Piper Jaffray Companies — Q3 2018 Form 10-Q
Business context and period. The filing is for the quarter and nine months ended September 30, 2018; financial statements are unaudited. The registrant named in the filing is Piper Jaffray Companies. Its two reporting segments are Capital Markets and Asset Management.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net revenues | $217.5 million | $240.6 million | $560.1 million | $638.8 million |
| Pre-tax income/(loss) | $29.6 million | $(82.2) million | $42.9 million | $(39.6) million |
| Net income/(loss) attributable to Piper Jaffray Companies | $22.0 million | $(49.7) million | $38.9 million | $(15.9) million |
| Diluted EPS | $1.43 | $(3.91) | $2.50 | $(1.42) |
| Pre-tax margin | 13.6% | (34.2)% | 7.7% | (6.2)% |
Q3 adjusted diluted EPS, a non-GAAP measure, was $1.86 versus $2.13; nine-month adjusted diluted EPS was $4.15 versus $5.31. Net revenue declined 9.6% in Q3 and 12.3% year to date. Investment banking and institutional brokerage were weaker; equity financing growth partly offset lower advisory, debt financing and brokerage revenues. Nine-month investment income also declined.
Segment trends. Capital Markets pre-tax margin was 14.1% in Q3 (13.9% prior year) and 8.4% for nine months (12.3% prior year); lower revenue weighed on year-to-date results. Asset Management reported a 4.7% Q3 GAAP margin and a (4.2)% nine-month margin. Excluding specified items, its adjusted margins were 16.7% and 8.2%, respectively, compared with 14.5% and 13.0% in 2017. Assets under management were $7.3 billion, down from $7.6 billion at September 30, 2017, with net outflows partly offset by market appreciation.
Cash flow, balance sheet and capital
- Operating cash flow was $360.4 million for the first nine months, versus $421.0 million a year earlier. Investing activities used $12.3 million; financing activities used $312.7 million. Financing outflows included $41.6 million of dividends and $31.7 million of share repurchases. Cash and cash equivalents ended at $68.8 million, up from $33.8 million at year-end 2017.
- At September 30, total assets were $1.49 billion, liabilities $746.0 million and shareholders’ equity $747.4 million. Compared with December 31, 2017, assets declined from $2.02 billion, principally alongside lower securities inventory and financing balances. Adjusted leverage was 2.2x, down from 3.2x.
- Short-term financing on the balance sheet was $50.0 million, compared with $289.9 million at year-end. The company also disclosed $96.9 million outstanding under a convertible-securities prime-broker arrangement, reported net of trading activity. The $125 million senior notes outstanding at quarter-end matured and were repaid on October 9, 2018; management said it did not intend to renew long-term borrowings.
- Available facilities included a $200 million committed secured revolving line with no advances at quarter-end, due December 14, 2018, and an $85 million uncommitted secured line, also undrawn. The company anticipated renewing the committed facility. Regulatory net capital was $199.1 million, $198.1 million above the SEC minimum; certain funding and clearing covenants require higher minimum capital.
Material changes, outlook and risks
- Comparability: The 2017 comparison includes a $114.4 million non-cash goodwill impairment charge in Asset Management. In 2018, the company adopted revenue-recognition guidance that presents client-reimbursed deal expenses gross: this increased both investment banking revenue and expenses by $7.7 million in Q3 and $18.9 million year to date, with no earnings impact. The guidance also delays recognition of certain alternative-fund performance fees. Adoption reduced retained earnings by $3.6 million.
- Costs and capital returns: Nine-month restructuring costs were $3.8 million, principally severance; management did not anticipate additional restructuring costs in 2018. Dividends declared during the first nine months totaled $2.75 per share, including a $1.62 special dividend. A further $0.375 dividend was declared for payment in December.
- Outlook: Management expected moderate U.S. economic growth for the remainder of 2018 and said its advisory pipeline supported continued activity, while deal timing could make quarterly revenue uneven. It anticipated equity underwriting could slow amid market volatility and the midterm elections. It cited ongoing pressure on equity brokerage fees, subdued fixed-income activity from a rising but flattening yield curve, and continuing pressure on active asset managers. No specific earnings or revenue guidance was provided.
- Risks and contingencies: Management reported heightened market volatility early in Q4 and warned sustained volatility or a material correction could hurt advisory, equity financing and asset-management results. Other risks include market and liquidity conditions, dependence on funding and clearing counterparties, uncollateralized derivative exposure, regulatory and operational risks, and asset-management outflows. Uncollateralized derivative credit exposure was $13.5 million, including $10.8 million to one counterparty. The company disclosed various legal and regulatory matters; it said reasonably possible losses above reserves were not material, while noting outcomes and potential losses can be difficult to estimate. It also had $80.6 million of investment commitments and $71.1 million of operating lease commitments.
Important facts for investors to verify
- Whether advisory, debt-financing and brokerage revenues stabilize, and whether the reported advisory pipeline converts to completed transactions.
- Asset Management AUM, outflows, fee yields and adjusted profitability, including the effect of market performance and deferred performance-fee recognition.
- Renewal of the committed $200 million credit facility and the company’s funding availability under discretionary, collateral-dependent arrangements.
- Cash generation and liquidity after repayment of the $125 million notes, dividends, incentive-compensation payments and investment commitments.
- Potential effects of market volatility, counterparty exposures, legal or regulatory developments, and the planned 2018 goodwill and intangible-asset impairment testing.