Piper Jaffray Companies — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2012; comparative periods ended September 30, 2011. The filing registrant is Piper Jaffray Companies (not Piper Sandler Companies). Amounts below are in millions unless stated otherwise.
Business context and financial performance
The company operated through Capital Markets and Asset Management, providing investment banking, institutional brokerage, and asset management services. Its Hong Kong capital markets business ceased operations on September 30, 2012 and is presented as discontinued operations.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net revenues from continuing operations | $133.0 | $95.9 | $352.3 | $344.0 |
| Pre-tax income from continuing operations | $22.7 | $5.1 | $43.5 | $37.5 |
| Income from continuing operations attributable to Piper Jaffray | $12.9 | $3.6 | $29.5 | $24.8 |
| Net income (loss) attributable to Piper Jaffray, including discontinued operations | $19.7 | $(3.6) | $29.4 | $14.3 |
| Diluted EPS | $1.11 | $(0.23) | $1.60 | $0.74 |
| Pre-tax operating margin | 17.1% | 5.3% | 12.3% | 10.9% |
Q3 net revenues rose 38.7%, mainly on fixed-income institutional brokerage, especially strategic trading in non-agency mortgage-backed securities. Nine-month net revenues increased 2.4%; stronger fixed-income brokerage was partly offset by lower merchant-banking gains and lower advisory and equity financing revenues. Compensation and benefits were $78.7 million in Q3, up 30.1% year over year, but declined to 59.2% of net revenues from 63.1%. Nine-month compensation was $211.6 million, or 60.1% of net revenues. Nine-month interest expense fell to $20.2 million from $24.7 million.
Capital Markets Q3 net revenues were $115.2 million and pre-tax income was $20.6 million; Asset Management net revenues were $17.7 million and pre-tax income was $2.1 million. Assets under management ended September at $13.8 billion, up from $12.2 billion at year-end 2011, reflecting $533 million of nine-month net inflows and $1.1 billion of market appreciation.
Cash flow, balance sheet, debt and liquidity
- Nine-month operating cash flow was negative $199.6 million, versus negative $110.5 million a year earlier. The filing attributes much of the use to growth in financial instrument inventory positions. Investing cash flow was negative $0.2 million; financing cash flow was positive $155.7 million.
- Cash and cash equivalents were $41.7 million at September 30, down from $85.8 million at December 31, 2011. An additional $33.0 million was segregated for customer liabilities and unavailable for general corporate use.
- Total assets were $1.961 billion and total shareholders’ equity was $770.6 million. Financial instruments owned totaled $1.155 billion, including $734.1 million pledged as collateral.
- Short-term financing was $446.5 million, up from $168.7 million at year-end; bank syndicated financing was $83.5 million, down from $115.0 million. The company reported compliance with its debt covenants. Its $250 million committed secured revolving facility had no balance drawn and was due for renewal by December 28, 2012; management anticipated renewal in Q4.
- SEC net capital at the broker-dealer was $170.6 million, $169.6 million above the regulatory minimum. The filing reports leverage of 2.5x and adjusted leverage of 3.3x, both higher than at year-end due to larger inventory balances.
Material changes, outlook and risks
- Hong Kong closure and tax item: Q3 discontinued operations reported $6.8 million of net income despite a pre-tax loss of $14.2 million, chiefly due to a $21.0 million U.S. tax benefit related to the realized loss on the Hong Kong subsidiaries. The filing estimates net cash proceeds of approximately $19.1 million from the closure, principally attributable to this tax benefit. Nine-month discontinued operations recorded a net loss of $0.013 million. Q3 included $11.1 million of restructuring costs for the closure.
- Trading revenue sustainability: Management said it had largely captured the opportunity behind unusually strong Q3 non-agency mortgage-backed securities trading revenue and did not expect that level to continue. Strategic trading results may vary significantly by quarter.
- Outlook: Management expected challenging economic conditions through the remainder of 2012 and into 2013, citing European sovereign-debt concerns, uncertain global growth, U.S. fiscal and budget uncertainty, and low interest rates. It anticipated historically low rates to persist and noted they had supported tax-exempt refinancing activity. The filing provides no numerical earnings guidance.
- Restructuring and capital return: Continuing-operations restructuring charges were $3.6 million for the first nine months, comprising severance and leased-office reductions. The prior $75 million repurchase authorization expired September 30; a new authorization of up to $100 million through September 30, 2014 became effective October 1, subject to financing-agreement restrictions.
- Contingencies and valuation: The company disclosed DOJ, SEC and state investigations, and related litigation, concerning municipal guaranteed investment contracts and derivatives. Management said a material loss was reasonably possible, but no loss was accrued and a range could not be estimated. Level III assets were $144.2 million, up from $80.6 million at year-end, and rely partly on unobservable valuation inputs. Uncollateralized derivative credit exposure was $34.4 million, including $18.9 million to one counterparty.
- Other risks: Funding depends partly on secured commercial paper, collateral availability and discretionary prime-broker and uncommitted bank financing. The company had $46.4 million of investment commitments, including $45.1 million to an affiliated merchant-banking fund. Market, liquidity, credit, regulatory and legal risks may affect results.
Important facts for investors to verify
- Whether the committed $250 million secured revolving facility was renewed on acceptable terms after its December 2012 maturity.
- How much Q3 profitability depended on the mortgage-securities trading opportunity that management said was not expected to recur at the same level.
- The final cash proceeds and total costs of the Hong Kong closure, including realization of the reported tax benefit.
- Developments in the municipal derivatives investigations and litigation, for which potential loss was not estimable.
- Changes in inventory funding, pledged collateral, Level III valuations, counterparty exposure and the $46.4 million investment commitments.
- Whether subsequent repurchases under the new authorization remain consistent with debt covenants and liquidity needs.