Piper Jaffray Companies — Q2 2015 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2015; the registrant is Piper Jaffray Companies, a capital-markets and asset-management firm. It reports Capital Markets and Asset Management segments. Amounts below are in U.S. dollars; financial figures are generally in millions unless stated otherwise.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Net revenues | $164.1 | $170.0 | $325.9 | $338.2 |
| Income before tax | $25.9 | $30.4 | $57.2 | $63.1 |
| Net income attributable to Piper Jaffray Companies | $17.0 | $18.2 | $34.0 | $36.0 |
| Diluted EPS | $1.08 | $1.11 | $2.11 | $2.21 |
| Pre-tax operating margin | 15.8% | 17.9% | 17.5% | 18.7% |
- Revenue mix and changes: Q2 investment banking revenue rose 2.2% to $106.1 million and institutional brokerage rose 6.2% to $36.7 million. Asset-management revenue fell 13.5% to $19.3 million; investment income swung to a $3.3 million loss from $2.9 million of income. For the first half, investment banking was nearly flat at $193.1 million, while institutional brokerage declined 7.5% to $72.7 million and asset management declined 8.0% to $39.8 million.
- Expenses and margins: Q2 non-interest expenses decreased 1.0% to $138.2 million, but compensation and benefits were nearly flat at $103.6 million and rose to 63.1% of net revenues from 60.6%. First-half non-interest expenses declined 2.3% to $268.8 million. Reported first-half net income fell 11.9% to $38.1 million; income attributable to the company fell 5.5% to $34.0 million.
- Cash flow: Operating activities used $0.2 million in the first half, compared with $98.7 million provided in the prior-year period. Investing activities used $2.0 million; financing activities provided $0.6 million. Cash and cash equivalents decreased $1.8 million to $14.1 million. The company also held $32.0 million of cash segregated for regulatory purposes.
- Balance sheet and liquidity: At June 30, total assets were $2.410 billion, total liabilities $1.457 billion and shareholders’ equity $953.7 million. Short-term financing was $500.4 million, up from $377.8 million at year-end 2014; variable-rate senior notes remained $125 million. The $250 million committed secured revolver and $185 million of uncommitted secured lines had no borrowings at quarter-end. Reported leverage was 2.5x and adjusted leverage 3.4x, versus 2.7x and 3.6x at year-end.
- Capital and shareholder returns: Broker-dealer net capital was $166.1 million, $165.1 million above the SEC minimum; the company reported compliance with debt and capital covenants. First-half share repurchases totaled $105.3 million, including $92.1 million under the repurchase authorization. Common shares outstanding were 13.9 million at quarter-end.
Material changes, outlook and risks
- Segment results: Q2 Capital Markets pre-tax operating income was $22.5 million, down from $23.4 million; its margin was 15.4% versus 15.8%. Asset Management income was $3.4 million versus $7.0 million, with margin down to 18.9% from 32.1%. Management’s adjusted, non-GAAP Q2 figures were $24.3 million and 16.7% for Capital Markets, and $4.9 million and 27.3% for Asset Management. These adjustments exclude items including noncontrolling interests and acquisition-related compensation and amortization.
- Management outlook: Management expected U.S. economic growth to strengthen in the second half of 2015 and municipal underwriting activity for the year to exceed 2014, assuming moderate interest-rate increases. It expected gradual rate increases to be generally supportive of fixed-income brokerage, while noting potential market volatility, correction, geopolitical or international shocks, and rate uncertainty. Asset-management revenue remains sensitive to investment performance, valuations and client flows. No specific earnings or EPS guidance was provided.
- Asset management: Assets under management ended Q2 at $11.4 billion, down from $12.6 billion a year earlier. First-half total net flows were positive $77 million, but market depreciation reduced AUM by $163 million during the first half; value-equity strategies experienced first-half outflows of $158 million.
- Acquisitions after quarter-end: The company agreed to acquire River Branch Holdings, an investment-banking boutique focused on financial institutions, with an expected Q3 2015 close. It also agreed to acquire BMO Capital Markets GKST Inc.’s municipal-bond business, with an expected Q4 close. Both were subject to approvals and customary conditions.
- Legal and market risks: Municipal-derivatives antitrust litigation seeks unspecified treble damages. The company recorded no loss contingency because the matter was not considered probable or reasonably estimable; management could not estimate a possible loss range. Uncollateralized derivative credit exposure was $23.1 million, including $15.0 million to one counterparty. Trading losses exceeded one-day VaR on three occasions in the first half. Management cautioned that VaR is not a limit on potential losses and that hedging and risk controls may not work in all market conditions.
- Other notable items: Management notified investors of its intention to close its municipal bond fund by year-end 2015. The $75 million Class B senior notes mature November 30, 2015; the remaining $50 million Class A notes mature in 2017. The filing reports effective disclosure controls and no material second-quarter change in internal control over financial reporting.
Important facts for investors to verify
- Whether the decline in value-equity AUM, fee yields and asset-management margins continues, and whether MLP inflows offset those pressures.
- How sustainable investment-banking and brokerage results are, especially given Q2 investment losses and weaker first-half institutional brokerage.
- Funding needs, collateral availability and refinancing or repayment plans for the $75 million notes due in November 2015, alongside elevated short-term financing.
- Progress, approval status, financing and integration costs for the River Branch and BMO GKST acquisitions.
- Developments in municipal-derivatives litigation and changes in concentrated uncollateralized counterparty exposure.
- The impact of market volatility, interest rates and the planned municipal bond fund closure on earnings, liquidity and capital.