Business Context and Reporting Period
Company: Piper Jaffray Companies (Piper Jaffray)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2008
Business Overview: Piper Jaffray provides investment banking, institutional brokerage, and asset management services primarily to middle-market companies, private equity groups, and institutional investors in the U.S., Europe, and Asia. The company operates as a single reporting segment. In 2007, the company expanded via acquisitions of Fiduciary Asset Management (FAMCO) and Goldbond Capital Holdings.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2008 | Three Months Ended Sep 30, 2007 | Nine Months Ended Sep 30, 2007 |
|---|---|---|---|---|
| Net Revenues | $72.7 million | $263.3 million | $92.9 million | $352.4 million |
| Net Income/(Loss) | $(27.2) million | $(34.2) million | $4.4 million | $27.1 million |
| EPS (Basic) | $(1.72) | $(2.15) | $0.27 | $1.62 |
| Total Assets | $1.64 billion (as of Sep 30, 2008) | |||
| Cash and Cash Equivalents | $38.6 million (as of Sep 30, 2008) | |||
| Shareholders' Equity | $891.2 million (as of Sep 30, 2008) | |||
| Net Capital (Regulatory) | $223.5 million (as of Sep 30, 2008) |
Material Changes vs. Prior Period
- Revenue Decline: Net revenues decreased 21.7% for the quarter and 25.3% for the nine-month period compared to the prior year. Investment banking revenues fell 3.9% (quarter) and 35.0% (nine months) due to significantly lower equity financing activity. Institutional brokerage revenues dropped 59.4% (quarter) and 15.8% (nine months).
- Losses from Continuing Operations: The company recorded a net loss from continuing operations of $26.5 million for the quarter and $35.0 million for the nine months, compared to net income of $4.8 million and $29.9 million, respectively, in the prior year periods.
- Tender Option Bond (TOB) Impact: A significant driver of the decline was a $21.7 million pre-tax loss in the third quarter related to the company's proprietary TOB program, caused by dislocation in the municipal bond market. This resulted in the consolidation of 23 previously off-balance-sheet securitized trusts.
- Expense Increases: Non-interest expenses increased 35.6% for the quarter, primarily due to higher compensation and benefits ($78.0 million vs. $54.3 million) and $4.6 million in restructuring-related expenses. Compensation as a percentage of net revenues rose to 107.3% for the quarter.
- Liquidity Position: Cash and cash equivalents decreased from $150.3 million at year-end 2007 to $38.6 million at September 30, 2008, reflecting a net decrease in cash of $111.7 million for the nine-month period.
Guidance, Outlook, and Risks
- Market Outlook: Management anticipates challenging market conditions to persist through the remainder of 2008 and well into 2009. Equity financing activity is expected to remain depressed, and the fixed income credit market is not expected to improve in the near term.
- Cost Reduction Strategy: The company intends to reduce core non-compensation expenses to a 5% increase over 2007 levels. The goal for 2009 is to reduce the core non-compensation expense run-rate to approximately $35 million. Management believes breakeven performance is achievable at $95 million in quarterly revenues in 2009.
- TOB Program Discontinuation: The company decided to discontinue its TOB program in the coming quarters due to the liquidity provider exiting the business and the belief that variable rate municipal trust certificates will no longer be a consistent funding source.
- Key Risks:
- Market Risk: Increased volatility in equity and fixed income markets, particularly in municipal securities and auction rate securities.
- Liquidity Risk: Disruption in traditional funding sources for variable rate demand notes and municipal bonds.
- Credit Risk: Counterparty exposure, including an estimated $2.1 million exposure to Lehman Brothers Holdings Inc. at quarter-end.
- Goodwill Impairment: Given declining revenues and profitability, the probability of goodwill impairment has increased. Total goodwill stands at $284.8 million.
Investor Verification Checklist
- TOB Program Exposure: Verify the extent of the $21.7 million loss and the timeline for exiting the tender option bond program, including the impact of consolidating 23 trusts.
- Liquidity Runway: Assess the adequacy of the $38.6 million cash balance and the $250 million committed credit facility against the projected cash burn and funding needs for the TOB wind-down.
- Compensation Structure: Review the shift to a more variable compensation model for 2009 and the feasibility of achieving the $35 million non-compensation expense target.
- Goodwill Valuation: Monitor the upcoming annual goodwill impairment test (scheduled for Q4) given the significant decline in operating results and market capitalization.
- Counterparty Exposure: Confirm the status of the $2.1 million Lehman Brothers exposure and the $10 million bridge loan currently in default (though collateralized).