Oppenheimer Holdings Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; unaudited. Oppenheimer provides retail brokerage, asset management, investment banking, institutional sales and trading, and related financial services. It reported 91 U.S. branches, $85.8 billion in client assets administered, and $28.7 billion in assets under management at quarter-end.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $242.6 million | $215.9 million | $477.1 million | $429.1 million |
| Income (loss) before tax, continuing operations | $12.5 million | ($1.6 million) | $22.1 million | ($8.7 million) |
| Net income (loss) attributable to Oppenheimer Holdings Inc. | $8.9 million | ($1.3 million) | $15.6 million | ($6.2 million) |
| Basic EPS | $0.67 | ($0.10) | $1.17 | ($0.46) |
| Operating cash flow | Six months: $11.3 million | Prior-year six months: ($70.4 million) |
- Q2 revenue rose 12.4%; first-half revenue rose 11.2%. Q2 pretax margin was approximately 5.2%, versus a pretax loss in the prior-year quarter.
- Q2 revenue gains included investment banking, up 81.4% to $27.9 million; advisory fees, up 6.2% to $77.3 million; and bank deposit sweep income, up 62.8% to $28.9 million. Commissions declined 1.2% to $82.9 million. Management attributed higher sweep income to higher short-term interest rates and investment banking growth to underwriting and M&A activity.
- Q2 compensation expense was $151.9 million, or 62.6% of revenue versus 66.1% a year earlier. Total expenses increased 5.8% to $230.1 million; interest expense rose 59.2% to $10.9 million.
- At June 30, total assets were $2.52 billion, total liabilities $1.98 billion, and stockholders’ equity $538.6 million. Cash and cash equivalents were $39.0 million, compared with $48.2 million at year-end 2017.
- Debt included $200 million principal amount of 6.75% senior secured notes due 2022 (carrying value $199.0 million). Bank call loans were $107.5 million, down from $118.3 million at year-end. The company reported compliance with note covenants.
- Six-month investing cash use was $4.3 million and financing cash use was $16.2 million; cash declined $9.2 million. The filing says management believes operating funds, capital, and available credit facilities are sufficient for foreseeable liquidity needs, while noting financing availability can depend on market conditions.
Changes versus comparable periods
- Profitability improved substantially from prior-year losses, alongside higher revenue and lower compensation expense as a share of revenue.
- Private Client Q2 revenue increased 11.6% to $156.6 million and pretax income increased 19.5% to $33.5 million. Capital Markets revenue rose 27.0% to $68.2 million and its pretax loss narrowed to $0.2 million from $11.0 million. Asset Management revenue declined 8.3% to $17.7 million; the filing cites a change in management-fee reporting methodology.
- For the first half, commissions fell 2.5%, while investment banking revenue increased 68.0% and sweep income increased 70.0%. Other revenue fell 33.5%, mainly reflecting changes in company-owned life-insurance cash surrender value. Non-compensation expense declined 0.9% year over year, partly because the prior-year period included an Israel VAT assessment charge.
- Client assets under administration decreased 1.3% from December 31, 2017 to $85.8 billion. AUM increased 10.0% year over year to $28.7 billion, including $1.7 billion of appreciation and $0.9 billion of net contributions in Q2.
Outlook, risks, contingencies and unusual items
- No quantified earnings or revenue guidance was provided. Management’s stated priorities include growing private-client and asset-management businesses, expanding capital-markets capabilities, improving technology and compliance, controlling expenses, and considering acquisitions.
- Key business sensitivities include securities-market volumes and volatility, interest and currency rates, competition, funding availability, regulation, foreign operations and Brexit, cybersecurity, and legal or regulatory outcomes. Management said MiFID II had reduced compensation for European equity research and that the post-Brexit operating impact remained uncertain; it was planning an EU office for investment banking and possible continued EU operations.
- Legal and regulatory proceedings are significant. For matters where a loss was reasonably possible and estimable, the company disclosed an aggregate possible loss range of $0 to approximately $30 million in excess of amounts accrued; some matters could not be estimated, and actual losses could exceed the range.
- Auction-rate securities (ARS) remain a notable exposure: the company held approximately $92.3 million principal value of ARS, with $2.1 million valuation adjustment, and had $12.2 million principal value of purchase commitments, including $5.0 million under regulatory settlements and $7.2 million under client legal settlements and awards through 2020. Eligible investors held a further approximately $21.2 million of ARS potentially subject to future offers; the timing and amount of future commitments are uncertain.
- The filing describes ongoing SEC and FINRA inquiries, including an SEC examination begun in June 2018 concerning implementation of independent consultant recommendations, a FINRA inquiry into unit investment trust sales, and participation in the SEC share-class disclosure initiative. The company also disclosed various pending lawsuits and regulatory matters.
- The company adopted the new revenue-recognition standard in Q1 2018 with no material financial-statement impact. It expects the lease-accounting standard effective after 2018 to have a significant balance-sheet impact, including recognition of operating-lease assets and liabilities.
- On July 27, 2018, the board declared a $0.11-per-share quarterly dividend, payable August 24, 2018.
Important facts for investors to verify
- Whether higher investment-banking and sweep revenues, and the resulting return to profitability, are sustainable amid changing market activity and interest rates.
- How compensation, legal and regulatory costs, and higher interest expense affect margins and earnings in subsequent periods.
- Liquidity and funding capacity under market stress, including dependence on collateralized borrowing, repurchase agreements, customer balances, and bank financing.
- Potential cash and earnings effects of ARS buybacks, remaining client holdings, and legal or regulatory matters—including exposures not included in the estimable loss range.
- Progress and costs associated with compliance recommendations, SEC/FINRA inquiries, the share-class disclosure initiative, and evolving U.S. and European regulation.
- Effects of the expected lease-standard adoption, Brexit-related operating plans, and any future dividend or repurchase decisions.