Business context and reporting period
Oppenheimer Holdings Inc. (OPY) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2017. The financial-services firm provides brokerage, investment banking, trading, asset management and trust services. It reported 93 U.S. offices and operations in five foreign jurisdictions; client assets administered were $82.8 billion and assets under management (AUM) were $27.2 billion at quarter-end. Its former commercial mortgage business is reported as discontinued operations.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue from continuing operations | $226.2m | $211.8m | $655.4m | $638.8m |
| Income (loss) before tax, continuing operations | $11.8m | $(1.8)m | $3.2m | $(14.4)m |
| Net income (loss) attributable to OPY | $7.8m | $(0.7)m | $1.6m | $0.6m |
| Basic EPS | $0.59 | $(0.05) | $0.12 | $0.05 |
| Cash used in operating activities | — | $(34.4)m | $(24.0)m |
Q3 continuing-operations pretax margin was approximately 5.2%, versus negative 0.9% a year earlier; the nine-month margin was approximately 0.5%, versus negative 2.3%. Compensation and related expenses were 62.8% of revenue in Q3 and 65.4% for the nine months, down from 67.2% and 67.7%, respectively, in 2016.
- Revenue mix: Q3 commissions fell 13.8% to $77.6m, while advisory fees rose 10.2% to $74.3m, investment banking rose 18.0% to $23.9m, and other revenue rose 80.7% to $32.2m. For the nine months, commissions fell 13.4%; advisory and investment banking revenue increased 8.5% and 11.3%.
- Cash and balance sheet: Cash and cash equivalents were $44.8m at September 30, down from $64.9m at year-end 2016. Total assets were $2.51bn, liabilities $2.00bn and stockholders’ equity $504.8m. Operating cash outflow was partly offset by financing inflows; investing activities used $2.3m in 2017, compared with $43.2m provided in 2016, which included asset-sale proceeds.
- Debt and funding: The company issued $200m of 6.75% senior secured notes due 2022 and redeemed its remaining $120m of 8.75% notes; the prior year-end balance included $150m of the older notes. Net carrying value of senior notes was $198.8m. Bank call loans were $130.1m, down from $145.8m at year-end. The company said it was in compliance with note covenants.
- Dividends and repurchases: Dividends declared were $0.11 per share for Q3 and $0.33 for the nine-month period. The company repurchased 450,350 Class A shares for $7.5m during the first nine months.
Material changes, outlook and risks
- Improved Q3 profitability reflected higher revenue and nearly flat total expenses. Management attributed the revenue increase in part to higher fees from the FDIC-insured bank deposit program and a favorable arbitration award; Q3 Private Client results also included $4.1m from an arbitration award and insurance proceeds. These items should be distinguished from recurring performance.
- Private Client revenue increased 15.3% in Q3, while Capital Markets revenue declined 3.1% and Asset Management revenue declined 17.0%, in part because the company changed its allocation of advisory fees between segments from January 2017. AUM reached a record $27.2bn, up 10.6% year over year; financial adviser headcount fell to 1,117 from 1,177.
- Management described a long-term focus on growing Private Client and Asset Management, recruiting experienced advisers, improving technology and expanding capital markets capabilities while managing expenses. It provided no quantified earnings or revenue guidance and cautioned that results are affected by market activity, prices, interest rates and other external factors.
- Cash flow was negative from operations, and the firm relies on collateralized and other short-term borrowings, repurchase agreements and market access for funding. Management said available capital, operations and credit facilities were sufficient for foreseeable liquidity needs, while noting that funding availability and costs may change.
- Legal and regulatory contingencies remain significant. For proceedings where losses were reasonably estimable and at least reasonably possible, the company estimated aggregate losses in excess of accruals of $0–$29m; some matters could not be estimated, and actual losses could exceed this range. The filing also describes continuing regulatory inquiries and implementation costs associated with compliance reviews.
- Auction-rate securities (ARS) create continuing exposure: the company held about $109m principal value and had $15.5m of present-value purchase commitments, including $5.0m under regulatory settlements and $10.5m under client settlements and awards through 2020. Eligible investors still held about $30.6m of ARS potentially subject to future offers; the timing and amount of further purchases are uncertain.
- Other risks discussed include the DOL fiduciary rules, MIFID II, Brexit-related operating uncertainty, cybersecurity threats, regulatory enforcement, competition and market volatility. Management reported disclosure controls were effective at period-end and no material change in internal control over financial reporting during the nine months.
Important facts for investors to verify
- How much of the marked improvement in Q3 revenue and profitability is recurring, particularly the arbitration award, insurance proceeds and bank-deposit program fees?
- Whether commission declines and lower adviser headcount stabilize, and whether AUM growth translates into sustained fee revenue.
- Cash generation, liquidity under stress, dependence on collateralized funding and the terms and covenants of the 6.75% secured notes.
- Potential costs from the $0–$29m estimated excess legal-loss range, matters not currently estimable, and future ARS repurchase obligations.
- Effects of regulatory requirements and remediation on expenses, business practices and client relationships.