Piper Jaffray Companies — Form 10-Q Summary
Business context and period. The filing is for the quarter ended September 30, 2013, with comparisons to 2012 and year-to-date results through September 30. The filing identifies the registrant as Piper Jaffray Companies. Its two reporting segments are Capital Markets and Asset Management; Hong Kong capital markets and FAMCO are reported as discontinued operations.
Key financial metrics
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenues | $138.8 million | $138.6 million | $366.1 million | $368.2 million |
| Net revenues | $128.3 million | $131.5 million | $337.6 million | $348.0 million |
| Continuing-operations pre-tax income | $12.1 million | $25.4 million | $33.6 million | $46.2 million |
| Continuing income attributable to Piper Jaffray | $6.9 million | $14.5 million | $21.9 million | $31.5 million |
| Total income attributable to Piper Jaffray | $5.3 million | $19.7 million | $18.0 million | $29.4 million |
| EPS, including discontinued operations | $0.33 | $1.11 | $1.06 | $1.60 |
| Pre-tax operating margin on net revenues | 9.4% | 19.3% | 9.9% | 13.3% |
Cash flow and balance sheet. For the first nine months, operating cash flow was negative $263.3 million, investing cash flow was negative $27.7 million, and financing cash flow was positive $199.6 million. Cash and cash equivalents fell $91.4 million to $14.0 million; an additional $25.0 million was segregated for regulatory purposes. At September 30, total assets were $2.49 billion and total shareholders’ equity was $857.0 million. Short-term financing was $663.3 million and variable-rate senior notes were $125.0 million. Reported leverage was 2.9x and adjusted leverage 4.2x.
Material changes versus prior periods
- Q3 net revenues declined 2.4%; continuing-operations pre-tax income fell 52.4%. For the first nine months, net revenues declined 3.0% and pre-tax income fell 27.4%.
- Q3 investment banking revenue rose 22.1% to $62.4 million, while institutional brokerage revenue fell 36.6% to $37.2 million, chiefly because of weaker fixed-income trading. Nine-month institutional brokerage revenue declined 24.6%.
- Asset management revenue increased 13.5% in Q3 and 12.0% year to date. Assets under management were $10.6 billion, up from $9.2 billion at December 31, 2012, largely reflecting market appreciation; year-to-date net flows were outflows of $174 million.
- Q3 non-interest expenses rose 9.5% to $116.3 million, including $3.8 million of acquisition-related restructuring, integration and transaction costs. Excluding those costs, management reported continuing-operations income of $9.2 million, or $0.57 per diluted share, versus reported continuing income of $6.9 million, or $0.42 per diluted share.
- Completed acquisitions of Seattle-Northwest Securities and Edgeview Partners in July for $32.7 million in cash. The company recorded $14.0 million of goodwill and $6.9 million of acquired intangible assets.
- Repurchased 1.68 million shares under the authorization for $54.7 million during the first nine months; $40.7 million remained authorized at September 30.
Outlook, risks and unusual items
- Management expected a gradual U.S. recovery and potentially stronger M&A activity if economic indicators remained firm, but cautioned that federal budget and debt-ceiling debate, Federal Reserve policy, tax changes and market volatility could make conditions challenging. It expected interest rates to remain sensitive to Fed actions and potentially rise over the medium to longer term, posing a risk to fixed-income revenues.
- Management anticipated approximately $1.0 million of additional restructuring and integration costs in Q4 2013 and expected to renew its $250 million committed credit facility in Q4. It also anticipated reversing a $4.9 million U.K. deferred-tax valuation allowance in Q4, subject to profitability and future earnings.
- Liquidity depends on secured commercial paper, prime-broker financing, repurchase agreements and bank lines. The committed $250 million facility was undrawn at quarter-end; $94.0 million was drawn on discretionary, uncommitted secured bank lines. The company had no credit rating, which management said could limit funding access or increase costs.
- Q3 results included a $1.5 million after-tax discontinued-operations loss, primarily from FAMCO-related indemnification expense. The company had recorded $4.7 million for that indemnification; potential payments under the sale agreement were not capped.
- Government investigations and litigation concerning municipal derivatives and guaranteed investment contracts continued. Management considered a material loss reasonably possible but said it could not estimate a range; no reserve was recorded because a loss was not considered probable or reasonably estimable.
- Trading and valuation risks remain material: Level III assets were $212.9 million, and total VaR at September 30 was $2.3 million versus $1.0 million at December 31, 2012. Trading losses exceeded one-day VaR once in the first nine months. Uncollateralized derivative credit exposure was $23.6 million, including $11.1 million with one counterparty.
Important facts for investors to verify
- Confirm the registrant’s identity: the supplied filing is for Piper Jaffray Companies, although the request metadata names Piper Sandler Companies.
- Assess whether the deterioration in Capital Markets earnings and margins is temporary or persistent, particularly the fixed-income trading weakness and increased expense burden.
- Review funding availability, collateral requirements, facility renewal, near-term maturities and the decline in unrestricted cash alongside rising short-term financing.
- Monitor the outcome and potential financial exposure from the FAMCO indemnity and municipal derivatives investigations and litigation.
- Evaluate acquisition integration, the expected additional costs, and whether management’s Q4 outlook and anticipated tax benefit materialize.