Piper Jaffray Companies — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017, compared with the same periods in 2016. The registrant named in the filing is Piper Jaffray Companies; the supplied metadata names Piper Sandler Companies.
Financial performance
| Metric | Q3 2017 | Nine months 2017 |
|---|---|---|
| Net revenues | $240.6 million, up 19.8% | $638.8 million, up 21.7% |
| Net income (loss) attributable to Piper Jaffray | $(49.7) million; $(3.91) per diluted share | $(15.9) million; $(1.42) per diluted share |
| Adjusted net income (non-GAAP) | $32.5 million; $2.13 per diluted share | $81.3 million; $5.31 per diluted share |
| Cash provided by operating activities | Not separately stated for the quarter | $444.0 million |
- Q3 investment banking revenue increased 39.4% to $190.5 million, led by advisory services. Institutional brokerage revenue fell 17.3% to $34.9 million; asset management revenue fell 16.0% to $12.8 million.
- For the first nine months, investment banking revenue rose 36.5% to $461.3 million, while institutional brokerage fell 9.3% to $111.1 million. Asset management revenue was approximately flat at $44.0 million.
- Q3 compensation and benefits were $169.5 million, 70.4% of net revenue, versus $135.2 million and 67.3% a year earlier. GAAP non-interest expense included a $114.4 million goodwill impairment charge.
- Capital Markets Q3 pre-tax income was $31.6 million, versus $16.7 million. Asset Management reported a $113.8 million pre-tax loss, primarily reflecting the impairment. Adjusted figures exclude specified items and are non-GAAP.
Financial position, liquidity and capital
- At September 30, 2017, total assets were $1.740 billion and total shareholders’ equity was $786.8 million, compared with $2.126 billion and $816.3 million at year-end 2016. The company cited its move to a fully disclosed clearing model and the goodwill impairment among factors affecting balance-sheet measures.
- Cash and cash equivalents were $40.9 million; cash segregated for regulatory purposes was $6.0 million. Nine-month cash flows were $444.0 million from operations, $(4.3) million from investing and $(441.3) million from financing; ending cash was $40.9 million.
- Short-term financing was $76.8 million and senior notes were $125.0 million. The Class A notes’ $50 million balance was repaid at maturity in May; the remaining Class C notes bear 5.06% interest and mature October 9, 2018. The company reported compliance with debt covenants.
- Reported regulatory net capital was $215.5 million, $214.5 million above the SEC minimum. A $200 million committed revolving facility had no borrowings at quarter-end and was due December 16, 2017; management said it anticipated renewal. Funding from Pershing and prime brokers is collateral-dependent and may be discretionary.
- The company began quarterly dividends in 2017 and declared $0.9375 per share through September. A further $0.3125 dividend was declared for payment in December. The board authorized up to $150 million in share repurchases through September 2019.
Material changes, outlook and risks
- The $114.4 million non-cash impairment fully eliminated Asset Management goodwill. Management attributed it to declining profitability as outflows and a shift toward lower-fee products were not offset by new business; investors’ preference for passive strategies was also cited. Asset Management AUM was $7.6 billion, down from $8.4 billion a year earlier, with $1.1 billion of net outflows in the first nine months. The company exited its Japan value product, reducing quarterly AUM by about $0.8 billion.
- Effective August 7, Piper Jaffray moved from self-clearing to a fully disclosed clearing model with Pershing. The company incurred $3.0 million of back-office conversion costs in the first nine months and expected additional costs in Q4. Management identified the transition as a change that may materially affect internal controls over financial reporting; it reported disclosure controls as effective.
- Management expected a slow, steady U.S. economic expansion and constructive conditions for equity capital raising and advisory work through the rest of 2017. It expected municipal underwriting activity to remain below 2016 record levels and warned that a flat yield curve could pressure fixed-income sales and trading. No numerical earnings guidance was provided.
- Risks include market volatility and rate or spread changes, illiquid inventory and reliance on secured or discretionary funding, counterparty exposure, client outflows and continued pressure on active asset management. Uncollateralized derivative credit exposure was $20.8 million, including $15.4 million to one counterparty.
- Proposed federal tax legislation could have caused a one-time, non-cash $50–$55 million write-down of deferred tax assets under the proposed corporate rate, and could affect public finance activity and compensation deductions. The filing said the legislation’s final contents and effects were uncertain.
- Legal proceedings and regulatory matters were described as ordinary-course risks; management said reasonably possible losses above accrued amounts were not material, while noting outcomes and estimates remain uncertain.
Investor verification priorities
- Confirm the registrant’s legal name and its relationship, if any, to the company identified in the request metadata.
- Review the goodwill impairment valuation assumptions and whether Asset Management AUM outflows, fee yields and profitability stabilize.
- Track the Pershing clearing transition, related costs and funding terms, along with renewal of the committed credit facility due December 2017.
- Assess the maturity and refinancing of the $125 million Class C notes in October 2018, and the company’s capacity to sustain dividends and repurchases.
- Verify the eventual tax legislation and its impact on deferred tax assets and municipal underwriting.