Oppenheimer Holdings Inc. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. The company provides brokerage, capital markets, investment banking, asset management, trust, and mortgage-finance services. Figures below are in millions of dollars unless stated otherwise.
Financial results and condition
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $231.8 | $231.6 | $703.2 | $729.6 |
| Profit before tax | $5.3 | $4.3 | $6.6 | $15.8 |
| Net profit | $3.0 | $2.5 | $2.5 | $8.7 |
| Net profit attributable to Oppenheimer Holdings Inc. | $2.3 | $2.1 | $0.087 | $6.9 |
| Basic / diluted EPS attributable to the company | $0.17 / $0.16 | $0.15 / $0.15 | $0.01 / $0.01 | $0.51 / $0.49 |
- Q3 revenue was essentially flat year over year; nine-month revenue fell 3.6%. Q3 pre-tax margin was approximately 2.3%, versus 1.8% a year earlier; the nine-month margin was approximately 0.9%, versus 2.2%.
- Q3 revenue mix: commissions $113.4 million, principal transactions $14.4 million, interest $14.8 million, investment banking $21.6 million, advisory fees $53.0 million, and other revenue $14.6 million.
- At September 30, total assets were $2.83 billion, down 19.9% from year-end 2011; cash and equivalents were $93.2 million, and total equity was $509.0 million. Customer receivables were $785.2 million.
- Debt included $195 million of 8.75% senior secured notes due 2018. Bank call loans were $94.6 million, up from $27.5 million at year-end. The company reported compliance with note covenants. The filing describes substantial secured financing and repurchase activity; balance-sheet securities sold under repurchase agreements were $778.4 million, down from $1.51 billion at year-end.
- For the first nine months, operating cash flow was negative $25.5 million, investing cash flow was negative $12.4 million, and financing cash flow was positive $60.7 million. Cash increased $22.9 million to $93.2 million. Operating cash flow included large offsetting movements in securities financing balances.
- Declared dividends were $0.11 per share quarterly; $0.33 per share was declared for the first nine months. Book value per share was $37.10 at September 30.
Material changes versus comparable periods
- Q3 commissions declined 8.0%, while investment banking revenue fell 26.1%, largely reflecting weak investor activity and fewer equity issuances. Principal transactions rose 74.6%, partly due to higher investment values; other revenue rose sharply, including OMHHF fees and company-owned life-insurance mark-to-market gains, substantially offset by compensation liabilities.
- For the nine months, commissions declined 7.7% and investment banking fell 27.0%; advisory fees rose 5.1% and other revenue rose 42.2%. Lower compensation expense partly offset weaker revenue.
- Nine-month company-attributable profit fell to $87,000 from $6.9 million. Management attributed pressure in part to $10.2 million of auction-rate securities (ARS)-related costs and $6.6 million of New York real-estate consolidation costs. The company also reported a $6.7 million earnings impact associated with the headquarters move.
- Client assets entrusted to the company were approximately $77.4 billion, broadly unchanged year over year; fee-based program assets rose 19.2% to $21.1 billion.
Outlook, risks, and unusual items
- Management gave no numerical earnings or revenue guidance. Its stated strategy is to grow private-client and asset-management businesses, expand capital-markets capabilities and OMHHF, invest in technology, and manage expenses; it may pursue acquisitions when terms and fit are appropriate.
- Management cited muted investor activity amid economic uncertainty, low interest rates, concerns about Europe and China, and U.S. fiscal-policy uncertainty. It said financing availability could become more challenging, although it believed operations, capital, and available credit would meet foreseeable liquidity needs.
- ARS remain a significant exposure: the company held approximately $79.6 million purchased from clients and had another $40.5 million of purchase commitments through 2016. Clients held approximately $231.7 million of ARS at the firm, with $45.1 million subject to repurchase commitments. Management said ultimate repurchases and related losses are uncertain.
- For legal proceedings where a loss was at least reasonably possible and estimable, estimated aggregate losses in excess of accrued amounts ranged from zero to approximately $180.5 million. Management cautioned actual losses could exceed the estimate; some matters, including the U.S. Airways arbitration, were not considered reasonably estimable. The U.S. Airways claim had been reduced to a $110 million liquidated-damages claim; the panel found a duty to mitigate, with a decision expected in early 2013. The filing also describes other ARS and non-ARS litigation and regulatory investigations.
- In August 2012, the company settled the Investec ARS arbitration for $4.5 million and agreed to repurchase remaining ARS in January 2015. A prior-period tax adjustment recorded in Q2 increased tax expense and reduced interest expense; the filing says the net-of-tax adjustment was $1.3 million and not material to prior periods.
- Hurricane Sandy, after quarter-end, disrupted New York-area operations and forced evacuation of two lower-Manhattan offices, including headquarters. Management said critical functions had been relocated but could not estimate the duration or financial effect.
Important facts for investors to verify
- Reconcile the sharp nine-month decline in company-attributable profit, including ARS costs, headquarters-consolidation accounting, and tax adjustments.
- Track ARS repurchase commitments, client claims, the U.S. Airways arbitration, and the broader disclosed range of potential legal losses.
- Assess liquidity and funding dependence, including on-demand bank call loans, secured financing, collateral availability, and negative operating cash flow.
- Monitor whether commissions and investment banking recover, and whether growth in fee-based assets and OMHHF revenue can offset market-sensitive revenue weakness.
- Check the financial and operational effects of Hurricane Sandy and the costs of the New York office consolidation.