises pertaining to alternative assets. A majority of our revenue is contingent upon the closing of a merger, acquisition, financing, restructuring, or other advisory transaction. While fees payable upon the successful conclusion of a transaction generally represent the largest portion of our corporate advisory fees, we also earn other fees, including on-going retainer fees, substantially all of which relate to non-success-based strategic advisory, financing advisory and restructuring assignments, and fees payable upon the commencement of an engagement or upon the achievement of certain milestones such as the announcement of a transaction or the rendering of a fairness opinion. Additionally, we generate private capital advisory revenues from sales of alternative assets in the secondary market and from capital raises where we act as private placement agents.
Revenues were
For the six months ended
We generally experience significant variations in revenues during each quarterly period. These variations can generally be attributed to the fact that a majority of our revenues is usually earned in large amounts throughout the year upon the successful completion of transactions, the timing of which are uncertain and are not subject to our control. Accordingly, the revenues earned in any particular period may not be indicative of revenues earned in future periods.
Operating Expenses
We classify operating expenses as employee compensation and benefits expenses and non-compensation operating expenses. Non-compensation operating expenses include the costs for occupancy and equipment rental, communications, information services, professional fees, recruiting, travel and entertainment, insurance, depreciation and amortization, and other operating expenses. Our total operating expenses for the second quarter of 2022 were$56.9 million , which compared to$52.4 million of total operating expenses for the second quarter of 2021. The increase in total operating expenses of$4.5 million , or 9%, resulted from higher compensation and benefits expenses and non-compensation operating expenses, each as described in more detail below. For the six months endedJune 30, 2022 , our total operating expenses were$116.9 million , which compared to$114.1 million of total operating expenses for the first half of 2021. The increase in total operating expenses of$2.8 million , or 2%, resulted from an increase in our compensation and benefits expenses, partially offset by a decrease in our non-compensation operating expenses, each as described in more detail below. 20 -------------------------------------------------------------------------------- The following table sets forth information relating to our operating expenses. For the Six Months Ended For the Three Months Ended June 30, June 30, 2022 2021 2022 2021 (in millions, unaudited) Employee compensation and benefits expenses$43.2 $39.8 $90.0 $87.1 % of revenues 120 % 92 % 110 % 78 % Non-compensation operating expenses 13.8 12.6 26.9 27.0 % of revenues 38 % 29 % 33 % 24 % Total operating expenses 56.9 52.4 116.9 114.1 % of revenues 158 % 121 % 143 % 102 % Total operating income (loss) (20.9) (9.2) (35.4) (2.0) Operating profit margin NM NM NM NM
Compensation and Benefits Expenses
The largest component of our operating expenses is employee compensation and benefits expenses, which we determine annually based on a percentage of revenues. The actual percentage of revenues, which we refer to as our compensation ratio, is determined by management in consultation with the Compensation Committee at each year end and is based on factors such as the relative level of revenues, anticipated compensation requirements to retain and reward our employees, the cost to recruit and exit employees, the charge for amortization of restricted stock and deferred cash compensation awards and related forfeitures, among others. Our employee compensation and benefits expenses were$43.2 million in the second quarter of 2022 as compared to$39.8 million for the second quarter of 2021. The increase in expense of$3.4 million , or 8%, was principally due to growth in professional headcount and a market driven increase in salaries. The ratios of compensation to revenues for the second quarters in both 2022 and 2021 were elevated due to lower than average quarterly revenues. For the six months endedJune 30, 2022 , our employee compensation and benefits expenses were$90.0 million compared to$87.1 million for the same period in 2021. The increase in expense of$2.9 million , or 3%, was principally attributable to headcount growth and higher salary levels of our professional staff. The ratio of compensation to revenues for the six month periods in 2022 and 2021 was elevated due to the low level of first half revenues in each year. Our compensation expense is generally based upon revenues and can fluctuate materially in any particular period depending upon 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 future periods.
Non-Compensation Operating Expenses
Our non-compensation operating expenses such as occupancy, depreciation, and information services are relatively fixed year to year although they may vary depending upon changes in headcount, geographic locations and other factors. Other expenses such as travel, professional fees and other operating expenses vary dependent on the level of business development, recruitment, foreign currency movements and the amount of reimbursable client expenses, which are reported in full in both our revenues and our operating expenses. It is management's objective to maintain comparable non-compensation costs year over year for each jurisdiction in which we operate. We monitor costs based on actual costs incurred in prior periods and on headcount and seek to gain operating efficiencies when possible. During the second half of 2022, we began the build out of newLondon space and expect to incur additional non-cash rent expense of approximately$1.6 million before we exit our existing space.
For the three months ended
Non-compensation expenses as a percentage of revenues for the three months endedJune 30, 2022 were 38% compared to 29% for the same period in 2021. The increase in non-compensation expenses as a percentage of revenues resulted from the effect of spreading slightly higher non-compensation costs over lower revenues in the three months endedJune 30, 2022 as compared to the same period in 2021. 21 -------------------------------------------------------------------------------- For the first half of 2022, our non-compensation operating expenses of$26.9 million decreased$0.1 million , or 1% as compared to$27.0 million in the comparable period in 2021. The slight decrease principally resulted from the benefit of a small foreign currency gain compared to a small foreign currency loss in the same period in the prior year, partially offset by increased travel and entertainment costs. Non-compensation expenses as a percentage of revenues for the six months endedJune 30, 2022 were 33% compared to 24% for the same period in 2021. The increase in non-compensation expenses as a percentage of revenues resulted from the effect of spreading comparable non-compensation costs over much lower revenues in the first half of 2022 as compared to the same period in 2021. Our non-compensation operating expenses can vary as a result of a variety of factors such as changes in headcount, the amount of recruiting and business development activity, the amount of office expansion, the amount of client reimbursed expenses, the impact of currency movements and other factors. Accordingly, the non-compensation operating expenses in any particular period may not be indicative of the non-compensation operating expenses in future periods.
Interest Expense
For the three months endedJune 30, 2022 , we incurred interest expense of$3.3 million as compared to$3.1 million for the same period in 2021. The increase of$0.2 million principally related to higher market borrowing rates in the second quarter of 2022 compared to the same period in 2021, offset in part by lower borrowings outstanding as a result of accelerated debt repayments made during 2021. For the six months endedJune 30, 2022 , we incurred interest expense of$6.0 million , a decrease of$0.3 million as compared to$6.3 million for the same period in 2021. The decrease related to lower borrowings outstanding, offset in part by higher average market borrowing rates in the first six months of 2022 as compared to the same period in 2021. The rate of interest on our borrowing is based on LIBOR and can vary from period to period. Accordingly, the amount of interest expense in any particular period may not be indicative of the amount of interest expense in future periods. There can be no certainty that our borrowing rate will not increase in future periods as a result of the transition from LIBOR to SOFR or another alternative rate.
Provision for Income Taxes
For the three months endedJune 30, 2022 , we recognized an income tax benefit of$5.4 million as compared to an income tax benefit of$3.4 million for the same period in 2021. The tax benefit recognized in the second quarter of 2022 increased as compared to the same period in 2021 as a result of a higher pre-tax loss in the recent three-month period. For the six months endedJune 30, 2022 , due to our pre-tax loss we recognized an income tax benefit of$10.6 million , which included an additional benefit of$1.0 million related to the tax effect of the vesting of restricted stock units at a market price higher than the grant price. This compared to an income tax benefit for the six month period endedJune 30, 2021 of$1.5 million , which included a charge of$0.6 million related to the tax effect of the difference between the grant price value and the market price value of restricted stock awards at the time of the vesting. Excluding these benefits/charges, the effective tax rates for the six month periods endedJune 30, 2022 and 2021 would have been 23% and 25%, respectively. The lower effective rate for the six months endedJune 30, 2022 is principally the result of a greater portion of earnings expected to be generated in the relatively low tax jurisdiction of theU.K. in 2022 as compared to 2021. The effective tax rate can fluctuate as a result of variations in the amount of income earned and the tax rate imposed in the tax jurisdictions in which we operate. Accordingly, the effective tax rate in any particular period may not be indicative of the effective tax rate in future periods.
Liquidity and Capital Resources
Our liquidity position, which consists of cash and cash equivalents, other significant working capital assets and liabilities, debt and other matters relating to liquidity requirements and current market conditions, is monitored by management on a regular basis. We retain our cash in financial institutions with high credit ratings and/or invest in short-term investments that are expected to provide liquidity and as permitted under the credit agreement. It is our objective to retain a global cash balance adequate to service our forecast operating and financing needs. AtJune 30, 2022 , we had cash and cash equivalents of$64.5 million . 22 -------------------------------------------------------------------------------- We generate substantially all of our cash from advisory fees. Since we are solely a financial advisory services firm and we do not underwrite, trade securities, lend or have asset management services, we do not need to retain a significant amount of regulatory capital. Our cash needs thus are primarily a function of working capital requirements. We use our cash primarily for recurring operating expenses, the repayment and service of our debt, the repurchase of our common shares and other capital needs. Our recurring monthly operating disbursements principally consist of base compensation expense, occupancy, travel and entertainment, and other operating expenses. In addition, we generally make interest payments on our debt on a monthly basis. Our recurring quarterly and annual disbursements consist of cash bonus payments, tax payments, debt service payments, dividend payments, and repurchases of our common stock from our employees in conjunction with the payment of tax liabilities incurred on vesting of restricted stock units. These amounts vary depending upon our profitability and other factors. Because a portion of the compensation we pay to our employees is distributed in annual cash bonus awards (usually in the first quarter of each year), our net cash balance is typically at its lowest level during the first quarter of each year and generally accumulates from our operating activities throughout the remainder of the year. Our current liabilities primarily consist of accounts payable, which are generally paid monthly, accrued compensation, which includes accrued cash bonuses that are generally paid in the first quarter of the following year to the large majority of our employees, and current taxes payable. Our current assets include accounts receivable, which we generally collect within 60 days, except for fees generated through our primary capital advisory engagements, which are generally paid in installments over a period of three years, and certain restructuring transactions, where collections may take longer due to court-ordered holdbacks. AtJune 30, 2022 , we had fees receivable of$22.1 million . Because we can experience significant fluctuations in our quarterly revenues due to the timing of transaction closings, there can be periods (which may fall at any time of the calendar year) in which our cash outflows exceed the cash inflows we generate from operations. If our cash balance declined to a level where we were unable to support our capital and operating requirements, we would seek other funding sources. In 2017, we announced a leveraged recapitalization to put in place a capital structure designed to enhance long term shareholder value. In 2019, we refinanced the credit facility that was put in place at the time of the recapitalization and entered into a new$375.0 million five-year term loan B facility ("TLB"). Borrowings under the TLB bear interest at either theU.S. Prime Rate plus 2.25% or LIBOR plus 3.25%. Our borrowing rates in the six month period endedJune 30, 2022 ranged from 3.35% to 4.92%. TheFCA , which regulates LIBOR, has announced that it will not compel panel banks to contribute to LIBOR after 2021. InNovember 2020 , theICE Benchmark Administration Limited announced a plan to extend the date as of which mostU.S. LIBOR values would cease being computed fromDecember 31, 2021 toJune 30, 2023 . OnJuly 29, 2021 , the Alternative Reference Rates Committee announced that it is formally recommending the forward-looking Secured Overnight Financing Rate ("SOFR") term rate. Our credit agreement includes alternative rate fallback provisions, which provides for use of a broadly accepted market convention to replace LIBOR as the rate of interest and are triggered by a notification from the Administrative Agent. We have not yet received such notification, but expect that when we do the TLB will likely be converted to a SOFR term rate based facility. There can be no assurance the LIBOR phase out will not increase our cost of capital. The TLB requires quarterly principal amortization payments of$4.7 million fromSeptember 30, 2019 throughMarch 31, 2024 , with the remaining balance due at maturity onApril 12, 2024 . The TLB permits voluntary principal payments to be made in advance without penalty and such payments are applied to the next successive quarterly installments. As a result of voluntary advance payments made in 2020 and 2021 we have repaid all required quarterly amortization payments due in advance of maturity. As ofJuly 29, 2022 the remaining outstanding principal balance is$271.9 million and is due at maturity. Subject to the terms of the credit agreement, we may also be required to repay certain amounts in advance of maturity in connection with an annual excess cash flow calculation, the non-ordinary course sale of assets, receipt of insurance proceeds, and the issuance of debt obligations, subject to certain exceptions. Future voluntary repayments on the TLB will be applied without penalty or premium. Based on the current outstanding balance of the TLB we have temporarily paused further principal repayments to maintain an appropriate level of trading liquidity in the loan facility in the event we elect to refinance in advance of maturity. We would consider refinancing, modifying or amending the TLB if market conditions were favorable and permitted us to improve some or all of terms, including an extension of the maturity date, a reduction of the borrowing rate, the modification of the restricted payment covenants and other actions to increase our flexibility with respect to our uses of free cash flow. We would consider making further repayments prior to maturity if interest rates increased meaningfully or we otherwise considered it a prudent use of our capital. The TLB is guaranteed by our existing and subsequently acquired or organized wholly-ownedU.S. restricted subsidiaries (excluding any registered broker-dealers) and secured with a first priority perfected security interest in certain domestic assets, 100% of the capital stock of eachU.S. subsidiary and 65% of the capital stock of each non-U.S. subsidiary, subject to certain exclusions. The credit facility contains certain covenants that limit our ability above certain permitted amounts to incur additional indebtedness, make certain acquisitions, pay dividends and repurchase shares. The TLB does not have financial 23 -------------------------------------------------------------------------------- covenants, however, we are subject to certain non-financial covenants such as repayment obligations, restricted payment limitations, financial reporting requirements and others. Our failure to comply with the terms of these covenants may adversely affect our operations and could permit lenders to accelerate the maturity of the debt and to foreclose upon any collateral securing the debt. AtJune 30, 2022 , we were compliant with all loan covenants under the credit agreement and we expect to continue to be compliant with all loan covenants in future periods. Since we announced our recapitalization in 2017, we have used the majority of the TLB borrowing proceeds along with a portion of our excess cash flow over the past several years to repurchase shares of our common stock through open market purchases (including pursuant to 10b5-1 plans) and tender offers. During 2022, we repurchased in the open market 1,130,208 shares of our common stock for$16.8 million and we are deemed to have repurchased 783,403 shares of common stock equivalents from employees at the time of vesting of RSUs to settle withholding tax liabilities for$13.4 million . For the period beginningFebruary 1, 2022 throughJanuary 31, 2023 our Board of Directors has authorized$70.0 million in purchases of common stock and common stock equivalents (via tax withholding on vesting of restricted stock units). As ofJuly 29, 2022 , we had$44.6 million remaining and authorized for repurchase throughJanuary 2023 . Future share repurchases are subject to market conditions and other factors, such as our results of operations, financial position and capital requirements, general business conditions, legal, tax and regulatory constraints or restrictions, any contractual restrictions and other factors deemed relevant. There can be no assurances of the price at which we may be able to repurchase our shares or that we will repurchase the full amount authorized for the period endingJanuary 31, 2023 or the amount authorized in any future period. In the first half of 2022, the Board of Directors declared quarterly dividend payments of$0.10 per share payable in March and June. InAugust 2022 , the Board also declared a quarterly dividend payment of$0.10 per share, which will be payable onSeptember 28, 2022 . Future authorizations to repurchase our common stock and to pay dividends on our common stock are at the discretion of our Board of Directors and depend upon, among other things, general financial conditions, capital requirements and surplus, cash flows, debt service obligations, our recent and expected future operations and earnings, legal and contractual restrictions and other factors as the Board of Directors may deem relevant. Further, under our credit agreement, we are restricted in the amount of cash we may use to repurchase our common stock and common stock equivalents and/or to make dividend distributions. Going forward, we intend to take a balanced approach to our use of available cash, allocating funds for a combination of deleveraging, share repurchases and dividends depending on such factors as our financial position, capital requirements, results of operations and outlook, as well as any legal, tax, regulatory or contractual constraints and any other factors deemed relevant. As part of our long term incentive award program, we may award restricted stock units to managing directors and other employees at the time of hire and/or as part of annual compensation. Awards of restricted stock units generally vest over a three to five-year service period, subject to continued employment on the vesting date. Each restricted stock unit represents the holder's right to receive one share of our common stock (or at our election, a cash payment equal to the fair value thereof) on the vesting date. Under the terms of our equity incentive plan, we generally repurchase from our employees that portion of restricted stock unit awards used to fund income tax withholding due at the time the restricted stock unit awards vest and pay the remainder of the award in shares of our common stock. Based upon the number of restricted stock unit grants outstanding atJuly 29, 2022 , we estimate repurchases of our common stock from our employees in conjunction with the cash settlement of tax liabilities incurred on vesting of restricted stock units of approximately$31.2 million (as calculated based upon the closing share price as ofJuly 29, 2022 of$8.70 per share and assuming a withholding tax rate of 46% consistent with our recent experience) over the next five years, of which an additional$4.2 million remains payable in 2022,$9.3 million will be payable in 2023,$7.0 million will be payable in 2024,$6.4 million will be payable in 2025,$2.8 million will be payable in 2026, and$1.5 million will be payable in 2027. We will realize a corporate income tax deduction concurrently with the vesting of the restricted stock units. While we expect to fund future repurchases of our common stock equivalents (if any) with operating cash flow, we are unable to predict the price of our common stock, and as a result, the timing or magnitude of our share repurchases may be greater or less than the amounts calculated above. Our credit agreement limits the amount we may use for common stock and common stock equivalent share repurchases. To the extent future repurchases are expected to exceed the amount permitted under the credit agreement, we may seek to modify the credit agreement to increase the amount or seek other means to settle the withholding tax liability incurred on the vesting of the restricted stock units. Also, as part of our long-term incentive award program, we may also award deferred cash compensation to managing directors and other employees at the time of hire and/or as part of annual compensation. Awards of deferred cash compensation generally vest over a three to five year service period, subject to continued employment. Each award provides the employee with the right to receive future cash compensation payments, which are non-interest bearing, on the vesting date. Based upon the value of the deferred cash awards outstanding atJuly 29, 2022 , we estimate payments of$36.7 million over the next five years, of which$0.9 million remains payable in 2022,$11.5 million will be payable in 2023,$10.3 million will be payable in 24 --------------------------------------------------------------------------------
2024,
Our capital expenditures relate primarily to technology systems and periodic refurbishment of our leased premises, which generally range from$2.0 million to$3.0 million annually. From time to time we incur leasehold improvements related to the build out of new space. In 2022, we expect to incur leasehold costs of approximately$8.0 million , excluding the benefit of lease incentives, related to the relocation of ourLondon office. There are no other large leasehold improvement expenditures planned in the near-term. Under theU.S federal tax law, we can repatriate foreign cash with minimal or no incremental tax burden. Subject to any limitations imposed by theTreasury Department and any future changes made to current tax law, we intend to repatriate our foreign cash dependent upon our needs for cash in theU.S. The amount of foreign cash we repatriate is subject to our estimated foreign operating and regulatory needs as well as our global cash management needs. Based on recent regulatory pronouncements in theU.K. andEurope our regulatory capital amounts are expected to modestly increase over the next few years. We operate in multiple countries inNorth America ,Europe ,Australia andAsia . As a financial services firm, we are subject to extensive regulation by governments, their respective agencies and/or various self-regulatory organizations or exchanges in each of the countries in which we operate. Each regulator imposes varying degrees of regulatory requirements which generally include net capital requirements, customer protection and market conduct requirements. The amount of regulatory capital required by each regulatory authority varies and may change through the implementation of new regulations or a change in our business operations. Due to the enactment of new regulatory standards in theU.K. and the relocation of our European headquarters toGermany , our regulatory capital requirements in theU.K. andEurope have increased moderately from historically very nominal levels. Elsewhere in the world we are also subject to varying capital requirements. To comply with these requirements, we may need to retain cash in certain jurisdictions in excess of our forecasted working capital needs. In the event we need additional capital in one or more locations we may be required to fund those needs by withdrawing capital from another jurisdiction, subject to limitations imposed on intercompany lending by our credit agreement. While we believe that the cash generated from operations will be sufficient to meet our expected operating needs, which include, among other things, our tax obligations, interest and principal payments on our loan facilities, dividend payments, share repurchases related to the tax settlement payments upon the vesting of the restricted stock units, deferred cash compensation payments and build-out costs of new office space, we may adjust our variable expenses and other disbursements, if necessary, to meet our liquidity needs. However, there is no assurance that our cash flow will be sufficient to allow us to meet our operating obligations and make timely principal and interest payments under the credit agreement. If we are unable to fund our operating and debt obligations, we may need to consider taking other actions, including issuing additional securities, seeking strategic investments, reducing operating costs or a combination of these actions, in each case on terms which may not be favorable to us. Further, failure to make timely principal and interest payments under the credit agreement could result in a default. A default of our credit agreement would permit lenders to accelerate the maturity for the debt and to foreclose upon any collateral securing the debt. In addition, the limitations imposed by the financing agreements on our ability to incur additional debt and to take other actions might significantly impair our ability to obtain other financing. Further, a failure to maintain adequate regulatory capital in one or more jurisdictions could result in sanctions, a suspension of our regulatory license in such locations or limit or prohibit us from conducting operations.
Cash Flows
In the six months endedJune 30, 2022 , our cash and cash equivalents decreased by$70.1 million fromDecember 31, 2021 , including a decrease of$3.6 million from the effect of the translation of foreign currency amounts intoU.S. dollars at the quarter-end foreign currency conversion rates. We used$31.1 million for operating activities, which consisted of an operating loss of$10.5 million after giving effect to non-cash items and a net increase in working capital of$20.5 million , principally from the payment of annual bonuses. We used$0.9 million in investing activities to fund leasehold improvements and equipment purchases. We used$34.5 million in financing activities, including$16.8 million for open market repurchases of our common stock,$13.4 million for the repurchase of our common stock from employees in conjunction with the payment of tax liabilities in settlement of restricted stock units, and$4.3 million for the payment of dividends. In the six months endedJune 30, 2021 , our cash and cash equivalents decreased by$20.2 million fromDecember 31, 2020 , including an increase of$0.3 million from the effect of the translation of foreign currency amounts intoU.S. dollars at the quarter-end foreign currency conversion rates. We generated$28.8 million from operating activities, which consisted of$13.5 million from operating earnings after giving effect to non-cash items and a net decrease in working capital of$15.3 million , principally from the collection of fees receivables. We used$2.9 million in investing activities principally to fund leasehold improvements and equipment purchases. We used$46.4 million in financing activities, including$20.0 million for the advance repayment of the term loan,$12.5 million for open market repurchases of our common stock,$11.3 million for the repurchase 25 --------------------------------------------------------------------------------
of our common stock from employees in conjunction with the payment of tax
liabilities in settlement of restricted stock units, and
Off-Balance Sheet Arrangements
We do not invest in off-balance sheet vehicles that provide financing, liquidity, market risk or credit risk support, or engage in any leasing or hedging activities that expose us to any liability that is not reflected in our condensed consolidated financial statements.
Contractual Obligations
There have been no material changes in our contractual obligations from those
disclosed in the Firm's Annual Report on Form 10-K for the year ended
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Market Risk
Our business is not capital-intensive and as such, is not subject to significant market or credit risks.
Risks Related to Cash and Short-Term Investments
Our cash and cash equivalents are principally held in depository accounts and money market funds and other short-term highly liquid investments with original maturities of three months or less. We maintain our depository accounts with financial institutions with high credit ratings. Although these deposits are generally not insured, management believes we are not exposed to significant credit risk due to the financial position of the depository institutions in which those deposits are held. Further, we do not believe our cash equivalent investments are exposed to significant credit risk or interest rate risk due to the short-term nature and high quality of the underlying investments in which the funds are invested. Credit Risk We regularly review our accounts receivable and allowance for doubtful accounts by considering factors such as historical experience, credit quality, age of the accounts receivable, and the current economic conditions that may affect a customer's ability to pay such amounts owed to the Firm. We maintain an allowance for doubtful accounts that, in our opinion, provides for an adequate reserve to cover losses that may be incurred.
Exchange Rate Risk
We are exposed to the risk that the exchange rate of theU.S. dollar relative to other currencies may have an adverse effect on the reported value of our non-U.S. dollar denominated assets and liabilities. Non-functional currency related transaction gains and losses are recorded in the condensed consolidated statements of operations. In addition, the reported amounts of our revenues may be affected by movements in the rate of exchange between the currency in which an invoice is issued and paid and theU.S. dollar, in which our financial statements are denominated. We do not currently hedge against movements in these exchange rates through the use of derivative instruments or other methods. We analyze our potential exposure to a decline in exchange rates by performing a sensitivity analysis on our net income in those jurisdictions in which we have generated a significant portion of our foreign earnings, which generally include theUnited Kingdom ,Europe , andAustralia . During the six months endedJune 30, 2022 , as compared to the same period in 2021, the average value of theU.S. dollar strengthened relative to the pound sterling, euro and Australian dollar. In aggregate, there was a slight negative impact on our revenues in the six months endedJune 30, 2022 as compared to the same period in 2021 as a result of the timing of recognition of foreign revenues. Even if the currency rates had changed more materially, the impact would not have had been significant to our foreign operations because our operating costs in foreign jurisdictions are denominated in local currency and consequently we are effectively internally hedged to some extent against the impact in the movements of foreign currency relative to theU.S. dollar. While our earnings are subject to volatility from changes in foreign currency rates, we do not believe we face any material risk in this respect.
Interest Rate Risk
Our TLB bears interest at theU.S. Prime Rate plus 2.25% or LIBOR plus 3.25%. Because we have indebtedness which bears interest at variable rates, our financial results will be sensitive to changes in prevailing market rates of interest. As ofJune 30, 2022 , we had$271.9 million of indebtedness outstanding, all of which bears interest at floating rates. The rate of interest varies from period to period and our interest rate exposure is not currently hedged to mitigate the effect of interest rate fluctuations. Depending upon future market conditions and our level of outstanding variable rate debt, we may enter into interest rate swap or other hedge arrangements (with counterparties that, in our judgment, have sufficient creditworthiness) to hedge our exposure against interest rate volatility. As ofJune 30, 2022 , a 100 basis point increase in LIBOR would have increased our annual borrowing expense by$2.7 million . TheFCA , which regulates LIBOR, has announced that it will not compel panel banks to contribute to LIBOR after 2021. InNovember 2020 , theICE Benchmark Administration Limited announced a plan to extend the date as of which mostU.S. LIBOR values would cease being computed fromDecember 31, 2021 toJune 30, 2023 . OnJuly 29, 2021 , the Alternative Reference Rates Committee announced that it is formally recommending the forward-looking SOFR term rate. Our credit agreement includes alternative rate fallback provisions, which provides for use of a broadly accepted market convention to replace LIBOR as the rate of interest and are triggered by a notification from the Administrative Agent. We have not yet received such notification, but expect that when we do the TLB will likely be converted to a SOFR term rate based facility. There can be no assurance the LIBOR phase out will not increase our cost of capital. 27 --------------------------------------------------------------------------------
Critical Accounting Policies and Estimates
Descriptions of our critical accounting policies and estimates, which are those that are most important to the presentation of our financial condition and results of operations and require management's most difficult, subjective and complex judgments, are set forth above in "Item 1 - Notes to Condensed Consolidated Financial Statements (unaudited), Note 2 - Summary of Significant Accounting Policies" and are incorporated by reference herein.
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