Piper Jaffray Companies (now Piper Sandler Companies) — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. The filing is under the historical name Piper Jaffray Companies. Amounts below are U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business context
The company provides investment banking, institutional brokerage and asset management services through Capital Markets and Asset Management segments. It completed its acquisition of energy-focused Simmons & Company International on February 26, 2016, expanding its energy-sector investment banking and advisory business.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net revenues | $200.8 | $149.6 | $524.9 | $475.6 |
| Income before tax | $18.5 | $6.8 | $28.4 | $63.9 |
| Net income attributable to Piper Jaffray | $10.7 | $4.8 | $15.0 | $38.8 |
| Diluted EPS | $0.70 | $0.32 | $0.97 | $2.46 |
| Pre-tax operating margin | 9.2% | 4.5% | 5.4% | 13.4% |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $43.0 | $290.3 |
- Quarterly drivers: Investment banking revenue rose 49% to $136.7 million, led by advisory and financing activity; institutional brokerage increased 23% to $42.2 million. Asset management revenue declined 20% to $15.3 million.
- Nine-month drivers: Investment banking revenue increased 19% to $338.0 million and institutional brokerage rose 15% to $122.4 million. Asset management revenue fell 26% to $43.7 million.
- Adjusted results (non-GAAP): Diluted EPS was $1.37 for Q3 2016 versus $0.48 a year earlier, and $2.95 for the nine months versus $2.83. Adjustments exclude specified acquisition-related compensation, restructuring and integration costs, acquired-intangible amortization and noncontrolling-interest effects; these measures are not substitutes for GAAP results.
- Balance sheet at September 30: Cash and cash equivalents were $51.4 million, down from $189.9 million at December 31, 2015; regulatory-segregated cash was $46.0 million. Total assets were $2.21 billion and shareholders’ equity $839.0 million.
- Debt and funding: Short-term financing was $425.8 million and senior notes were $175.0 million. The notes comprise $50 million of variable-rate Class A notes due May 2017 and $125 million of fixed-rate Class C notes due October 2018. The company reported compliance with debt covenants.
Material changes and unusual items
- Q3 net revenue increased 34%, but nine-month GAAP net income attributable to the company declined 61%. For the nine months, higher revenue was outweighed by increased compensation and other expenses, including acquisition-related costs.
- Compensation and benefits rose 41% in Q3 and 21% for the nine months. Nine-month restructuring and integration costs were $10.2 million, and acquired-intangible amortization was $15.4 million.
- The 2015 comparison included a $9.8 million legal settlement charge in Q3; the company recorded no restructuring and integration costs in Q3 2016.
- Simmons generated $60.7 million of goodwill and $26.6 million of identifiable intangible assets at acquisition. A Q3 measurement-period adjustment increased the fair value of acquired intangibles and resulted in $2.3 million of additional amortization for the period from acquisition through June 30, 2016.
- Nine-month operating cash flow fell to $43.0 million from $290.3 million. Investing activities used $78.4 million, including $71.0 million for acquisitions; financing activities used $101.8 million, including $70.4 million of share repurchases.
- Total assets were financed in part by $592.1 million of inventory positions pledged as collateral. Adjusted leverage, a company-defined non-GAAP measure, increased to 3.8x from 3.4x at year-end 2015.
Outlook, risks and contingencies
- Management expected sluggish U.S. economic growth through the remainder of 2016 and anticipated relatively consistent equity financing activity absent heightened volatility or a material market decline. It expected advisory services to remain strong and municipal underwriting activity to continue into Q4; this was commentary, not quantified earnings guidance.
- Management cited potential market disruption from international economic weakness, Brexit-related uncertainty, geopolitical conditions, the U.S. election and changing interest rates. Market volatility, liquidity, deal timing and trading volumes could cause results to fluctuate.
- Asset Management faces active-to-passive fund flows and below-benchmark performance. AUM was $8.4 billion at September 30; nine-month net outflows were $1.7 billion, partly offset by market appreciation. Management identified the segment’s goodwill as a focus for its Q4 2016 impairment test and warned that an impairment could materially affect results.
- Legal proceedings, investigations and regulatory matters are ongoing. Management said it believed pending matters would be resolved without a material adverse effect based on information available, but noted outcomes and potential losses are uncertain and reserves may require revision.
- Uncollateralized derivative credit exposure was $29.1 million, including $21.9 million with one counterparty. One-day VaR was $0.5 million at quarter-end, but trading losses exceeded VaR on 11 occasions in the first nine months; actual losses can exceed modeled estimates.
- Funding depends on secured commercial paper, prime brokers and other facilities. The $250 million committed revolving facility had no borrowings at quarter-end and was due December 17, 2016; management anticipated renewal. Prime-broker funding is discretionary, and the company reported no credit rating.
Important facts for investors to verify
- Whether Q4 and annual goodwill testing results in impairment, particularly for Asset Management goodwill.
- How acquisition-related compensation, restructuring, amortization and integration expenses affect reported versus adjusted earnings.
- Whether Asset Management outflows and investment performance improve, and whether AUM and fee revenue stabilize.
- Renewal and availability of the committed credit facility, continued access to short-term funding, and compliance with net-capital and debt covenants.
- Developments in legal or regulatory matters and the concentrated, uncollateralized derivative counterparty exposure.
- The sustainability of operating cash flow and the effects of acquisition spending, share repurchases and annual incentive-compensation payments on liquidity.