Oppenheimer Holdings Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. Comparisons are with Q1 2016 unless stated otherwise. Oppenheimer provides brokerage, capital markets, investment banking, asset management and trust services. It reported $80.2 billion in client assets administered and $25.8 billion in assets under management at quarter-end.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 / prior period |
|---|---|---|
| Revenue from continuing operations | $213.3 million | $215.0 million |
| Expenses | $220.3 million | $222.3 million |
| Loss before tax, continuing operations | $7.0 million | $7.3 million |
| Net loss attributable to Oppenheimer Holdings Inc. | $4.8 million; $0.36 per share | $3.8 million; $0.29 per share |
| Operating cash flow | $(42.0) million | $(40.8) million |
| Cash and cash equivalents, March 31 | $62.4 million | $64.9 million at Dec. 31, 2016 |
| Total assets / stockholders’ equity, March 31 | $2.53 billion / $502.6 million | $2.24 billion / $513.3 million at Dec. 31, 2016 |
- Compensation was $143.9 million, or 67.5% of revenue, down from 69.1%. Non-compensation expenses rose 3.5% to $76.4 million, including a $6.4 million Israeli VAT assessment charge.
- Cash used in investing activities was $1.6 million; financing provided $41.0 million, primarily reflecting a $49.9 million increase in bank call loans, partly offset by dividends, share repurchases and employee tax payments.
- At March 31, bank call loans were $195.7 million, up from $145.8 million at year-end. Senior secured notes had $150 million principal outstanding ($149.5 million net carrying value); the company redeemed $30 million on April 15, leaving $120 million principal outstanding. Notes bear 8.75% interest and mature April 15, 2018.
- Broker-dealer Oppenheimer reported $132.1 million of regulatory net capital, $110.7 million above its minimum requirement. Management said funds from operations, capital and available credit facilities were sufficient for foreseeable liquidity needs, while noting funding availability could be affected by market conditions.
Material changes versus Q1 2016
- Total revenue declined 0.8%. Commissions fell 16.5% to $86.7 million, reflecting lower transaction volumes and financial-adviser headcount. Advisory fees increased 5.1% to $69.4 million; investment banking rose 45.5% to $18.0 million.
- Interest revenue declined 19.0% to $10.6 million and principal transactions revenue fell 18.8% to $5.4 million. Other revenue increased 77.5% to $23.2 million, primarily on higher client-deposit program fees and positive changes in company-owned life insurance cash value.
- Private Client revenue increased 7.7% to $137.4 million and pretax income rose to $28.8 million. Capital Markets revenue fell 8.5% to $55.9 million and its pretax loss widened to $12.6 million, including the VAT charge. Segment comparisons are affected by a change in advisory-fee allocation effective January 1, 2017.
- Continuing-operations net loss widened to $5.3 million from $3.3 million, despite a slightly smaller pretax loss, primarily because the tax benefit was smaller. Discontinued operations contributed $0.6 million of net income versus a $0.6 million loss in Q1 2016.
- AUM increased 8.9% year over year to $25.8 billion, including $1.6 billion of appreciation and $0.5 billion of net contributions during the quarter. Client assets administered rose to $80.2 billion from $77.2 billion at year-end.
Outlook, risks and unusual items
- No quantified earnings or revenue guidance was provided. Management’s stated priorities include growing private-client and asset-management businesses, recruiting experienced advisers, expanding capital-markets capabilities, investing in technology and managing expenses; it also cited potential growth through acquisitions.
- The $6.4 million Israeli VAT charge followed adverse court decisions in other cases; the company reached an agreement in principle to settle and said it was fully reserved for the matter at March 31.
- Legal and regulatory matters remain a material uncertainty. For proceedings where losses are reasonably estimable and at least reasonably possible, the company estimated aggregate losses in excess of accruals at $0–$50 million; some matters could not be estimated, and actual losses could exceed the range.
- Auction-rate securities remain a liquidity and valuation exposure. The company held approximately $92.3 million principal value of ARS and had $26.4 million of purchase commitments under client legal settlements and awards through 2020. Eligible clients also held approximately $29.4 million of ARS for possible future regulatory-settlement offers; those offers were not yet committed at quarter-end.
- Other risks include securities-market activity and volatility, interest and funding conditions, regulatory change, litigation, cybersecurity, and uncertainty about the effects of Brexit. The DOL fiduciary-rule compliance date had been delayed to June 9, 2017, with full compliance delayed to January 1, 2018; management anticipated potential adverse effects on retirement-account revenues but noted possible further changes.
- The company declared a $0.11-per-share quarterly dividend after quarter-end. It repurchased 257,783 shares for $4.4 million during Q1; 51,473 shares remained available under the authorization at March 31.
Investor verification priorities
- Assess whether higher advisory and investment-banking income and client-deposit fees can offset ongoing weakness in commissions and institutional trading.
- Confirm the final amount, payment terms and cash-flow effect of the Israeli VAT settlement, and monitor further legal and regulatory developments against the disclosed $0–$50 million estimated excess-loss range.
- Review refinancing plans and liquidity ahead of the April 2018 notes maturity, including the effect of the April 2017 redemption and the company’s reliance on callable bank borrowing and secured financing.
- Track ARS repurchase obligations, client holdings eligible for future offers, issuer redemptions and valuation assumptions for these Level 3 assets and commitments.
- Separate underlying operating performance from the advisory-fee allocation change, discontinued-operation results and unusual items when comparing segments and periods.