Piper Jaffray Companies — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; interim financial statements are unaudited. The filing identifies the registrant as Piper Jaffray Companies, consistent with the filing text, rather than the Piper Sandler name in the request metadata.
Business context and results
The company operates Capital Markets and Asset Management businesses, providing investment banking, institutional brokerage, and asset management services. It completed its acquisition of Simmons & Company International on February 26, 2016, expanding its energy-sector investment banking and advisory business.
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net revenues | $170.5 million | $164.1 million | $324.0 million | $325.9 million |
| Income before taxes | $6.5 million | $25.9 million | $10.0 million | $57.2 million |
| Net income applicable to Piper Jaffray | $1.9 million | $17.0 million | $4.4 million | $34.0 million |
| Diluted EPS | $0.12 | $1.08 | $0.28 | $2.11 |
| Pre-tax operating margin | 3.8% | 15.8% | 3.1% | 17.5% |
Q2 adjusted non-GAAP net income was $13.9 million, or $0.88 per diluted share, versus $18.6 million, or $1.19, a year earlier. First-half adjusted net income was $24.5 million, or $1.58 per diluted share, versus $37.5 million, or $2.33. These adjusted measures exclude specified acquisition-related compensation, restructuring and integration costs, acquired-intangible amortization, and noncontrolling-interest effects.
Financial position, cash flow and liquidity
- At June 30, 2016, total assets were $2.12 billion, total liabilities $1.29 billion, and shareholders’ equity $827.3 million. Cash and cash equivalents were $172.2 million, plus $42.0 million segregated for regulatory purposes.
- Six-month operating cash flow was positive $61.3 million, compared with negative $0.2 million in the prior-year period. Investing cash outflow was $75.3 million, principally including $71.0 million for acquisitions; financing cash outflow was $2.8 million. Cash decreased $17.7 million to $172.2 million.
- Short-term financing was $501.8 million, up from $446.2 million at year-end 2015. Senior notes remained $175.0 million: $50 million Class A notes due May 2017 and $125 million Class C notes due October 2018. The company reported compliance with debt covenants.
- Regulatory net capital at the U.S. broker-dealer was $202.7 million, $201.6 million above the SEC minimum. The company had a $250 million committed secured revolving facility with no advances outstanding and $185 million in uncommitted secured lines, also undrawn; availability of uncommitted lines is discretionary.
- Leverage was 2.6 times; adjusted leverage was 3.8 times, versus 3.4 times at December 31, 2015. The company reported no credit rating, which it said could raise financing costs or limit funding access.
Material changes versus prior periods
- Q2 net revenues rose 3.9%, but net income applicable to the company fell 88.6%. First-half net revenues declined 0.6%, while company-attributable net income fell 87.1%.
- Q2 institutional brokerage revenue increased 31.4%, supported by equity and fixed-income activity and recent acquisitions. Investment banking revenue declined 8.2% as lower equity financing outweighed stronger debt financing and advisory revenue. Asset management revenue decreased 24.2%.
- For the first half, advisory services revenue rose substantially, but equity financing revenue fell sharply; asset management revenue decreased 28.5%. Total assets under management were $8.1 billion, down from $11.4 billion a year earlier, with first-half net outflows of $1.35 billion.
- Non-interest expenses rose 18.6% in Q2 and 16.9% in the first half, driven by acquisition-related compensation, integration and restructuring costs, amortization, and business expansion. First-half restructuring and integration charges were $10.2 million.
- Goodwill increased to $290.7 million from $218.0 million, primarily reflecting Simmons; total goodwill and intangible assets were $328.5 million. The acquisition’s post-close revenue and net income were not separately discernible in the filing.
Outlook, risks and unusual items
- Management expected sluggish U.S. economic growth in 2016 and identified international weakness, Brexit-related uncertainty, geopolitical events, and the U.S. election as potential sources of economic and market volatility.
- Management anticipated strong municipal underwriting activity in the second half of 2016, and expected equity capital raising to improve gradually if volatility did not intensify. It expected advisory activity to perform well, while noting deal-closing timing can make quarterly revenue uneven.
- Management said low interest rates and preference for passive strategies were challenging active asset management, particularly domestic value strategies. Results remain sensitive to market activity, interest rates, credit spreads, liquidity, trading volumes, AUM, and investment performance; no quantified earnings guidance was provided.
- The Q2 effective tax rate excluding noncontrolling interests was unusually high at 50.7%, due to a full valuation allowance against tax benefits from SCIL net operating losses. The six-month rate was 34.0%.
- The company disclosed $30.3 million of uncollateralized derivative credit exposure to five counterparties, including $22.0 million to one counterparty. Trading losses exceeded one-day VaR on nine occasions in the first half; reported June 30 VaR was $396,000.
- The $9.8 million settlement in the municipal derivatives antitrust litigation received final court approval in Q2 2016. Management stated that pending legal matters were not expected to have a material adverse effect based on information then available, but noted outcomes and potential losses remain uncertain.
Important facts for investors to verify
- Whether acquired businesses and expansion investments can produce enough recurring revenue to offset higher compensation, integration, and operating costs.
- Whether asset management outflows—especially in value equity—and weaker active-management demand persist, and how AUM changes affect fee revenue.
- Near-term funding needs and the availability, collateral requirements, and covenant headroom of commercial paper, prime-broker financing, and bank facilities.
- The trajectory of acquisition-related compensation, restructuring charges, amortization, goodwill, and the difference between GAAP and adjusted earnings.
- Developments in uncollateralized derivative exposure, legal and regulatory matters, market-risk losses, and the company’s ability to maintain required regulatory capital.