Piper Sandler Companies — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Financial statements are unaudited; amounts below are in U.S. dollars unless noted.
Business context and performance
Piper Sandler is an investment banking and institutional securities firm operating as one reporting segment. It completed acquisitions of Cornerstone Macro in February and Stamford Partners in June 2022; in July it announced an agreement to acquire DBO Partners, expected to close in Q4 2022, subject to approvals and customary conditions.
| Metric | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 |
|---|---|---|---|---|
| Net revenues | $352.2m | $508.6m | $702.8m | $937.3m |
| Income before tax | $37.2m | $114.1m | $72.8m | $196.9m |
| Net income attributable to Piper Sandler | $21.4m | $69.8m | $58.0m | $119.3m |
| Diluted EPS | $1.26 | $4.12 | $3.39 | $7.14 |
| GAAP pre-tax margin | 10.6% | 22.4% | 10.4% | 21.0% |
Q2 investment banking revenue fell 39.5% to $234.1m, led by declines in advisory and corporate financing. Institutional brokerage rose 9.5% to $104.9m, as higher equity brokerage more than offset lower fixed income revenue. Investment income was $10.9m versus $26.7m a year earlier. For H1, investment income was a loss of $2.1m versus income of $50.5m, reflecting unrealized investment losses, including lower valuations in managed funds.
Expenses declined less than revenues: Q2 non-interest expenses fell 20.2% to $315.0m, while compensation fell 26.2% to $239.9m. Compensation was 68.1% of net revenues, up from 63.9%; non-compensation expenses were 21.3%, up from 13.6%. Management-reported adjusted non-GAAP diluted EPS was $2.47 for Q2 and $5.59 for H1, down 54.0% and 41.2%, respectively. Adjusted pre-tax margin was 17.5% for Q2 and 19.2% for H1. These adjusted measures exclude specified acquisition, noncontrolling-interest and financing items and are not GAAP results.
Cash flow, balance sheet and capital
- Cash and cash equivalents were $237.8m at June 30, down from $971.0m at December 31, 2021. H1 operating cash flow was negative $450.3m; investing used $47.4m and financing used $232.0m. The filing identifies annual incentive compensation payments, repurchases and dividends as significant cash uses; accrued compensation declined $493.7m.
- Total assets were $1.951bn and shareholders’ equity was $1.178bn. Long-term financing was $125m, comprising 5.20% fixed-rate Class B senior notes due October 15, 2023. No borrowings were outstanding on the $65m unsecured revolver or the $100m committed secured line at quarter-end.
- Funding also included $70m outstanding through a clearing arrangement for convertible securities. Pershing financing was less than $0.1m at quarter-end and is uncommitted. Management notes that funding availability can depend on collateral and counterparties.
- Reported SEC net capital was $243.1m, $242.1m above the SEC minimum; the firm was also subject to $120m regulatory-net-capital covenants and reported compliance with applicable covenants. Adjusted leverage was 2.1x, down from 2.8x at year-end.
- H1 cash dividends totaled $89.8m, including a $4.50-per-share special dividend; declared dividends were $5.70 per share for H1. The company repurchased 1.07m shares for $142.9m under its authorization and had $157.1m of combined authorization remaining at June 30.
Outlook, risks and notable items
Management provided no specific earnings guidance. It expected a slowing U.S. economy, heightened recession risk and continued uncertainty from inflation, geopolitical events, higher rates and market volatility. Equity capital raising remained largely shut down, and management said reopening timing was unclear. Advisory deal timelines and execution were affected by uncertainty, weaker confidence and valuations. Management cited a strong advisory pipeline but emphasized increased uncertainty. It expected municipal issuance to moderate, while describing its specialty-sector pipeline as strong but market-dependent. It anticipated additional restructuring and integration costs during the remainder of 2022.
Key exposures include market, liquidity, credit, operational, human-capital and legal/regulatory risks. A parallel adverse 50-basis-point rate move was estimated to reduce fixed-income inventory value by about $0.3m after hedges. Uncollateralized derivative credit exposure was $14.0m, including $9.1m to one counterparty. Management said reasonably possible legal losses above reserves were not material, while noting outcomes and estimates remain uncertain. The DBO acquisition was expected to be funded from operating cash flows. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported for Q2.
Important facts for investors to verify
- Whether investment banking activity, particularly corporate financing and advisory closings, recovered after the reporting period.
- How cash usage, incentive compensation timing and available funding facilities evolved, including the renewal or extension of facilities due in December 2022.
- Progress, purchase terms, funding needs and integration costs for the DBO Partners acquisition, and performance of the Cornerstone Macro and Stamford Partners acquisitions.
- Changes in investment valuations, derivative counterparty exposure and market liquidity, as well as developments in legal or regulatory matters.
- How GAAP results compare with adjusted non-GAAP measures, including the exclusions used in management’s reconciliations.