Piper Jaffray Companies — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2010. The filing identifies the registrant as Piper Jaffray Companies; it does not identify it as Piper Sandler Companies.
Business context and reporting period
The company operated Capital Markets and Asset Management businesses, providing investment banking, institutional sales and trading, and asset management services. Results are interim and may not indicate full-year performance. The March 1, 2010 acquisition of Advisory Research Holdings, Inc. (ARI) materially expanded Asset Management; ARI’s results are included from the acquisition date.
Financial performance and position
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Total revenues | $124.6 million | $126.5 million | $380.5 million | $347.7 million |
| Net revenues | $116.5 million | $119.7 million | $353.7 million | $335.8 million |
| Income before tax | $13.6 million | $15.6 million | $34.6 million | $37.5 million |
| Net income | $7.1 million | $9.3 million | $14.9 million | $18.1 million |
| EPS, diluted | $0.36 | $0.47 | $0.75 | $0.93 |
| Pre-tax margin on net revenues | 11.7% | 13.0% | 9.8% | 11.2% |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $6.3 million | $56.4 million |
Q3 net revenues declined 2.7% year over year and net income declined 23.9%. For the first nine months, net revenues rose 5.3%, but net income fell 17.5%. The nine-month effective tax rate was 56.8%, including no recognized tax benefit for U.K. losses and a $5.6 million deferred tax asset write-off related to restricted stock.
- Revenue mix: Q3 investment banking revenue increased 16.9% to $56.2 million, while institutional brokerage fell 32.1% to $40.4 million. Asset management revenue rose to $16.8 million from $3.6 million, primarily reflecting ARI. For nine months, investment banking increased 27.6% to $171.7 million and institutional brokerage declined 30.7% to $121.6 million.
- Expenses and margins: Q3 non-interest expense was $102.9 million, down slightly year over year; nine-month expense increased 7.0% to $319.1 million. Q3 included a $6.6 million compensation expense reversal because management considered the performance target for certain restricted-stock awards improbable. Capital Markets’ Q3 pre-tax margin declined to 9.3% from 13.9%; Asset Management reported a 25.2% margin.
- Balance sheet at September 30: Total assets were $2.061 billion, liabilities $1.256 billion, and shareholders’ equity $804.7 million. Cash and cash equivalents were $38.5 million, with a further $20.0 million segregated for regulatory purposes. Financial instruments owned totaled $939.3 million; $415.5 million was pledged as collateral.
- Funding and debt: Short-term financing was $107.0 million, including $50.0 million drawn on secured bank lines and $57.0 million of secured commercial paper. The company also had $120 million of variable-rate senior notes bearing LIBOR plus 4.10%; both the notes and the $250 million committed revolving facility were due December 31, 2010. The notes were being evaluated for refinancing. Securities sold under repurchase agreements were $313.4 million.
- Capital and liquidity: U.S. broker-dealer net capital was $211.4 million, $210.2 million above the regulatory minimum. The company reported a 2.56 leverage ratio versus 2.19 at year-end 2009. It had $275 million of uncommitted secured lines and a $100 million uncommitted unsecured facility; advances are discretionary and may be denied. The committed facility was undrawn at quarter-end, and management anticipated renewal.
- Cash flow and capital allocation: Nine-month operating cash flow was $6.3 million versus $56.4 million a year earlier. Investing cash outflow was $191.1 million, including $182.1 million for acquisitions; financing cash inflow was $179.4 million, including increased repurchase-agreement financing. The company repurchased $45.2 million of shares during the first nine months; $59.8 million remained under its new $75 million authorization.
Material changes, outlook, and risks
- ARI was acquired for $212.1 million, comprising $180.3 million cash and $31.8 million in shares. The acquisition added $152.3 million of goodwill and $55.1 million of identifiable intangibles. Since acquisition, ARI contributed $28.3 million of net revenue and $6.3 million of net income. Assets under management reached $12.8 billion, including $5.6 billion added with ARI; nine-month net outflows were $415 million.
- Management cited strong investment banking backlogs but said realization depends on constructive capital markets. It expected continuing weakness in equity trading volumes and market volatility to pressure Q4 municipal institutional brokerage revenues. Most Asset Management performance fees, if earned, are generally recognized in Q4.
- On October 20, 2010, the company announced a European restructuring, exiting origination and distribution of European securities and focusing on distribution of U.S. and Asian securities and M&A advisory. The filing estimates total charges at $8.3–$9.8 million, including $0.8 million recorded in Q3; most remaining charges were expected in Q4, with transition completion targeted by December 31, 2010. The notes separately estimate $7.5–$9.0 million of charges principally in Q4.
- Risks include volatile capital markets, lower institutional trading activity, concentration in middle-market sectors, funding and collateral availability, and extensive or changing regulation, including Dodd-Frank. The company had no credit rating. Management noted that shares traded below book value and that future goodwill impairment was possible; no impairment was reported in the period.
- Legal matters include broad municipal derivatives investigations and class actions for which a reasonably possible loss range could not be estimated. In the Union County, Iowa case, summary judgment was granted on the contract claim but denied on other claims; trial was scheduled for December 6, 2010. The company estimated a reasonably possible loss range of $0–$6.0 million.
- Other exposures include $31.4 million of uncollateralized derivative counterparty credit exposure, including $17.5 million with one counterparty. A $5.5 million private-company debt investment was in default; management believed secured collateral exceeded the loan and had recorded no impairment. The company also disclosed $787.7 million of net assets in identified unconsolidated VIEs, with its exposure to loss stated as $5.3 million.
Important facts for investors to verify
- Whether the $120 million senior notes and committed credit facility were refinanced or renewed by their December 31, 2010 maturity dates, and on what terms.
- Actual Q4 European restructuring costs compared with the filing’s differing estimates, and whether the planned transition was completed on schedule.
- Subsequent trends in institutional brokerage, investment banking backlogs, Asset Management flows and performance fees, and Capital Markets margins.
- Changes in uncollateralized counterparty exposure, the defaulted private-company loan, and the outcomes or reserve implications of legal proceedings.
- Whether operating cash generation and liquidity improved, particularly around annual incentive compensation payments and collateral-dependent funding needs.
- Any goodwill impairment assessment and the effect of restricted-stock vesting on the tax rate; management estimated a further $5.2 million tax expense in Q1 2011 based on the September 30 share price.