PIPER SANDLER COMPANIES annual report, FY2015

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Piper Jaffray Companies — FY 2015 Form 10-K

Business context and period: The filing is for the fiscal year ended December 31, 2015, with unaudited quarterly data. The registrant named in the filing is Piper Jaffray Companies (NYSE: PJC); it is not identified as Piper Sandler in this filing. Its two segments are Capital Markets and Asset Management.

Financial performance

  • Revenue: Total revenue was $696.3 million and net revenue was $672.9 million, up 3.8% from $648.1 million in 2014. Investment banking revenue rose 12.0% to $414.1 million; asset management revenue fell 11.8% to $75.0 million; institutional brokerage revenue was $154.9 million, down 1.2%.
  • Profit: Net income attributable to Piper Jaffray Companies was $52.1 million, down 17.6% from $63.2 million. Diluted EPS was $3.34, versus $3.87. Net income attributable to common shareholders was $48.1 million, versus $58.1 million.
  • Margins and expenses: Pre-tax income fell 21.7% to $86.4 million; the pre-tax margin declined to 12.8% from 17.0%. Non-interest expenses rose 9.0% to $586.5 million. Compensation and benefits were $421.7 million, or 62.7% of net revenue, compared with 60.9% in 2014.
  • Segments: Capital Markets pre-tax income was $78.4 million, versus $89.1 million, with a 12.9% GAAP margin versus 15.7%. Asset Management pre-tax income was $8.0 million, versus $21.2 million, with a 12.6% margin versus 26.4%; the segment recorded a $6.8 million investment loss, mainly from MLP holdings.
  • Cash flow and liquidity: Operating activities provided $379.5 million, compared with $50.1 million used in 2014; cash and cash equivalents ended the year at $189.9 million, up $174.0 million. Management attributed operating cash generation substantially to earnings and reductions in operating assets, including the liquidation of the outside-investor municipal bond fund. The company also held $81.0 million of cash segregated for regulatory purposes.
  • Debt and capital: Senior notes totaled $175 million, up from $125 million; short-term financing was $446.2 million, including $276.9 million of commercial paper and $169.3 million under a prime-broker arrangement. The $250 million committed revolving facility had no balance outstanding. Broker-dealer regulatory net capital was $187.9 million, $186.9 million above the SEC minimum; the company reported compliance with debt covenants.
  • Other measures: Assets under management fell to $8.9 billion from $11.5 billion, primarily as MLP market depreciation more than offset net inflows. Total assets were $2.14 billion and total shareholders’ equity was $832.8 million. No cash dividend was paid; the company repurchased $118.5 million of shares under authorizations.

Material changes versus 2014

  • Investment banking was the main growth driver: debt financing and advisory services increased, while equity financing rose more modestly. Negotiated municipal issuance par value for Piper Jaffray increased 49.8%.
  • Asset management weakened as value-equity outflows and market depreciation reduced AUM, while depressed energy and MLP valuations generated investment losses. MLP AUM declined to $3.9 billion from $5.7 billion.
  • Expenses included $10.7 million of restructuring and integration costs, primarily associated with River Branch and BMO GKST, and a $9.8 million charge related to municipal-derivatives litigation. Adjusted non-GAAP results were higher than GAAP results; adjusted net income was $65.9 million and adjusted diluted EPS was $4.22. These measures exclude specified items and should not be treated as GAAP results.
  • Year-end assets and noncontrolling interests declined, in part following liquidation of the municipal bond fund with outside investors. The company issued $125 million of fixed-rate Class C notes and repaid $75 million of Class B notes.

Quarterly results, outlook, risks, and contingencies

  • Fourth quarter: Net revenue was $197.4 million, compared with $150.5 million in Q4 2014. Net income attributable to Piper Jaffray Companies was $13.3 million, versus $12.5 million; diluted EPS was $0.88, versus $0.77.
  • Outlook: Management expected sluggish U.S. economic growth and continued market volatility in 2016, citing international weakness, low oil prices, geopolitical risks, and uncertainty around markets and interest rates. It anticipated that sustained volatility could disrupt capital raising and that asset-management revenue would remain sensitive to investment performance, valuations, and client flows. Management said MLP management fees would likely decline in 2016 absent significant market appreciation or inflows. No numerical earnings or revenue guidance was provided.
  • Strategy and unusual items: River Branch and BMO GKST acquisitions were completed in 2015. The planned Simmons & Company International acquisition, focused on energy investment banking, was expected to close in Q1 2016 for approximately $139 million, with an additional $21 million committed for retention. The municipal bond fund for outside investors was liquidated in 2015.
  • Legal matter: On February 22, 2016, the company agreed to a $9.8 million settlement of the municipal-derivatives multidistrict class action, subject to court approval. Separate California and New York litigation remained ongoing. Management stated that other pending legal matters were not expected to have a material adverse effect, while noting outcomes remain uncertain.
  • Principal risks: Results depend on financial-market activity and transaction completions; market, interest-rate, liquidity, counterparty and valuation risks; MLP and energy exposure; competition and retention of key personnel; regulation; litigation; and cybersecurity, technology and third-party service-provider risks. The filing reports effective internal control over financial reporting and unqualified audit opinions.

Important facts for investors to verify

  • Whether the $9.8 million settlement received court approval and the status and potential exposure of the remaining municipal-derivatives cases.
  • Post-filing completion terms, integration costs, and performance of the Simmons acquisition, along with ongoing River Branch and BMO GKST integration results.
  • Subsequent AUM flows and valuations, particularly in MLP and energy strategies, and their effect on fees and firm investments.
  • Recurring operating cash generation after the 2015 balance-sheet contraction and municipal fund liquidation, plus liquidity available under secured and discretionary funding sources.
  • Debt maturities, covenant headroom, and the effect of share repurchases on capital and per-share results.