Business context and reporting period
The supplied 10-Q is for Piper Jaffray Companies, for the quarter ended March 31, 2011; it is not labeled Piper Sandler. The company operated Capital Markets and Asset Management businesses. Comparisons below are with Q1 2010 unless otherwise noted.
Financial performance
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Total revenues | $132.9 million | $118.4 million |
| Net revenues | $124.8 million | $109.6 million |
| Income before tax | $11.3 million | $9.2 million |
| Net income | $7.2 million | $0.5 million |
| Net income attributable to common shareholders | $5.7 million | $0.4 million |
| Diluted EPS | $0.38 | $0.03 |
| Operating margin before tax | 9.1% | 8.4% |
| Operating cash flow | $25.6 million | $(227.3) million |
- Net revenues rose 13.9%. Investment banking revenue increased 7.5% to $47.0 million; institutional brokerage fell 1.8% to $48.2 million; asset management revenue rose 95.9% to $17.9 million, principally reflecting a full quarter of Advisory Research, Inc. (ARI), acquired in March 2010.
- Non-interest expenses increased 12.9% to $113.4 million. Compensation and benefits rose 16.1% to $75.5 million and equaled 60.5% of net revenues, versus 59.4% a year earlier. Management attributed expense growth to higher variable compensation and a full quarter of ARI costs; intangible amortization also increased.
- Net interest income was approximately $6.1 million, up from $4.7 million, primarily due to higher income on net inventory balances.
- Cash and cash equivalents were $43.3 million at quarter-end, down from $50.6 million at December 31, 2010. Including regulatory-segregated cash, the total was $50.3 million. Total assets were $2.0 billion and shareholders’ equity was $833.6 million.
- Short-term financing was $125.2 million and long-term financing was $122.5 million. Securities sold under repurchase agreements were $320.3 million. The company reported $25.0 million outstanding on its $50 million revolving facility and $97.5 million on its term loan; the $250 million committed short-term facility had no advances at quarter-end. Secured commercial paper outstanding was $105.2 million.
- Operating cash flow improved substantially year over year, but quarterly cash flows were affected by working-capital movements, including compensation and other liability payments. Net cash decreased $7.3 million during Q1 2011.
Material changes versus the prior comparable period
- The prior-year effective tax rate was unusually high at 94.4%, versus 36.3% in Q1 2011. Q1 2010 included a $5.2 million deferred-tax-asset write-off related to restricted stock, reducing prior-year EPS by about $0.26. The large year-over-year net income and EPS increase therefore reflects both improved operating results and the absence of that charge.
- Capital Markets pre-tax income declined 4.5% to $7.1 million and its margin fell to 6.6% from 7.4%. Lower debt financing—particularly municipal underwriting—offset stronger equity financing and advisory revenue.
- Asset Management pre-tax income increased to $4.3 million from $1.7 million, and its margin rose to 23.5% from 19.1%. Assets under management grew to $12.8 billion from $12.3 billion at year-end, reflecting $665 million of market appreciation partly offset by $203 million of net outflows.
- Q1 2010 included only one month of ARI results; Q1 2011 included a full quarter. This limits comparability of asset-management revenue and expenses.
Outlook, risks and unusual items
- No quantified earnings or revenue guidance was provided. Management expected Asia capital-markets activity to be weighted toward the second half of 2011 and said equity financing and advisory services could benefit if markets remained favorable, while cautioning about potential volatility.
- Management expected municipal underwriting to remain challenging amid lower state and local government borrowing. It also cited reduced municipal sales and trading activity, weaker investor demand, and concerns about municipal credit quality.
- Management said new asset-management mandates, including higher-fee inflows, could mitigate outflows. Q1 net outflows were approximately $203 million, while market appreciation was $665 million; management cited $0.8 billion in new mandates won during the quarter.
- Risk exposures include market, liquidity, credit, operational, legal, regulatory and reputational risks. One-day 95% VaR was $1.5 million at March 31, 2011, compared with $0.8 million at year-end; trading losses exceeded VaR on two days in Q1. Management cautioned that actual losses can exceed VaR.
- Derivative counterparty exposure included $17.3 million of uncollateralized credit exposure, with $9.8 million attributable to one counterparty. Repurchase funding and inventory financing depend on collateral, counterparties and market liquidity.
- The company disclosed DOJ, SEC and state investigations, and related class actions, concerning municipal guaranteed investment contracts and derivatives. Management considered a material loss reasonably possible, but said an estimate or range could not be made; no loss contingency was recorded.
- The company reported compliance with its credit-agreement covenants and $197.7 million of broker-dealer net capital, $196.7 million above the SEC minimum. The filing noted restrictions on dividends and certain capital actions under financing covenants.
Important facts for investors to verify
- Confirm the issuer identity: the supplied filing names Piper Jaffray Companies, while the request identifies Piper Sandler.
- Assess how much of the earnings improvement is sustainable versus the prior-year tax charge and the full-quarter contribution from ARI.
- Track municipal underwriting and trading conditions, equity and advisory activity, and whether asset-management inflows offset client outflows.
- Review liquidity and funding reliance, including repurchase agreements, secured commercial paper, short-term facilities and collateral availability.
- Monitor the municipal investigations and litigation, uncollateralized derivative exposure, and the company’s market-risk measures.
- Distinguish shares purchased by the retirement-plan trustee from repurchases under the company’s public authorization: the filing says no shares were repurchased under that authorization in Q1, with $57.4 million remaining.