Piper Sandler Companies — Q3 2023 Form 10-Q
Business context and period: Investment banking and institutional brokerage firm operating as one reportable segment. This unaudited filing covers the three and nine months ended September 30, 2023; comparisons are with the corresponding 2022 periods. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net revenues | $289.5 million | $331.8 million | $876.1 million | $1,034.6 million |
| Income/(loss) before tax | $(3.5) million | $18.9 million | $36.7 million | $91.7 million |
| Net income attributable to Piper Sandler | $3.9 million | $14.5 million | $33.5 million | $72.6 million |
| Diluted EPS | $0.22 | $0.87 | $1.95 | $4.27 |
| GAAP pre-tax margin | (1.2)% | 5.7% | 4.2% | 8.9% |
Q3 adjusted non-GAAP net revenues were $306.2 million, adjusted operating income $46.7 million, adjusted net income attributable to Piper Sandler $31.5 million, adjusted diluted EPS $1.76, and adjusted operating margin 15.3%. For the nine months, the respective adjusted figures were $872.8 million, $113.9 million, $94.0 million, $5.24, and 13.0%. These company-defined non-GAAP measures exclude specified items and should be considered alongside, not instead of, GAAP results.
- Revenue mix: Q3 investment banking revenue fell 12.3% to $211.7 million; institutional brokerage was nearly flat at $90.5 million. Investment income was a $17.1 million loss versus a $2.2 million loss in Q3 2022. For the nine months, investment banking declined 20.9% to $580.0 million, brokerage declined 8.2% to $274.6 million, and investment income was $9.8 million versus a $4.3 million loss.
- Expenses: Q3 compensation and benefits declined 11.0% to $207.3 million, while total non-interest expenses fell 6.4% to $292.9 million. Other operating expenses rose to $18.9 million, principally reflecting the SEC matter accrual. Nine-month non-interest expenses declined 11.0% to $839.4 million.
- Cash flow: Operating cash flow was negative $147.4 million for the first nine months, versus negative $385.7 million in 2022. Cash and cash equivalents fell from $365.6 million at year-end 2022 to $51.9 million at September 30, 2023. Cash dividends paid were $74.2 million and share repurchases were $67.6 million, primarily employee tax-related purchases.
- Balance sheet and funding: Total assets were $1.97 billion and shareholders’ equity $1.22 billion at September 30. Long-term financing was $125 million at quarter-end; the Class B Notes matured and were repaid in full on October 15, 2023, with no replacement long-term financing. The $75 million unsecured revolver and $80 million secured committed line had no advances at quarter-end; the company reported $55 million drawn on the revolver as of November 3. Broker-dealer regulatory net capital was $156.6 million, above the $120 million covenant level.
Changes, outlook, and material matters
- Compared with Q3 2022, lower advisory and financing revenues and a larger investment loss contributed to lower results. Q3 GAAP net income attributable to Piper Sandler fell 73.3%; diluted EPS declined 74.7%. For the first nine months, attributable net income fell 53.9%.
- Management reported incremental improvement in client activity during Q3 and expected advisory revenue to improve sequentially in Q4, assuming announced transactions close on schedule. Corporate financing activity in October was similar to the Q3 run rate; management expected strong Q4 equity brokerage revenues. Near-term fixed income conditions were expected to remain challenging, while municipal financing was expected to stay below historical issuance levels until rates stabilize and investor demand improves. These are expectations, not guarantees.
- Management cited elevated interest rates, inflation, tighter bank lending, geopolitical uncertainty, market volatility and subdued transaction activity as business risks. Results may fluctuate materially with financial-market conditions.
- The company accrued $15.0 million for an anticipated SEC civil penalty concerning recordkeeping for business communications sent through unapproved channels, and incurred $1.4 million of related outside-services expense. Settlement discussions were ongoing. It reported up to approximately $5.0 million of reasonably estimable losses above accrued amounts; no CFTC-investigation accrual was recorded because loss was not then considered probable and estimable.
- A $7.5 million municipal financing receivable was written off in Q2 2023. Nine-month restructuring and integration costs were $3.9 million, including severance associated with headcount reductions.
- Management stated that disclosure controls were effective and that there were no material changes to internal control over financial reporting during the quarter. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Progress and final cost of the SEC recordkeeping investigation and any separate CFTC outcome.
- Q4 advisory pipeline conversion and whether announced transactions close as expected; current conditions in municipal and fixed income markets.
- Liquidity following the sharp decline in quarter-end cash, including the November revolver draw, renewal of the $80 million committed line, and reliance on clearing firms whose financing may be discretionary.
- Performance and valuation sensitivity of investments, including $204.2 million of Level III investments at fair value and material investment-related volatility.
- Dividend sustainability: the company declared a further $0.60 per-share quarterly dividend for payment in December; its stated policy targets returning 30%–50% of fiscal-year adjusted net income, but the board may change the policy.