Piper Sandler Companies — Q1 2022 Form 10-Q
Business context and period. The filing covers the unaudited quarter ended March 31, 2022, compared with Q1 2021. Piper Sandler operates one reportable segment, providing investment banking and institutional brokerage services, alongside alternative asset management activities.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net revenues (GAAP) | $350.6 million | $428.6 million | (18.2%) |
| Income before tax | $35.6 million | $82.9 million | (57.0%) |
| Consolidated net income | $24.7 million | $65.6 million | (62.4%) |
| Net income attributable to Piper Sandler | $36.7 million | $49.5 million | (25.9%) |
| Diluted EPS | $2.12 | $3.00 | (29.3%) |
| GAAP pre-tax margin | 10.2% | 19.3% | Down 9.1 percentage points |
Investment banking revenue fell 13.0% to $257.5 million: advisory revenue rose 38.0% to $210.9 million, while corporate financing declined 83.5% to $19.2 million amid a near-shutdown in equity issuance. Municipal financing was broadly flat at $27.4 million. Institutional brokerage revenue decreased 4.5% to $104.6 million; equity brokerage grew 15.2% to $49.8 million, partly reflecting Cornerstone Macro, while fixed-income services fell 17.4% to $54.8 million.
Investment income swung to a $13.1 million loss from $23.8 million of income, reflecting unrealized investment losses, including losses attributable to noncontrolling interests. Compensation and benefits declined 11.6% to $247.9 million, but the compensation ratio increased to 70.7% from 65.4%. Non-compensation expenses rose 2.6% to $67.1 million. The effective tax rate was 30.8%, versus 20.8%.
Non-GAAP measures: Adjusted net revenues were $361.8 million, down 12.6%; adjusted operating income was $75.2 million, down 26.8%; adjusted diluted EPS was $3.12, down 24.5%; and adjusted operating margin was 20.8%, versus 24.8%. These are management-defined measures that exclude specified noncontrolling-interest and acquisition-related items, among other adjustments, and should be considered alongside—not instead of—GAAP results.
Cash flow, balance sheet and liquidity
- Cash and cash equivalents were $247.0 million at March 31, down from $971.0 million at year-end. Net cash used in operating activities was $484.2 million, versus $263.6 million used in Q1 2021; the filing identifies a $601.7 million decrease in accrued compensation as a major operating cash-flow item. Cash used in investing was $29.7 million, including $25.0 million for acquisitions, and cash used in financing was $208.8 million, including dividends and share repurchases.
- Total assets were $1.88 billion and total shareholders’ equity was $1.16 billion. The reported leverage ratio was 1.6x and adjusted leverage was 2.0x, both lower than at December 31, 2021.
- Long-term financing was $125 million of unsecured Class B senior notes bearing 5.20% interest and maturing October 15, 2023. The company reported no borrowings under its $65 million unsecured revolving facility or $100 million committed secured credit line at quarter-end. It also disclosed $143.2 million of financing outstanding through its CIBC clearing arrangement for convertible securities.
- Regulatory net capital was $338.2 million, $337.2 million above the SEC minimum; the company reported compliance with applicable capital requirements and financing covenants.
Material changes, outlook and risks
- On February 4, 2022, Piper Sandler completed its acquisition of Cornerstone Macro for a purchase price of approximately $34.0 million, including cash and contingent consideration. It added $18.6 million of customer-relationship intangible assets and $9.9 million of goodwill. Up to $27.8 million of additional earnout cash may be earned, subject to the stated conditions.
- The company announced an agreement to acquire Stamford Partners, expected to close in Q2 2022 subject to regulatory approval and customary conditions. It expected further acquisition-related restructuring and integration costs during the remainder of 2022.
- Management anticipated moderate U.S. economic growth, but highlighted uncertainty from the war in Ukraine, inflation, supply and labor constraints, energy prices, interest-rate increases and market volatility. Equity capital-raising weakness could persist into the second half of 2022.
- Management described its advisory pipeline as robust and said it believed the advisory business was positioned for a strong 2022 if market conditions remained supportive. It expected Cornerstone Macro to support equity brokerage cross-selling and market-share gains as integration progressed. Fixed-income client activity was strong in Q1, though revenue could become more volatile; municipal issuance was expected to moderate from 2021.
- Key risks include market and investment valuation volatility, liquidity and funding availability, uncollateralized derivative counterparty exposure, and legal, regulatory, operational and cybersecurity risks. Uncollateralized derivative credit exposure was $18.8 million, including $12.5 million to one counterparty. Management said reasonably possible legal losses above recorded reserves were not material, while noting outcomes and estimates remain uncertain.
Investor facts to verify
- Whether the advisory pipeline converts to completed transactions and whether subdued equity financing persists.
- Investment valuations and the effect of market conditions on investment income, margins and earnings.
- Cash-flow and liquidity trends, including the timing of incentive-compensation payments and reliance on secured or discretionary clearing finance.
- Integration and performance of Cornerstone Macro, Stamford Partners’ closing, and potential earnout and other acquisition-related costs.
- Progress on share repurchases and dividends: Q1 included a $4.50-per-share special dividend and $92.9 million of program repurchases; a new $150 million repurchase authorization was approved May 6, 2022.