Oppenheimer Holdings Inc. — FY2019 Form 10-K
Reporting period: Year ended December 31, 2019; filed March 2, 2020. This is an annual report, not a standalone fourth-quarter filing. Oppenheimer is a middle-market investment bank and full-service broker-dealer, with private client, asset management and capital markets businesses. It reported $91.0 billion in client assets under administration and $32.1 billion in assets under management at year-end.
Financial performance and condition
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Revenue | $1.033 billion | $958.2 million | +7.9% |
| Income before tax | $74.9 million | $44.9 million | +67.0% |
| Net income | $53.0 million | $28.9 million | +83.3% |
| Basic / diluted EPS | $4.10 / $3.82 | $2.18 / $2.05 | Higher |
| Operating cash flow | $79.1 million | $168.6 million | Lower |
- Pre-tax margin was approximately 7.3%, compared with 4.7% in 2018; net margin was approximately 5.1%, versus 3.0%.
- Revenue drivers included advisory fees of $353.7 million (+12.5%), investment banking of $126.2 million (+9.4%), and principal transactions of $30.1 million (+108.1%). Commissions declined 2.9% to $320.1 million. Bank deposit sweep income rose 1.2% to $117.4 million, while interest revenue fell 3.4% to $50.7 million.
- Alternative-investment incentive fees increased substantially: $37.5 million across the Private Client and Asset Management segments, versus $0.9 million combined in 2018. Management said this materially benefited fourth-quarter results.
- Expenses increased 4.9% to $958.5 million. Compensation rose 8.3% to $657.7 million; non-compensation expenses declined 1.7% to $300.8 million. Compensation was 63.6% of revenue, versus 63.4%.
- Fourth-quarter revenue was $295.9 million and net income was $25.4 million, compared with $243.3 million and $8.3 million, respectively, in Q4 2018. Q4 2019 basic EPS was $1.99.
- By segment, Private Client revenue was $653.4 million and pre-tax income $163.9 million; Asset Management revenue was $88.8 million and pre-tax income $31.6 million. Capital Markets revenue was $290.8 million, but it recorded a $13.7 million pre-tax loss.
- Year-end assets were $2.465 billion, liabilities $1.872 billion and stockholders’ equity $592.7 million. Cash and cash equivalents were $79.6 million. The balance sheet included $203.1 million of operating lease liabilities following adoption of lease accounting in 2019.
- Long-term debt was $149.5 million net of issuance costs: $150 million principal of 6.75% senior secured notes due 2022. The company redeemed $50 million principal in August 2019, incurring $1.9 million in call-premium and debt-cost charges; management said the redemption reduces annual interest costs by $3.8 million. It reported covenant compliance at year-end.
- Operating cash flow was positive but down from 2018; cash declined $11.1 million to $79.6 million after investing and financing outflows. The company repurchased 323,249 shares for $8.4 million, paid $0.46 per share in dividends, and advanced $13.7 million in forgivable employee notes.
- Broker-dealer capital remained above requirements: Oppenheimer had $223.4 million net capital, $206.7 million above its minimum; Freedom had $5.1 million, $5.0 million above its minimum. The filing does not provide a single corporate liquidity ratio.
Material changes and management commentary
- Revenue and earnings improved year over year, with management describing total revenue, after-tax income and EPS as the firm’s second-best reported results. Strong M&A advisory, debt capital markets, fixed income trading and alternative-investment incentive fees were key contributors.
- U.S. equity markets rose strongly in 2019, supporting AUM and advisory fees; AUM reached a record $32.1 billion. Management said this was expected to support first-quarter 2020 advisory fees.
- The Federal Reserve cut rates three times in 2019, reducing short-term rates by 0.75 percentage points in total. Management said this pressured earnings, particularly cash-sweep income, and warned further rate cuts or lower client cash balances could hurt results.
- Management’s stated strategy is to grow private-client and asset-management businesses through experienced adviser and investment-personnel recruitment, targeted acquisitions, technology investment and expanded capital-markets capabilities. It expressed optimism about the U.S. economy and markets, but provided no quantified earnings or revenue guidance.
Risks, contingencies and unusual items
- Regulation and compliance: Regulation Best Interest compliance was scheduled for June 30, 2020. The company anticipated added compliance, technology and litigation costs and possible pressure on transaction-based revenue and certain products. On December 29, 2019, it agreed with FINRA to provide $3.9 million in customer restitution plus interest and pay an $800,000 fine relating to supervision of unit investment trust sales from 2011–2015.
- Auction-rate securities: At year-end, the company held $29.4 million of ARS, had $3.5 million remaining to purchase under regulatory settlements, and had a separate $3.7 million purchase commitment due by July 2020. ARS were valued using tender-offer prices; disclosed valuation adjustments totaled $5.1 million.
- Legal matters: For certain proceedings where a loss was reasonably possible and estimable, the estimated aggregate loss in excess of amounts accrued was $0 to approximately $3.0 million. The company cautioned actual losses could be materially higher and some matters could not be estimated. It settled a bankruptcy-trustee matter for $1.35 million, with court approval in November 2019.
- Market and funding exposure: Earnings are sensitive to trading volumes, market prices, interest rates, client activity and the ability to obtain financing. Repurchase agreements and securities-lending activity create collateral and counterparty risks; the company also faces credit, operational and concentration risks.
- Other key risks: Competitive pressure on commissions and trading margins, adviser retention, cybersecurity and privacy incidents, regulatory changes, Brexit-related disruption, and potential environmental claims relating to former Canadian mining operations. The company reported no material cybersecurity losses to date, but gave no assurance against future incidents.
- Goodwill of $137.9 million and indefinite-lived intangible assets of $32.1 million had no impairment recorded in 2019. Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Most important facts for investors to verify
- Whether 2019 earnings growth is repeatable, given the significant contribution from year-end alternative-investment incentive fees and favorable markets.
- Current AUM, client cash-sweep balances and the sensitivity of earnings to interest rates and market activity.
- Progress on Regulation Best Interest implementation, related costs, revenue mix and any subsequent regulatory developments.
- Resolution and cash impact of ARS purchase obligations, FINRA restitution and fine, and other legal or regulatory proceedings.
- Debt maturity, covenant restrictions, available parent-level liquidity and the distinction between corporate debt and operating funding liabilities.
- Capital allocation—including further share repurchases, dividends, recruiting advances and any acquisitions—and the associated effect on cash and dilution.