Piper Jaffray Companies — Q1 2013 Form 10-Q
Business context and period. The filing is for the three months ended March 31, 2013, with balance-sheet comparisons to December 31, 2012. The registrant was Piper Jaffray Companies (not Piper Sandler Companies). Continuing operations comprised Capital Markets and Asset Management; Hong Kong and FAMCO results were reported as discontinued operations.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change / context |
|---|---|---|---|
| Total revenue | $118.1 million | $119.9 million | Down 1.4% |
| Net revenue | $109.5 million | $113.4 million | Down 3.4% |
| Continuing-operations pretax income | $18.2 million | $15.2 million | Up 19.4% |
| Continuing-operations income | $12.6 million | $7.7 million | Up 63.9% |
| Net income attributable to Piper Jaffray Companies | $10.1 million | $2.9 million | Up 246.4%; includes discontinued operations |
| Diluted EPS | $0.57 | $0.15 | Continuing-operations diluted EPS was $0.60 versus $0.33 |
| Operating margin, continuing operations | 16.6% | 13.4% | Improved |
| Operating cash flow | $(183.5) million | $(205.5) million | Cash used in both periods |
- Investment banking revenue fell 16.1% to $40.4 million, primarily because equity financing revenue declined. Institutional brokerage revenue was nearly flat at $43.3 million; asset management revenue increased 10.1% to $18.2 million.
- Non-interest expenses decreased 7.0% to $91.4 million. Compensation and benefits were $66.1 million, or 60.4% of net revenue, versus $68.8 million and 60.6% a year earlier. The company cited lower compensation and insurance proceeds for prior legal settlements as key contributors to lower expenses.
- Capital Markets pretax income rose 18.7% to $12.8 million, despite net revenue declining 5.8%; its margin increased to 14.0% from 11.1%. Asset Management pretax income increased 20.9% to $5.4 million, with margin rising to 29.6% from 26.9%.
- Assets under management were $10.2 billion at March 31, up from $9.1 billion at year-end, mainly from $1.2 billion of market appreciation; net outflows were $53 million. Equity AUM had $225 million of net outflows, while MLP AUM had $172 million of net inflows.
Balance sheet, funding and liquidity
- Total assets were $2.33 billion and total shareholders’ equity was $861.8 million at March 31, 2013. Cash and cash equivalents were $22.5 million, down from $105.4 million at year-end; an additional $45.0 million was segregated for regulatory/customer purposes.
- Short-term financing was $409.0 million, down from $477.0 million at year-end. The company also had $125.0 million of variable-rate senior notes outstanding. The notes bear interest at three-month LIBOR plus 4.00% and 4.50%, with maturities in May 2014 and November 2015.
- Operating cash outflow of $183.5 million was partly offset by $101.0 million of financing cash inflow; cash decreased by $82.9 million during the quarter. Cash flow reflected, among other items, inventory and receivables changes and seasonal compensation payments.
- Leverage was 2.7x and adjusted leverage 3.4x, compared with 2.6x and 3.4x at year-end; management attributed the higher reported leverage to larger inventory balances. Broker-dealer regulatory net capital was $170.2 million, $169.2 million above the SEC minimum. The company reported compliance with its debt covenants.
Changes, outlook and notable matters
- Management expected a gradual U.S. recovery and potentially favorable capital-markets activity in 2013, conditional on economic conditions. It anticipated advisory activity improving in the second half, while warning that interest-rate uncertainty could pressure fixed-income client flow and that market-sensitive results may fluctuate. No numerical earnings or revenue guidance was provided.
- On April 30, 2013, after quarter-end, the company completed the sale of FAMCO for $4.0 million. Q1 discontinued-operations loss was $0.5 million, versus $3.3 million in Q1 2012. The Hong Kong business had ceased operations in 2012.
- On April 16, 2013, the company agreed to acquire Seattle-Northwest Securities in a transaction valued at approximately $21.0 million, expected to close in Q3 2013 subject to approvals and customary conditions.
- Q1 other operating expenses included a net benefit of $1.8 million, attributed to insurance proceeds reimbursing prior legal settlements. Other income also benefited from merchant banking and firm investment gains.
- A material loss was considered reasonably possible in investigations and litigation concerning municipal derivatives and guaranteed investment contracts. The company recorded no reserve because loss was not considered probable or reasonably estimable; it could not estimate a loss range.
- Risks highlighted include market and interest-rate volatility, funding availability and collateral requirements, counterparty credit exposure, valuation uncertainty in less-liquid investments, regulation, and variability in investment banking and asset-management activity. Uncollateralized derivative credit exposure was $29.1 million, including $16.0 million with one counterparty.
Important facts for investors to verify
- Whether the lower investment-banking revenue, particularly equity financing, rebounds as management anticipated, and whether expense reductions persist without insurance proceeds.
- Cash and funding needs, inventory growth, reliance on secured and discretionary short-term funding, and covenant and regulatory-capital headroom.
- Actual completion economics and subsequent effects of the FAMCO sale and proposed Seattle-Northwest acquisition.
- Developments in the municipal-derivatives investigations and litigation, including whether a loss becomes estimable or probable.
- Asset-management flows and performance, including the divergence between equity outflows and MLP inflows and the role of market appreciation in AUM growth.