Business Context and Reporting Period
Company: Oppenheimer Holdings Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2011
Filing Date: November 10, 2011
Oppenheimer Holdings Inc. operates as a full-service financial services firm providing retail securities brokerage, institutional sales and trading, investment banking, asset management, and trust services. The company reported client assets entrusted totaling approximately $77.3 billion and assets under management of $17.7 billion as of the reporting date.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2011 | Nine Months Ended Sep 30, 2011 | Three Months Ended Sep 30, 2010 | Nine Months Ended Sep 30, 2010 |
|---|---|---|---|---|
| Total Revenue | $231.6 million | $729.6 million | $235.1 million | $739.5 million |
| Net Profit (Attributable to OPY) | $2.1 million | $6.9 million | $3.7 million | $20.4 million |
| Diluted EPS | $0.15 | $0.49 | $0.26 | $1.46 |
| Cash and Cash Equivalents | $87.5 million | (N/A) | (N/A) | (N/A) |
| Total Assets | $3.35 billion | (N/A) | (N/A) | (N/A) |
| Total Liabilities | $2.84 billion | (N/A) | (N/A) | (N/A) |
| Stockholders' Equity | $503.5 million | (N/A) | (N/A) | (N/A) |
| Operating Cash Flow (9mo) | $54.5 million | (N/A) | (N/A) | ($63.8 million) |
Material Changes vs. Prior Period
- Profitability Decline: Net profit attributable to Oppenheimer Holdings Inc. decreased 42.4% year-over-year for the quarter and 66.2% for the nine-month period. Profit before taxes dropped 42.8% for the quarter and 57.0% for the nine months.
- Revenue Mix Shifts:
- Principal Transactions: Decreased 63.6% (quarter) and 46.5% (nine months) due to lower fixed income trading revenue and net losses on firm investments.
- Investment Banking: Increased 34.0% (quarter) and 9.7% (nine months), driven by the collection of an $8.0 million fee from a 2008 transaction.
- Advisory Fees: Increased 16.9% (quarter) and 14.7% (nine months) due to higher assets under management, partially offset by waived money market fees.
- Expense Increases: Interest expense rose 56.3% (quarter) and 59.2% (nine months) primarily due to the issuance of $200 million in Senior Secured Notes in April 2011 to refinance variable-rate debt. Other expenses increased 24.5% (quarter) due to higher legal costs.
- Balance Sheet Expansion: Total assets increased 27.5% from December 31, 2010, largely due to an expansion in government and agency securities inventory. Securities purchased under agreement to resell increased from $347.1 million to $589.7 million.
Guidance, Outlook, Risks, and Unusual Items
- Refinancing Activity: In April 2011, the company issued $200 million of 8.75% Senior Secured Notes due 2018. Proceeds were used to retire a $22.4 million Senior Secured Credit Note and a $100 million Subordinated Note. This fixed the interest rate and extended maturities but increased interest expense.
- Auction Rate Securities (ARS): The company remains significantly exposed to ARS litigation and settlement obligations. As of September 30, 2011, the company held $69.3 million in ARS purchased from clients and is committed to purchasing an additional $40.2 million through 2016. A valuation adjustment (unrealized loss) of $4.0 million was recorded for ARS.
- Legal Proceedings:
- U.S. Airways: Arbitration commenced in September 2011 regarding a claim for $110 million in liquidated damages (reduced from $250 million).
- Other ARS Claims: Approximately 27 arbitration claims and two court actions are pending. The company estimates a potential aggregate loss range of $0 to $220 million for matters where a loss is reasonably possible.
- Metal Management: Settled a dispute in August 2011, receiving approximately $10 million.
- Regulatory Environment: The company faces increased compliance costs due to the Dodd-Frank Act and potential impacts from the Volcker Rule. It is also responding to investigations regarding the sale of low-priced securities.
- Market Risks: The downgrade of U.S. sovereign debt by Standard & Poor's and European sovereign debt issues pose risks to liquidity and collateral requirements.
- Dividends: The company declared a quarterly dividend of $0.11 per share, payable November 25, 2011.
Investor Verification Checklist
- Debt Structure: Verify the impact of the new 8.75% Senior Secured Notes on future interest coverage ratios and cash flow.
- ARS Exposure: Monitor the progress of ARS settlement obligations and the potential for additional litigation losses beyond the current $220 million estimate.
- Capital Markets Performance: Assess the sustainability of the decline in Principal Transactions revenue and the volatility of Investment Banking fees.
- Liquidity Position: Review the company's reliance on repurchase agreements and bank call loans given the tightening credit markets and sovereign debt concerns.
- Legal Reserves: Track the status of the U.S. Airways arbitration and other pending ARS claims for potential material adjustments to reserves.