Oppenheimer Holdings Inc. — Q3 2019 Form 10-Q
Business context and reporting period. Unaudited results for the quarter and nine months ended September 30, 2019. Oppenheimer provides brokerage, capital markets, investment banking, advisory, asset management and trust services. At quarter-end, it reported $87.6 billion of client assets administered, $30.2 billion of AUM and 2,974 employees.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $234.8 million | $237.8 million | $737.5 million | $714.9 million |
| Income before taxes | $6.5 million | $7.2 million | $39.9 million | $29.3 million |
| Net income | $3.9 million | $5.1 million | $27.5 million | $20.6 million |
| Diluted EPS | $0.29 | $0.36 | $1.99 | $1.47 |
| Pre-tax margin | 2.8% | 3.0% | 5.4% | 4.1% |
| Net margin | 1.7% | 2.1% | 3.7% | 2.9% |
- For the nine months, operating cash flow was $22.9 million; investing cash flow was negative $7.0 million and financing cash flow was negative $80.4 million. Cash and cash equivalents fell $64.5 million to $26.2 million.
- At September 30, total assets were $2.20 billion, total liabilities $1.64 billion and stockholders’ equity $566.6 million. Cash was $26.2 million, versus $90.7 million at December 31, 2018.
- Senior secured notes had $150 million principal outstanding ($149.5 million net carrying value), down from $200 million. Bank call loans were zero, compared with $15 million at year-end. Repurchase-agreement liabilities were $253.7 million, down from $484.2 million. Operating lease liabilities were $208.7 million.
- Oppenheimer’s regulatory net capital was $230.8 million, $214.8 million above its minimum. Management said funds from operations, capital and available credit facilities were sufficient for foreseeable liquidity needs.
Material changes versus the prior comparable period
- Q3 revenue declined 1.3% and net income declined 22.1%. Lower investment banking, bank deposit sweep and interest revenue contributed; advisory fees rose 3.5% and principal transactions improved to $7.6 million from a small loss.
- Q3 investment banking revenue fell 23.1%, mainly because of fewer lead-managed underwriting transactions; higher M&A advisory fees partly offset the decline. Q3 Capital Markets revenue fell 6.0%, and its pre-tax loss widened to $6.4 million from $2.1 million.
- Nine-month revenue rose 3.2% and net income rose 33.4%. Higher sweep income, principal transactions and other revenue—including life-insurance-related gains and a favorable legal settlement—supported the increase; commissions and investment banking revenue decreased.
- Q3 expenses declined 1.0%; nine-month expenses rose 1.7%. Communications and technology costs increased 12.2% in Q3 and 11.2% year to date.
- The company redeemed $50 million of 6.75% notes in August, paying a call premium and related costs; it said the redemption should reduce annual interest costs by $3.8 million. It also repurchased 323,249 shares for $8.4 million in the first nine months.
Outlook, management commentary and risks
- No quantitative earnings or revenue guidance was provided. Management’s stated priorities include expanding private-client and asset-management businesses, hiring experienced advisers, investing in technology and compliance, growing capital markets capabilities, managing expenses and pursuing suitable acquisitions.
- Management said two Federal Reserve rate cuts during Q3 negatively affected earnings. Further rate cuts, higher rates paid on client deposits or lower client cash balances could pressure earnings. It also cited market volatility, trade tensions, economic uncertainty and lower transaction-based activity.
- AUM reached a record $30.2 billion at September 30, up 2.0% sequentially; the increase reflected $1.0 billion of net contributions partly offset by $0.4 billion of lower asset values. Management said higher quarter-end security valuations were expected to benefit Q4 advisory fees.
- Regulation Best Interest compliance was due June 30, 2020. The company anticipated additional documentation, possible limits on certain practices, and higher technology, compliance and litigation costs; effects remained uncertain.
- Legal and regulatory matters remain a risk. The company estimated possible aggregate losses above accruals at $0 to $3.0 million where losses could be estimated, while noting some matters could not be estimated. A separate $1.35 million settlement in principle in the International Management Associates case was reached September 30 and remained subject to court approval after quarter-end.
- Auction-rate securities exposure included $29.4 million held and purchase commitments of $3.4 million under regulatory settlements plus a $3.6 million client commitment due by June 2020. Management also identified cybersecurity, funding availability, market, credit, regulatory and foreign-operation risks.
Most important facts for investors to verify
- Whether lower interest rates and client cash balances continue to reduce sweep and interest revenue, and how those effects compare with growth in advisory fees.
- Capital Markets underwriting and trading trends, given the Q3 revenue decline and wider segment pre-tax loss.
- Cash and liquidity movements, including the impact of securities-financing activity, share repurchases, dividends and further debt reduction.
- Progress and final costs of the ARS commitments, the FINRA inquiry concerning unit investment trust sales, and the settlement requiring court approval.
- Implementation costs and business effects of Regulation Best Interest, as well as ongoing cybersecurity and regulatory-capital requirements.