Business context and reporting period
Cohen & Co. Inc. is identified in the filing as Institutional Financial Markets, Inc. (IFMI); its common stock traded as IFMI. This is the audited Form 10-K for the year ended December 31, 2013. The company provides fixed-income capital markets, asset management, and principal-investing services. Unless stated otherwise, financial amounts below are in millions of dollars.
At year-end, assets under management were $5.695 billion, including $5.377 billion in CDOs. The filing also presents unaudited fourth-quarter results; the primary comparisons below cover full-year 2013 versus 2012.
Financial performance and condition
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Total revenue | $57.5 | $95.2 | Down 40% |
| Net trading revenue | $38.5 | $69.5 | Down 45% |
| Asset management revenue | $19.8 | $23.2 | Down 15% |
| New issue and advisory revenue | $6.4 | $5.0 | Up 28% |
| Principal transactions and other income | $(7.2) | $(2.4) | Larger loss |
| Operating expenses | $78.6 | $94.9 | Down 17% |
| Operating income (loss) | $(21.1) | $0.3 | Turned to loss |
| Net income (loss) | $(19.9) | $(2.0) | Larger loss |
| Net income (loss) attributable to IFMI | $(13.3) | $(1.0) | Larger loss |
| Basic and diluted loss per share | $(1.08) | $(0.09) |
Operating margin was approximately -36.7% in 2013 versus 0.3% in 2012; net loss attributable to IFMI was approximately 23.2% of revenue versus 1.0% in 2012. These margins are calculated from reported figures. Compensation and benefits fell 25% to $47.2 million, alongside reduced staffing and lower incentive compensation, but lower revenue outweighed the cost savings. Interest expense, net, rose to $4.2 million from $3.7 million. A $3.6 million income-tax benefit reduced the reported 2013 loss.
Full-year cash flow from operating activities was $(8.2) million, investing activities provided $2.9 million, and financing activities provided $4.0 million. Cash and cash equivalents ended the year at $13.2 million, down from $14.5 million. Total assets were $216.8 million, total liabilities $155.6 million, and total permanent equity $61.2 million.
Balance-sheet debt was $29.7 million carrying value. The filing separately reports approximately $59.5 million of recourse indebtedness at par, including $11.4 million of convertible notes and $48.1 million of junior subordinated notes held by third parties. The $3.1 million balance of 10.50% notes could be put to the company in May 2014. Broker-dealer net capital was $28.6 million against $2.6 million of minimum requirements; withdrawals remain subject to regulatory restrictions.
Material changes versus comparable periods
- Trading revenue declined broadly across business lines. Management cited falling volumes, reduced activity in agency new issues and TBA origination, and mark-to-market losses associated with rising interest rates and Federal Reserve tapering concerns.
- CDO and related service agreement revenue fell $7.5 million. CDO AUM declined about 11%, from $6.052 billion to $5.377 billion, and many managed CDOs no longer paid subordinated management fees because of cash-flow diversion and credit tests.
- Principal-investment losses increased to $11.4 million from $6.3 million. Star Asia accounted for a $13.1 million fair-value loss, including $7.6 million of foreign-exchange losses and $5.4 million from underlying investment values. The company’s Tiptree valuation method also changed during 2013.
- Operating expenses fell $16.3 million, primarily reflecting lower compensation and headcount; employee count decreased from 197 at year-end 2012 to 148 at year-end 2013.
- Fourth-quarter 2013 revenue was $11.7 million, with an operating loss of $7.0 million and a loss attributable to IFMI of $4.0 million. Fourth-quarter 2012 revenue was $23.4 million, operating income $1.5 million, and income attributable to IFMI $3.0 million.
Outlook, risks, contingencies, and unusual items
Management described the business environment as challenging into the foreseeable future and noted uncertainty around trading volumes, interest rates, securitization markets, and competition. The filing gives no quantitative earnings or revenue guidance.
- Post-year-end restructuring: On January 31, 2014, the two U.S. broker-dealers, CCPR and JVB, merged under the JVB name. The company said the consolidation and approximately 20% workforce reduction were intended to lower costs and improve capital efficiency, but cautioned that integration may disrupt operations and may not deliver expected benefits.
- Star Asia sale: On February 20, 2014, the company completed the sale of its Star Asia interests and related entities for an upfront payment of approximately $20.0 million, plus a 15% share of certain revenues for at least four years. The sale substantially changes the principal-investing portfolio; proceeds may be reinvested.
- Legal matters: A U.S. Bank fee dispute was settled after year-end; a sufficient loss had been accrued at December 31, 2013, but the settlement amount is confidential. Northern Rock litigation concerning a CDO investment remained pending, and the company stated it would defend the case. The filing also reports a $4.7 million Pennsylvania tax assessment relating to a 2009 KOZ credit; the company appealed and recorded no reserve.
- Other exposures: Risks include illiquid and difficult-to-value securities, trading and counterparty losses, margin calls and reliance on clearing brokers, CDO defaults and manager-removal provisions, regulatory capital requirements, and the ability to raise funding. A 100-basis-point adverse yield-curve shift was estimated to reduce fixed-income fair value by $4.2 million at year-end.
- Capital and dilution: The company raised $13.7 million in 2013 through common stock and 8% convertible notes. Those notes carried $8.2 million principal at year-end and were convertible at $3.00 per share. The board declared $0.02 quarterly dividends during 2013, but future dividends are discretionary. Management reported effective disclosure controls and internal control over financial reporting; auditor attestation of internal controls was not required and was not provided.
Important facts for investors to verify
- Whether the 2014 broker-dealer merger and cost reductions improved trading profitability without impairing client relationships or controls.
- Cash generation, available funding, and the outcome of the May 2014 put right on up to $3.1 million of 10.50% notes.
- Final proceeds and any continuing revenue-share receipts from the Star Asia sale, and how sale proceeds were deployed.
- Performance and fee-collection prospects for the remaining CDOs, including default, liquidation, and manager-removal risks.
- Resolution of Northern Rock litigation and the Pennsylvania tax appeal, including any effect beyond recorded accruals.
- Potential dilution from convertible notes, outstanding equity awards, and the 2.5 million CEO options requiring stockholder approval.