Piper Jaffray Companies — Q1 2018 Form 10-Q
Entity note: The supplied filing is for Piper Jaffray Companies, not Piper Sandler Companies. It covers the three months ended March 31, 2018; comparative results are for Q1 2017. Amounts below are in U.S. dollars unless stated otherwise.
Business context and reporting period
The company provides investment banking, institutional brokerage and asset management services through its Capital Markets and Asset Management segments. In 2017 it moved to a fully disclosed clearing model, using Pershing as its clearing broker. The financial statements are unaudited interim statements prepared under U.S. GAAP.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 / prior year-end |
|---|---|---|
| Total revenue | $174.4 million | $205.5 million |
| Net revenue | $169.1 million | $200.5 million |
| Pre-tax income; margin | $8.0 million; 4.8% | $22.8 million; 11.4% |
| Net income | $10.6 million | $23.2 million |
| Net income attributable to Piper Jaffray Companies | $10.6 million | $20.3 million |
| GAAP diluted EPS | $0.47 | $1.31 |
| Management-adjusted diluted EPS (non-GAAP) | $1.38 | $1.77 |
| Operating cash flow | $146.4 million | $163.8 million |
| Cash and cash equivalents at period end | $27.6 million | $33.8 million at Dec. 31, 2017 |
| Total assets; total shareholders’ equity | $1,577.4 million; $735.0 million | $2,024.7 million; $741.2 million at Dec. 31, 2017 |
Revenue fell 15.1% and net revenue fell 15.7% year over year. Investment banking revenue decreased 8.6%, institutional brokerage 29.4%, asset management 21.4%, and investment income 71.9%; interest revenue rose 34.9%. Non-interest expenses declined 9.4% to $161.0 million, mainly with lower compensation, but expenses remained high relative to net revenue. Compensation and benefits were $115.2 million, or 68.1% of net revenue, versus 67.0% a year earlier.
Cash flow from operations was positive, while investing activities used $1.6 million and financing activities used $151.8 million, including $30.4 million of cash dividends, $16.8 million of share purchases for employee tax withholding, and $103.7 million of reduced short-term financing. Cash, cash equivalents and restricted cash decreased $6.2 million during the quarter.
Short-term financing was $186.3 million at March 31, down from $289.9 million at year-end; senior notes were $125.0 million. The notes carry a 5.06% fixed rate and mature October 9, 2018. The company reported $185.8 million of broker-dealer net capital, $65.8 million above the $120 million covenant threshold applicable to key financing and clearing arrangements. The $200 million committed credit line and $85 million uncommitted line had no advances outstanding at quarter-end; uncommitted and counterparty financing remains subject to collateral and availability.
Material changes and unusual items
- Capital Markets pre-tax income declined to $9.0 million from $22.2 million; its pre-tax margin fell to 5.7% from 11.9%. Asset Management recorded a $1.0 million pre-tax loss versus $0.6 million income, with segment margin at negative 8.9% versus positive 4.1%.
- Advisory revenue was down 18.9%; equity financing revenue rose 61.0%, while debt financing fell 53.2%. The company completed 53 negotiated municipal issues totaling $1.3 billion, compared with 123 issues totaling $3.4 billion a year earlier.
- Assets under management were $6.9 billion, down from $8.8 billion at the start of the comparable year-ago period. Q1 2018 market depreciation of $428 million and net outflows of $41 million reduced AUM.
- Adoption of the new revenue-recognition standard increased reported investment banking revenue and deal-related expenses by $5.1 million each, with no earnings impact. Adoption also reduced opening retained earnings by $3.6 million, net of tax. The new rules defer recognition of certain alternative-fund performance fees until reversal risk has passed.
- The company declared and paid a $0.375 quarterly dividend and a $1.62 annual special dividend per share in Q1, totaling $30.6 million. The special dividend affected GAAP EPS under the two-class method; management’s adjusted EPS adds back the resulting $0.21 per-share allocation adjustment, among other specified items.
- Income taxes reflected a $2.6 million tax benefit, including a $5.0 million benefit related to vesting stock awards and $1.0 million of additional tax expense related to provisional Tax Cuts and Jobs Act accounting.
Outlook, risks and contingencies
Management expected moderate U.S. economic growth and constructive conditions for advisory and equity capital-raising activity, but did not provide formal earnings or revenue guidance. It expected municipal underwriting activity to be meaningfully lower for 2018 than in 2017, with gradual improvement and a stronger market in the second half. Management also cited a flat yield curve and low rates as pressures on fixed-income brokerage, continuing challenges for active asset management and equity brokerage, and possible effects from MiFID II. Faster-than-expected rate increases, market volatility or correction, trade disputes and geopolitical or international instability could adversely affect results.
Key exposures include market, liquidity, counterparty, operational, regulatory and legal risks. The company disclosed $17.0 million of uncollateralized derivative credit exposure, including $12.9 million with one counterparty, and $80.3 million of investment commitments. It had $78.7 million of operating lease commitments. Management said reasonably possible legal losses in excess of recorded reserves were not material, while noting that outcomes and potential losses can be difficult to estimate. The company also relies on Pershing for clearing and related funding; financing availability can be reduced or denied.
Management estimated annual deal-related expenses of approximately $20 million to $25 million under the new gross presentation. It expected approximately $1.4 million of tax benefit in Q2 2018 from performance-share-unit vesting. Operating leases were expected to be recognized as right-of-use assets and lease liabilities beginning in 2019; management did not expect a material impact on rent expense or a significant net-capital impact.
Most important facts for investors to verify
- Confirm the issuer identity: this filing names Piper Jaffray Companies, despite the request’s Piper Sandler Companies label.
- Review the October 2018 senior-note maturity and the company’s refinancing or repayment plans, as well as continued compliance with net-capital covenants.
- Assess whether the sharp year-over-year declines in advisory, municipal, brokerage and asset-management revenue persist, and whether the anticipated second-half municipal recovery materializes.
- Distinguish GAAP EPS of $0.47 from adjusted EPS of $1.38 and evaluate the adjustments, special-dividend effect and tax benefits underlying the comparison.
- Monitor the $17.0 million uncollateralized derivative exposure, $80.3 million investment commitments, and reliance on discretionary secured funding and Pershing.
- Track AUM, client flows and market performance, and review the assumptions behind reported Level III valuations and legal-contingency estimates.