Piper Jaffray Companies — Q1 2016 Form 10-Q
Business context and reporting period. This filing is for the three months ended March 31, 2016, compared with the three months ended March 31, 2015. The registrant was Piper Jaffray Companies (the company identified in the request as Piper Sandler); it operated Capital Markets and Asset Management segments.
Key financial results
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Total revenue | $159.6 million | $168.4 million |
| Net revenue | $153.6 million | $161.9 million |
| Pre-tax income | $3.4 million | $31.3 million |
| Net income attributable to Piper Jaffray Companies | $2.4 million | $17.0 million |
| Common shareholder diluted EPS | $0.16 | $1.03 |
| Pre-tax margin | 2.2% | 19.3% |
| Cash from operating activities | $(74.3) million | $(175.1) million |
Management also reported non-GAAP adjusted net income attributable to the company of $10.6 million, or $0.70 per diluted share, versus $18.8 million, or $1.14, a year earlier. These adjusted figures exclude specified noncontrolling-interest, acquisition-related compensation, restructuring/integration and acquired-intangible amortization items.
- Revenue mix: Investment banking revenue increased 19% to $103.9 million, led by advisory services. Institutional brokerage fell 11% to $32.0 million; asset management revenue declined 33% to $13.8 million; investment income fell to $0.9 million from $12.6 million.
- Expenses and margins: Non-interest expenses rose 15% to $150.1 million. Compensation and benefits were $104.4 million, or 68.0% of net revenue versus 59.2%. Acquisition-related restructuring and integration costs were $6.8 million; intangible amortization was $3.3 million.
- Segments: Capital Markets GAAP pre-tax income was $2.8 million (2.0% margin), versus $26.0 million (18.3%). Asset Management GAAP pre-tax income was $0.6 million (5.4% margin), versus $5.3 million (27.0%).
- Assets, debt and liquidity: At March 31, total assets were $2.18 billion and total shareholders’ equity was $852.9 million. Short-term financing was $459.0 million and senior notes were $175.0 million. Cash and cash equivalents were $49.1 million, with another $47.0 million segregated for regulatory purposes. The company reported $215.0 million of broker-dealer net capital, $214.0 million above its SEC minimum; it said it complied with debt covenants. Its $250 million committed secured credit facility and $185 million of uncommitted secured lines had no advances outstanding.
Material changes versus the prior period
- Company-attributable net income fell 86% and diluted EPS declined from $1.03 to $0.16. Net revenue decreased 5.1%, while non-interest expenses increased 15%, compressing the GAAP pre-tax margin.
- Advisory revenue rose to $81.6 million from $30.5 million, while equity financing revenue fell to $6.6 million from $36.0 million. The company completed 36 advisory transactions versus 16, but 7 equity financings versus 35.
- Asset Management faced lower fees and investment performance: assets under management ended at $7.5 billion, down from $8.9 billion at year-end 2015, reflecting $1.0 billion in quarterly net outflows and $335 million in market depreciation.
- Cash and cash equivalents declined by $140.8 million during the quarter. Operating cash use was $74.3 million and investing cash use was $71.6 million, including $70.2 million for acquisitions.
- The February 26 acquisition of Simmons & Company International expanded energy-sector investment banking. Reported acquisition-related goodwill was $71.9 million; the transaction’s economic value was approximately $140 million. Simmons’ post-acquisition results were not separately discernible.
Outlook, commentary and risks
- No specific earnings or revenue guidance was provided. Management expected sluggish U.S. economic growth and noted international weakness, geopolitical events and the U.S. election as possible sources of market volatility.
- Management said first-quarter equity-market volatility hurt capital raising, while potentially benefiting equity sales and trading; it saw municipal underwriting activity as sustainable at current or higher levels and described fixed-income client trading as relatively strong. It expected additional Simmons integration costs in Q2 2016 and maintained a conservative inventory and hedging posture.
- Energy exposure and falling MLP valuations weighed on assets under management; continued oil-price volatility could add uncertainty. Asset management also faces passive-investing competition, client outflows and investment-performance risk.
- Market, funding and counterparty risks remain material. One-day VaR was $790,000 at quarter-end, and trading losses exceeded VaR on seven occasions during the quarter. Uncollateralized derivative credit exposure was $28.2 million, including $20.0 million to one counterparty.
- Legal proceedings include ongoing municipal-derivatives litigation. A $9.8 million settlement of the nationwide class action was subject to final court approval; related separate California and New York cases continued. Management said pending matters were not expected to have a material adverse effect based on information then available, while noting outcomes could differ.
- The effective tax rate was unusually low at 9.5%, versus 35.9%, because tax-exempt municipal interest income represented a larger share of pre-tax income. The company adopted consolidation guidance that deconsolidated certain investment partnerships; management reported no retained-earnings impact.
Most important facts for investors to verify
- Whether advisory growth and the Simmons acquisition can offset weak equity financing, lower asset-management fees and integration costs.
- Whether quarterly cash use, lower cash balances and reliance on secured short-term funding remain manageable through compensation payments and market stress.
- Whether AUM outflows and MLP-related depreciation continue, and how they affect recurring management fees and segment profitability.
- Whether the reported adjusted earnings provide a useful view alongside GAAP results, given the significant exclusions and sharply lower GAAP income.
- Developments in the municipal-derivatives settlement and related litigation, and any change in uncollateralized counterparty exposure or regulatory-capital headroom.