Piper Jaffray Companies — FY 2017 Form 10-K
Entity note: The supplied filing is for Piper Jaffray Companies, not Piper Sandler Companies. It covers the fiscal year ended December 31, 2017; financial comparisons are primarily with 2016.
Business context
Piper Jaffray operated investment banking, institutional brokerage and asset management businesses through two reportable segments: Capital Markets and Asset Management. Its activities focused mainly on U.S. middle-market clients and included advisory and financing, public finance, securities sales and trading, and investment management. Year-end assets under management (AUM) were $7.3 billion.
Financial performance and position
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Total revenue | $895.2 million | $769.9 million |
| Net revenue | $874.9 million | $747.3 million |
| GAAP net loss attributable to Piper Jaffray | $61.9 million | $22.0 million |
| GAAP diluted loss per share | $5.07 | $1.73 |
| Adjusted net income attributable to Piper Jaffray (non-GAAP) | $108.9 million | $72.6 million |
| Adjusted diluted EPS (non-GAAP) | $7.12 | $4.69 |
| Operating cash flow | $232.1 million | $48.8 million |
| Cash and cash equivalents at year-end | $33.8 million | $41.4 million |
| Total assets | $2.02 billion | $2.13 billion |
| Shareholders’ equity | $741.2 million | $816.3 million |
- Revenue mix: Investment banking revenue rose 29.3% to $633.8 million, led by advisory services, up 45.5% to $443.3 million, and equity financing, up 39.1% to $99.0 million. Debt financing fell 18.8% to $93.4 million. Institutional brokerage declined 4.1% to $154.6 million; asset management revenue declined 6.3% to $56.8 million.
- Expenses and margins: GAAP non-interest expenses increased 16.2% to $904.2 million, including a $114.4 million non-cash goodwill impairment. Compensation and benefits rose 21.0% to $617.6 million and were 70.6% of net revenue, versus 68.3% in 2016. Capital Markets reported a 10.2% GAAP pre-tax margin, versus 6.7%; its adjusted margin was 18.0%, versus 14.7%. Asset Management’s adjusted pre-tax margin, excluding investment income, fell to 9.6% from 19.3%.
- Cash flow: Operating activities provided $232.1 million; investing activities used $8.1 million and financing activities used $233.1 million. Financing outflows included repayment of $50 million of notes, reduced short-term financing and dividends.
- Debt and liquidity: Year-end short-term financing was $289.9 million and senior notes were $125 million. The notes bear fixed interest of 5.06% and mature October 9, 2018. A $200 million committed revolving facility had no balance outstanding; the filing also describes discretionary, uncommitted funding sources. Reported leverage was 2.7x and adjusted leverage 3.2x. Broker-dealer net capital was $137.6 million, $136.6 million above the SEC minimum.
Material changes, outlook and risks
- The GAAP loss widened year over year, chiefly reflecting the $114.4 million asset-management goodwill impairment and a $54.2 million non-cash tax charge to remeasure deferred tax assets after the federal corporate rate reduction. The impairment eliminated all remaining goodwill in the Asset Management reporting unit. The company also reported a $9.2 million tax benefit from stock-award vesting. Adjusted results exclude specified impairment, acquisition-related, restructuring and tax items; they are non-GAAP measures, not substitutes for GAAP.
- Asset Management AUM decreased from $8.7 billion to $7.3 billion. Net outflows were $1.4 billion, partly offset by $42 million of net market appreciation. Equity strategies had $1.0 billion of net outflows; MLP strategies had $424 million of net outflows and $402 million of market depreciation.
- The company completed its transition to a fully disclosed clearing model in August 2017 and relies on Pershing for clearing and settlement. Management cited the operational importance of this arrangement and its funding is at Pershing’s discretion. In the fourth quarter, the company increased municipal inventory after identifying a trading opportunity.
- Management expected moderate U.S. economic growth in 2018 and anticipated continued strength in advisory activity, but no specific earnings or revenue guidance was provided. It expected municipal underwriting activity to decline meaningfully, citing tax-law changes and lower refunding activity. A flatter yield curve could constrain fixed-income brokerage; market volatility could hurt advisory and equity capital raising, while potentially helping equity brokerage.
- Other stated risks include deal timing and cancellations, market and interest-rate volatility, concentration in municipal and selected industry-sector activity, asset-management outflows and investment performance, competition for talent, cybersecurity and third-party operational risks, and legal, regulatory and capital constraints. Management said pending legal matters were not expected to have a material adverse effect based on current information; reasonably possible losses above accrued amounts were described as not material.
- Beginning January 1, 2018, new revenue guidance was expected to present completed-deal expenses gross rather than net against investment banking revenue, increasing reported revenue and non-compensation expense without affecting earnings; management estimated $20–$25 million of annual deal costs. Performance-fee recognition would also be delayed. The company estimated an approximately $3 million after-tax reduction to retained earnings on adoption.
Most important facts to verify
- Confirm the intended issuer: this filing identifies Piper Jaffray Companies, not Piper Sandler Companies.
- Review the reconciliation of GAAP losses to adjusted net income and EPS, especially the goodwill impairment, tax remeasurement and acquisition-related compensation adjustments.
- Assess whether the fall in AUM and Asset Management profitability stabilizes, including investment performance, client flows and fee yields.
- Verify refinancing or repayment plans for the $125 million notes due in October 2018 and the availability and terms of short-term funding.
- Track Pershing clearing performance, municipal inventory exposure and the effects of tax reform on public finance and municipal markets.
- Consider dividend sustainability: the stated policy targeted returning 30%–50% of prior-year adjusted net income, but the board could change the policy.