Piper Sandler Companies — FY2021 Form 10-K
Reporting period: Year ended December 31, 2021; filed February 25, 2022. This is an annual report, not a standalone fourth-quarter filing. Piper Sandler is an investment bank and institutional securities firm operating as one reportable segment, with most revenue and long-lived assets in the U.S.
Financial performance
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Net revenues, GAAP | $2.031 billion | $1.238 billion | +64.0% |
| Investment banking revenue | $1.553 billion | $858.5 million | +80.9% |
| Institutional brokerage revenue | $387.6 million | $357.8 million | +8.3% |
| Income from continuing operations before tax | $441.5 million | $68.5 million | +544.1% |
| Net income attributable to Piper Sandler | $278.5 million | $40.5 million | +587.6% |
| Diluted EPS, GAAP | $16.43 | $2.72 | +504.0% |
| Adjusted net income attributable to Piper Sandler (non-GAAP) | $399.0 million | $177.6 million | +124.7% |
| Adjusted diluted EPS (non-GAAP) | $21.92 | $10.02 | +118.8% |
GAAP pre-tax margin rose to 21.7% from 5.5%; adjusted operating margin increased to 27.8% from 20.3%. The company’s non-GAAP measures exclude specified acquisition-related items, financing interest and noncontrolling interests and should be considered alongside, not instead of, GAAP results.
- Advisory revenue rose 131.5% to $1.026 billion, reflecting more completed transactions and higher average fees. Corporate financing revenue grew 22.8% to $362.8 million; municipal financing increased to $164.3 million.
- Equity brokerage revenue declined 4.6% to $154.1 million, while fixed income services revenue rose 19.0% to $233.5 million.
- Investment income increased to $94.0 million from $23.3 million, including gains in firm investments and consolidated merchant banking funds. Adjusted investment income excluding noncontrolling interests was $35.0 million.
- Compensation expense rose 48.7% to $1.305 billion, but the compensation ratio fell to 64.3% from 70.9% as revenue grew faster. Total non-interest expenses increased 35.9% to $1.590 billion.
Cash, debt and capital
- Cash and cash equivalents were $971.0 million at year-end, up $463.0 million. Operating activities generated $707.1 million; investing used $20.6 million and financing used $223.1 million.
- Financing cash outflows included $70.0 million of debt repayments, $99.4 million of dividends and $69.9 million of share repurchases.
- Year-end long-term financing was $125 million: Class B senior notes bearing 5.20% interest and due October 2023. The $50 million Class A notes and $20 million Valence notes were repaid during 2021.
- The company had no advances on its $100 million secured committed broker-dealer facility or its $65 million unsecured parent revolving facility at year-end. Other funding included $93.4 million outstanding under a convertible-securities financing arrangement and $0.2 million under the Pershing arrangement.
- SEC-rule net capital at the U.S. broker-dealer was $362.5 million, $361.5 million above the regulatory minimum. The adjusted leverage ratio was 2.8x, down from 3.2x.
- The board’s dividend policy targets returning 30%–50% of fiscal-year adjusted net income. Including the declared $4.50-per-share special dividend payable in March 2022, the company said it would return $9.45 per share, approximately 43% of FY2021 adjusted net income.
Material changes, outlook and risks
- Results benefited from strong 2021 market activity and economic recovery, particularly in advisory and capital raising, compared with the pandemic-disrupted prior-year period. Municipal issuance volumes were broadly flat in the market, while Piper Sandler’s municipal financing revenue increased.
- Management expected economic growth to continue in 2022 but highlighted inflation, supply-chain constraints, labor shortages, higher energy prices, COVID-19 uncertainty, Federal Reserve tightening and Russia’s invasion of Ukraine as sources of uncertainty and volatility. It expected equity capital-raising activity to decline substantially from recent record levels; advisory pipeline was described as strong, and municipal issuance was expected to be broadly consistent with the prior two years.
- Fixed-income client activity was muted in Q4 2021; management anticipated solid 2022 performance but cautioned that inflation and rate uncertainty could make revenues more volatile. These statements are outlook commentary, not quantified earnings guidance.
- After year-end, the company completed its Cornerstone Macro acquisition on February 4, 2022, and agreed to acquire Stamford Partners, with closing expected in the first half of 2022 subject to customary conditions. Further integration and amortization costs were expected in 2022.
- Key risks include cyclical and transaction-dependent revenue, market volatility and deal cancellations, competitive and compensation pressures, dependence on key personnel, liquidity and counterparty exposures, valuation uncertainty in private investments, cybersecurity and third-party operational risks, and extensive legal and regulatory requirements.
- Uncollateralized credit exposure on certain matched-book derivatives was $20.7 million, including $16.3 million with one counterparty. The company had $80.6 million of investment commitments. Management said reasonably possible legal losses in excess of accruals were not material and expected pending matters to resolve without material adverse effect, while noting outcomes remain uncertain.
Important facts for investors to verify
- How much of FY2021’s exceptional advisory, capital-raising and investment-income performance is sustainable in a more volatile, lower-activity market.
- The composition and recurring nature of GAAP versus adjusted earnings, including acquisition-related compensation, noncontrolling interests and investment gains.
- Integration costs, retention arrangements and expected contribution from Cornerstone Macro and any completed Stamford Partners transaction.
- Liquidity availability under discretionary clearing and financing arrangements, debt maturity and covenant headroom, and regulatory limits on subsidiary distributions.
- Valuation assumptions for private-company investments and the concentration of uncollateralized derivative counterparty exposure.
- Dividend and repurchase execution relative to earnings, cash needs and the company’s stated capital-return policy.