Piper Jaffray Companies — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012; financial statements are unaudited. The filing identifies the registrant as Piper Jaffray Companies (not Piper Sandler Companies).
Business context
The company operated Capital Markets and Asset Management businesses, providing investment banking, institutional brokerage, and asset management services. Its results are sensitive to financial-market activity, financing and advisory demand, trading conditions, interest rates, and assets under management.
Financial results and position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net revenues | $106.4 million | $132.9 million | $223.3 million | $257.6 million |
| Income before tax | $1.7 million | $17.1 million | $14.0 million | $28.7 million |
| Net income applicable to Piper Jaffray Companies | $6.9 million | $10.7 million | $9.8 million | $17.9 million |
| Basic and diluted EPS | $0.37 | $0.55 | $0.52 | $0.93 |
| Pre-tax operating margin | 1.6% | 12.9% | 6.3% | 11.1% |
| Net cash used in operating activities | — | $(285.5) million | $(82.9) million |
Q2 compensation and benefits were $66.5 million, or 62.5% of net revenues, versus $80.3 million and 60.4% a year earlier. Q2 non-interest expenses totaled $104.7 million, including $3.6 million of restructuring charges. The six-month effective tax rate was 16.0%, compared with 35.2% in 2011.
At June 30, 2012, total assets were $2.00 billion and shareholders’ equity was $741.9 million. Cash and cash equivalents were $39.6 million, plus $17.0 million segregated for regulatory purposes. Short-term financing was $428.7 million, bank syndicated financing $88.6 million, and repurchase liabilities $157.6 million. Adjusted leverage was 3.6x, up from 2.8x at year-end 2011. The company reported $157.6 million of broker-dealer net capital, $156.6 million above the SEC minimum, and compliance with its credit-agreement covenants.
Material changes versus prior periods
- Q2 net revenues fell 19.9%; six-month net revenues fell 13.3%. Lower equity financing and institutional brokerage, along with reduced merchant-banking and firm-investment income, were key contributors.
- Q2 Capital Markets revenue declined 21.0% and the segment recorded a $2.1 million pre-tax loss, versus $12.4 million income a year earlier. Asset Management revenue declined 13.9%; its pre-tax income was $3.7 million, down from $4.7 million.
- Debt financing was a relative bright spot: Q2 revenue rose 19.8% and six-month revenue rose 31.1%, supported by public-finance refinancing activity in a low-rate environment.
- Operating cash outflow increased substantially, principally reflecting larger financial-instrument inventory positions and related working-capital movements. Financing activities provided $240.8 million in the first half, including a $260.0 million increase in short-term financing.
- Assets under management ended Q2 at $12.7 billion, down $0.5 billion during the quarter due to $0.3 billion of market depreciation and $0.2 billion of net outflows. For the first half, AUM increased $0.6 billion, reflecting market appreciation and net inflows.
Outlook, commentary, risks and unusual items
- Management expected a challenging environment through the rest of 2012, citing European sovereign-debt concerns, uncertain global growth, U.S. fiscal and debt-ceiling issues, and unpredictable capital-markets activity. It anticipated historically low interest rates, continued municipal refinancing opportunities, and ongoing dependence of asset-management results on markets and investment performance. No quantified earnings or revenue guidance was provided.
- On July 25, 2012, after quarter-end, the company announced plans to exit the Hong Kong capital-markets business by September 30 through a sale or liquidation. It expected net cash proceeds of $13–$18 million, principally from a U.S. tax benefit; Asian operations were expected to be reported as discontinued operations in Q3. Hong Kong operations lost $3.9 million in Q2 and $6.8 million in the first half.
- Q2 included a $7.1 million after-federal-tax benefit from reversing an uncertain state tax position, and a $2.2 million after-tax restructuring charge. The tax benefit helped lift net income despite sharply lower pre-tax income; it is not an indication of recurring operating performance.
- The company disclosed a material-loss-possible contingency involving government investigations and civil litigation concerning municipal guaranteed investment contracts and derivatives. No loss reserve was recorded because management said the loss was not probable or reasonably estimable.
- Funding depends substantially on secured commercial paper, repurchase agreements, bank lines, and a prime-broker arrangement; some facilities are uncommitted or discretionary. The filing also reports $36.2 million of uncollateralized derivative counterparty exposure, including $19.6 million with one counterparty, and $56.4 million of remaining investment commitments.
- Market, liquidity, credit, operational, legal and regulatory risks remain. One-day 95% VaR was $1.1 million at June 30, versus $1.0 million at December 31; trading losses exceeded one-day VaR twice in the first half. The company cautions that losses can exceed VaR.
Important facts for investors to verify
- Whether Hong Kong was exited as planned, the realized proceeds and costs, and the Q3 discontinued-operations presentation.
- How much of earnings depended on the one-time tax benefit, and the sustainability of underlying Capital Markets profitability and expense reductions.
- Inventory growth, operating cash use, short-term funding needs, collateral availability, and compliance with net-capital and debt covenants.
- Developments in the municipal-derivatives investigations and litigation, including whether a loss estimate or reserve becomes possible.
- AUM flows and performance, and whether the anticipated public-finance refinancing activity continued.