Piper Jaffray Companies — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; the filing also reports fourth-quarter results. The registrant was then named Piper Jaffray Companies (not Piper Sandler Companies).
Business context and reporting period
The firm provided investment banking, institutional brokerage and research, and traditional and alternative asset management services. Its two reportable segments were Capital Markets and Asset Management. Substantially all net revenue and long-lived assets were in the U.S.
Financial results and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Total revenue | $801.0 million | $895.2 million |
| Net revenue | $784.4 million | $874.9 million |
| Income (loss) before tax | $74.9 million | $(29.3) million |
| Net income (loss) attributable to Piper Jaffray Companies | $57.0 million | $(61.9) million |
| Diluted EPS | $3.72 | $(5.07) |
| Adjusted net income and adjusted diluted EPS (non-GAAP) | $93.7 million; $6.13 | $108.9 million; $7.12 |
- Fourth quarter: Total revenue was $226.8 million, net revenue $224.4 million, pretax income $31.9 million, and net income attributable to the company $18.2 million; diluted EPS was $1.21. In Q4 2017, net revenue was $236.1 million, the company recorded a $46.1 million net loss, and diluted EPS was $(3.63), including a major tax charge.
- Revenue mix and change: Full-year investment banking revenue was $589.0 million (down 7.1%); institutional brokerage was $124.5 million (down 19.4%); asset management was $49.8 million (down 12.4%); and investment income was $4.9 million versus $18.0 million. Higher equity financing revenue was outweighed by lower advisory, debt financing, brokerage, asset management, and investment income.
- Expenses and margins: Compensation and benefits fell 17.0% to $512.8 million. Non-interest expenses fell 21.5% to $709.6 million, chiefly reflecting the absence of 2017’s $114.4 million goodwill impairment. GAAP pretax margin was 9.5%, versus negative 3.4%. Adjusted Capital Markets pretax margin declined to 15.4% from 18.0%; adjusted Asset Management margin declined to 6.4% from 11.7%.
- Cash flow: Operating activities provided $509.9 million; investing activities used $15.9 million; financing activities used $476.8 million. Cash and restricted cash ended at $50.4 million, up $16.6 million. Operating cash flow benefited substantially from a $534.4 million reduction in net inventory positions as the firm reduced trading inventory.
- Balance sheet and funding: Total assets were $1.345 billion, down from $2.025 billion; shareholders’ equity was $730.4 million. Long-term notes were fully repaid in October 2018. Year-end short-term financing was $50.0 million, primarily secured commercial paper. The firm also reported $86.0 million outstanding under a prime-broker financing arrangement in its funding discussion; confirm its presentation and relationship to balance-sheet line items. A $175 million committed facility and an $85 million uncommitted line had no advances outstanding at year-end. SEC-rule broker-dealer net capital was $222.3 million, $221.3 million above the stated minimum.
- Other metrics: AUM fell to $5.755 billion from $7.346 billion, reflecting $714 million in net outflows and $877 million in market depreciation. Year-end inventory was $627.2 million, down 54.7%. The reported leverage ratio declined to 1.8 from 2.7; adjusted leverage was 2.1 versus 3.2.
Material changes versus the prior period
- Equity financing improved: revenue rose 23.4% to $122.2 million. Advisory revenue fell 11.1% to $394.1 million despite more completed transactions, as 2017 benefited from several large fees. Debt financing fell 21.6% to $73.3 million, partly due to a sharp decline in municipal refunding activity.
- Equity and fixed-income institutional brokerage declined 5.2% and 24.5%, respectively. Management cited a shrinking equity research and execution fee pool, MiFID II-related unbundling, and weaker municipal-market trading conditions.
- Asset management AUM declined in both MLP and equity strategies. Equity strategies had $520 million in net outflows; MLP strategies had $194 million in outflows. Both experienced market depreciation.
- The 2017 net loss included a $114.4 million noncash goodwill impairment and a $54.2 million noncash deferred-tax-asset remeasurement charge associated with U.S. tax reform. No goodwill impairment was recorded in 2018.
Outlook, commentary, risks and unusual items
- Management expected moderate U.S. economic growth in 2019 and expressed a constructive view of advisory activity, supported by its deal pipeline. It expected municipal issuance to increase toward normalized levels, while acknowledging persistent challenges in fixed income and equity brokerage. The filing provides no quantified earnings or revenue guidance.
- Management highlighted market volatility, trade-policy uncertainty, global economic deceleration, U.S. political gridlock, Brexit, interest-rate and yield-curve changes, and the impact of sector-specific conditions. Advisory and financing fees depend on transactions closing and can vary sharply between periods.
- Investment management results remain exposed to AUM market declines, client outflows, relative investment performance, and continued industry shifts toward passive products. Energy-related assets are also sensitive to commodity and sector conditions.
- Liquidity relies in part on Pershing, whose financing is discretionary, and on secured or uncommitted funding sources. Other notable exposures include trading and Level III valuations, counterparty credit risk, cybersecurity and third-party service-provider disruption, competition for key employees, and extensive regulation.
- Uncollateralized derivative counterparty credit exposure was $15.9 million across five counterparties, including $12.5 million with one counterparty. The firm had $78.0 million of investment commitments with no specified call dates.
- Legal proceedings were described as part of ordinary business; management said reasonably possible losses above accrued amounts were not material at year-end, while noting outcomes remain uncertain. The financial-statement and internal-control audit opinions were unqualified.
- Accounting changes: 2018 revenue guidance required $25.1 million of client-reimbursed deal costs to be presented gross in both revenue and expense, with no pretax-income effect. Adoption also reduced retained earnings by $3.6 million, net of tax. New lease accounting adopted in 2019 was expected to add approximately $44 million in right-of-use assets and $59 million in lease liabilities.
- After year-end, the company agreed to acquire Weeden & Co. for approximately $42 million, with up to $31.5 million of additional consideration tied to revenue targets; closing was expected in Q2 2019, subject to approvals and customary conditions.
Most important facts for investors to verify
- Reconcile GAAP earnings with adjusted earnings, including acquisition-related compensation, the deferred-tax valuation allowance, and stock-based compensation tax benefits.
- Assess the sustainability of investment banking fees and the sensitivity of results to deal closings, municipal issuance, and market volatility.
- Review AUM flows and performance, particularly the ongoing equity strategy outflows and MLP exposure.
- Confirm the composition and availability of year-end funding, including the $86 million prime-broker amount, Pershing’s discretionary financing, and facility covenants.
- Monitor the $15.9 million derivative counterparty exposure, $78.0 million investment commitments, legal contingencies, and the terms and integration risks of the proposed Weeden acquisition.