Business context and reporting period
The filing is Piper Jaffray Companies’ unaudited Form 10-Q for the quarter and six months ended June 30, 2011. The registrant named in the filing is Piper Jaffray Companies; this differs from the request metadata’s “Piper Sandler Companies.” The firm operates Capital Markets and Asset Management businesses, serving clients in the United States, Asia and Europe.
Financial performance and condition
Unless noted otherwise, figures below are in millions of dollars. Income-statement comparisons are to the corresponding 2010 period.
| Metric | Q2 2011 | Six months 2011 |
|---|---|---|
| Net revenues | $135.9; up 6.5% | $260.7; up 9.9% |
| Income before tax | $17.1; up 45.7% | $28.7; up 37.6% |
| Net income attributable to Piper Jaffray Companies | $10.7 | $17.9 |
| Net income attributable to common shareholders | $8.8 | $14.4 |
| Diluted EPS | $0.55 | $0.93 |
| Pre-tax operating margin | 12.6%, versus 9.2% | 11.0%, versus 8.8% |
- Revenue mix: Q2 investment banking revenue fell 6.5% to $67.1 million, while institutional brokerage rose 15.9% to $37.2 million and asset management rose 23.7% to $19.6 million. First-half asset management revenue increased 50.1% to $37.6 million, partly reflecting a full six months of Advisory Research, Inc. (ARI), acquired in March 2010.
- Segments: Q2 Capital Markets net revenue was $115.5 million and pre-tax income $12.2 million (10.5% margin); Asset Management net revenue was $20.4 million and pre-tax income $4.9 million (24.2% margin). First-half segment pre-tax income was $19.4 million for Capital Markets and $9.2 million for Asset Management.
- Expenses: Q2 non-interest expenses were $118.8 million, up 2.5%; compensation and benefits rose 7.3% to $83.4 million. Management attributed the compensation increase to higher variable compensation with improved revenue and profitability. First-half non-interest expenses rose 7.2% to $232.1 million.
- Cash flow: Operating cash flow was negative $82.9 million in the first half, compared with negative $15.2 million in 2010. Cash flow reflected, among other items, increased receivables and inventory positions and lower accrued compensation. Investing cash outflow was $4.4 million; financing cash inflow was $106.8 million. Cash and cash equivalents ended at $70.1 million, up from $50.6 million at year-end.
- Balance sheet and funding: At June 30, total assets were $2.22 billion, total liabilities $1.36 billion and shareholders’ equity $862.6 million. Short-term financing was $224.6 million and bank syndicated financing $120.0 million. Repurchase-agreement liabilities were $368.3 million. The filing reports a 2.64 total-assets-to-equity leverage ratio. Cash and cash equivalents plus cash segregated for regulatory purposes totaled $100.1 million; segregated balances are restricted for client protection.
- Capital and liquidity: Broker-dealer net capital was $188.7 million, $186.9 million above the SEC minimum, and exceeded the $150 million and $160 million minimums under the committed facility and syndicated agreement, respectively. The company reported compliance with credit-agreement covenants. Its $250 million committed secured revolving facility was due December 30, 2011; $114.3 million of a $300 million commercial-paper program was outstanding. The syndicated term loan and revolver mature in December 2013.
Material changes versus comparable periods
- Q2 earnings attributable to Piper Jaffray rose to $10.7 million from $7.4 million; diluted EPS increased to $0.55 from $0.36. First-half earnings rose to $17.9 million from $7.9 million; diluted EPS increased to $0.93 from $0.39.
- Q2 fixed-income brokerage improved substantially, including stronger taxable securities and municipal strategic trading, while equity brokerage weakened amid lower client volumes and reduced market volatility. Investment banking declined on lower advisory activity and lower Asia equity financing.
- First-half results benefited from higher asset-management revenue, merchant-banking and firm-investment gains, and lower interest expense. The 2010 first-half tax rate was unusually high (62.9%) because of a $5.3 million deferred-tax-asset write-off; the 2011 rate was 35.2%.
- Assets under management were $12.36 billion at June 30, versus $12.30 billion at December 31, 2010. First-half market appreciation of $633 million was largely offset by $567 million of net outflows; Q2 alone saw $364 million of outflows and $32 million of market depreciation.
- Q2 total VaR was $1.04 million, up from $0.80 million at December 31, 2010. The company said inventory had greater spread and volatility sensitivity, and daily trading losses exceeded one-day VaR twice in the first half.
Outlook, commentary, risks and contingencies
- Management provided no quantitative earnings or revenue guidance. It expected Asia capital-markets activity to be weighted toward Q4 2011 and said equity financing and advisory could benefit if markets remained favorable, while cautioning about global-market and U.S. fiscal-policy uncertainty.
- Management expected municipal underwriting markets to remain difficult for the rest of 2011. Industry municipal negotiated issuance was down 47% in the first half; Piper Jaffray’s par value of new issuance fell 10%, and its municipal financing economic fee market share increased 150 basis points.
- The firm said its restructured European operations had returned to profitability in the first half of 2011. The 2010 restructuring liability was not material at June 30, 2011.
- Management highlighted sensitivity to economic and market conditions, financing and M&A activity, trading volumes and volatility, interest rates, assets under management, and regulation. It also warned that funding depends on collateral and counterparties; uncommitted bank lines may be denied, and market illiquidity can require holding inventory longer.
- Derivative counterparty exposure included $17.4 million of uncollateralized credit exposure, including $8.6 million to one counterparty. The filing also describes valuation uncertainty in Level III assets and potential market, credit, liquidity, operational, legal and regulatory risks.
- The DOJ, SEC and state attorneys general were investigating numerous firms, including the company, over municipal guaranteed investment contracts and derivatives; related class actions were pending. Management considered a material loss reasonably possible, but said it could not estimate a loss range; no reserve was recorded because a loss was not considered probable or reasonably estimable.
- The company was involved in other legal and regulatory matters and stated that, except for the municipal-investigation matter, management did not expect pending matters to have a material adverse effect on consolidated financial condition based on then-available information. It cautioned that an adverse contingency exceeding reserves could materially affect results.
Important facts for investors to verify
- Confirm the registrant identity and its relationship, if any, to the “Piper Sandler Companies” named in the request metadata.
- Review the drivers and durability of revenue and earnings growth, especially fixed-income trading, merchant-banking gains, performance fees, and the contribution from ARI.
- Assess asset-management client outflows, assets under management, and the timing-dependent nature of performance fees.
- Monitor operating cash outflow, working-capital and inventory movements, funding mix, and the December 2011 maturity of the committed revolving facility.
- Evaluate municipal-derivatives litigation and investigations, uncollateralized derivative counterparty exposure, and the sensitivity of Level III valuations and VaR to changing markets.
- Check future regulatory-capital and debt-covenant compliance, and whether market conditions or regulation affect financing access and business activity.