Oppenheimer Holdings Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. Unaudited interim results; amounts below are in millions of dollars except per-share data. Oppenheimer is a diversified broker-dealer and financial-services firm, with private-client, asset-management, capital-markets and commercial-mortgage-banking businesses. At quarter-end, it reported approximately $80.1 billion of client assets under administration and $22.5 billion of assets under management.
Financial performance and position
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $243.8 | $233.1 | $483.0 | $471.4 |
| Income before tax | $5.7 | $7.8 | $12.4 | $1.4 |
| Net income (loss) attributable to Oppenheimer | $2.8 | $2.4 | $6.5 | $(2.2) |
| Diluted EPS | $0.20 | $0.17 | $0.46 | $(0.16) |
| Dividends declared per share | $0.11 | $0.11 | $0.22 | $0.22 |
- Q2 pretax margin was approximately 2.3%, versus 3.4% a year earlier; six-month pretax margin was approximately 2.6%, versus 0.3%. These are calculated from reported revenue and pretax income.
- Q2 revenue growth was led by commissions (+10.7%) and advisory fees (+12.8%); principal transactions (−44.0%), investment banking (−9.6%) and interest revenue (−8.0%) declined year over year.
- Q2 expenses rose 5.7% to $238.2 million, outpacing revenue growth of 4.6%. Compensation was $160.0 million, or 65.6% of revenue, versus 64.7% a year earlier. Six-month total expenses were nearly flat at $470.6 million.
- At June 30, total assets were $2.754 billion, total liabilities $2.242 billion and total stockholders’ equity $511.8 million. Cash and cash equivalents were $106.1 million, down from $135.4 million at year-end 2012.
- Six-month cash used in operating activities was $105.9 million; investing activities used $11.7 million, while financing activities provided $88.3 million, including a $91.5 million increase in bank call loans. Cash decreased $29.3 million over the period.
- Long-term debt comprised $195.0 million of 8.75% senior secured notes due 2018. Bank call loans were $219.8 million, up from $128.3 million at year-end; repurchase-agreement liabilities were $496.0 million. The company reported a gross leverage ratio of 5.4 and compliance with note covenants.
Changes versus comparable periods
- Q2 attributable net income increased 17.6% despite lower pretax income, reflecting a lower tax provision and lower income attributable to non-controlling interests.
- For the first six months, the company moved from an attributable net loss of $2.2 million to income of $6.5 million. Management cited higher revenue, lower non-compensation expenses and a $5 million reduction in legal costs; the 2012 comparison also included $6.3 million of real-estate consolidation costs.
- Private Client and Asset Management improved: Q2 revenue rose 11.5% and 10.1%, respectively, and pretax income rose 22.9% and 80.3%. Capital Markets revenue declined 5.1%, with pretax income down to $1.0 million. Commercial Mortgage Banking revenue fell 13.3% and pretax income fell 54.5%.
- Occupancy and equipment expense fell 16.9% for the first half, in part reflecting the prior-year consolidation costs. Advisory fees benefited from market appreciation and AUM growth. Commission revenue benefited from higher transaction volumes and equity markets.
Outlook, risks and unusual items
- No numerical earnings or revenue guidance was provided. Management’s stated priorities include recruiting experienced financial advisers and investment professionals, developing existing businesses, improving technology and capital-markets capabilities, growing commercial mortgage banking and non-U.S. operations, and managing expenses. Management expects benefits from its headquarters consolidation.
- Management said funds from operations, capital and available credit facilities should meet foreseeable liquidity needs, while noting that financing availability depends on market conditions. The company relies on bank borrowing, securities lending and repurchase agreements; bank call loans are generally payable on demand. Foreign-subsidiary earnings are not repatriated for domestic liquidity needs.
- Auction-rate securities (ARS) remain a significant exposure. The company held approximately $83.3 million of client ARS purchased under settlements and was committed to purchase a further $33.9 million through 2016; clients held approximately $195.2 million of ARS at the firm. The company reported a $7.6 million valuation adjustment on ARS and said client liquidity solutions are uncertain.
- For legal proceedings where loss was reasonably possible, the company estimated aggregate loss in excess of accrued amounts at $0 to approximately $126 million; some matters could not be estimated, and actual losses could exceed the estimate. A FINRA panel’s $30 million U.S. Airways award was paid in February 2013 and its after-tax charge was recorded in 2012 results.
- On July 16, 2013, after quarter-end, the company received an SEC Wells Notice concerning penny-stock sales for a former customer. Other disclosed matters include ARS litigation, an ongoing regulatory inquiry into low-priced securities, and a $25 million CIBC earn-out dispute; the $25 million is held in escrow.
- Additional risks cited include market and interest-rate volatility, reduced financing availability, regulatory changes, legal and compliance costs, and potential indirect effects of financial regulation. S&P downgraded the company and notes to B from B+ in March 2013; Moody’s affirmed its B2 ratings in June. The company reported no European sovereign-debt exposure at quarter-end.
- The board declared a $0.11-per-share quarterly dividend on July 26, payable August 23, 2013. Management concluded disclosure controls were effective at June 30; no significant change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether operating cash outflows, increased bank call loans and gross leverage remain manageable, and the availability and terms of secured and unsecured funding.
- Potential cash requirements and valuation sensitivity from the $33.9 million remaining ARS purchase commitments, the $83.3 million already held, and further client or regulatory claims.
- Developments in the SEC Wells Notice, other regulatory investigations, and the stated $0–$126 million range of possible legal losses above accrued amounts.
- Whether advisory-fee growth and the $22.5 billion AUM level persist, and whether declines in investment banking, trading or mortgage originations continue.
- Whether the CIBC escrow dispute, commercial-mortgage servicing-rights write-offs, and announced dividend affect future liquidity or earnings.