Business context and reporting period
Oppenheimer Holdings Inc. filed this unaudited Form 10-Q for the three months ended March 31, 2018. The financial-services firm operates retail brokerage, institutional sales and trading, investment banking, asset management and trust businesses. It reported 92 U.S. branch offices, client assets administered of $84.9 billion and assets under management (AUM) of $28.2 billion at quarter-end.
Financial performance and liquidity
Unless otherwise noted, amounts are in U.S. dollars; financial statement figures are rounded to millions.
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Total revenue | $234.5 million | $213.3 million; up 10.0% |
| Income (loss) before tax, continuing operations | $9.6 million | $(7.0) million |
| Net income (loss) attributable to Oppenheimer Holdings Inc. | $6.7 million; $0.51 basic and $0.48 diluted per share | $(4.8) million; $(0.36) per basic and diluted share |
| Net margin attributable to parent | About 2.9% | About (2.3)% |
| Compensation and related expenses / revenue | 65.3% | 67.5% |
| Cash flow from operations | $(27.5) million | $(42.0) million |
| Cash and cash equivalents | $42.7 million at March 31 | $48.2 million at December 31, 2017 |
Revenue growth was led by bank deposit sweep income (+79.1% to $25.3 million), investment banking (+56.5% to $28.2 million) and advisory fees (+11.7% to $77.5 million). Commissions declined 3.8% to $83.4 million; principal transactions fell 49.3% to $2.7 million. Interest revenue rose 15.7% to $12.2 million. Total expenses increased 2.1% to $224.9 million, as higher compensation and interest expense were more than offset by lower other expenses. Interest expense increased 67.3% to $9.0 million. The effective tax rate on continuing operations was 30.3%; the prior-year period reported a tax benefit.
By segment, Private Client revenue was $154.1 million and pretax income was $40.2 million; Asset Management revenue was $17.6 million and pretax income was $3.7 million; Capital Markets revenue was $61.5 million and its pretax loss was $6.1 million. Capital Markets’ loss narrowed from $12.6 million, partly reflecting a prior-year Israeli VAT assessment charge.
Total assets were $2.534 billion and stockholders’ equity was $530.5 million at March 31. The company had $200 million principal amount of 6.75% senior secured notes due 2022 (carrying value $198.9 million) and $147.4 million of bank call loans, up from $118.3 million at year-end. The notes’ fair value was reported as $206.5 million. The company said it was in compliance with note covenants. Operating cash outflow was partly offset by $25.2 million of financing cash inflow, including a $29.1 million increase in bank call loans; cash declined $5.4 million during the quarter.
U.S. broker-dealer regulatory capital remained above minimums: Oppenheimer had $147.1 million, $123.9 million above its required minimum; Freedom had $5.4 million, $5.3 million above its minimum. Management stated that funds from operations, its capital base and available credit facilities should meet foreseeable liquidity needs, while noting that funding availability and costs may be affected by market conditions.
Material changes versus the prior comparable period
- The company moved from a continuing-operations pretax loss to pretax income, with revenue up 10.0% and expenses up only 2.1%.
- Private Client revenue increased 12.2% and pretax income increased 39.6%, supported by advisory fees, sweep income and margin interest. Client assets administered declined 2.3% from December 31, 2017, to $84.9 billion.
- Capital Markets revenue rose 10.1%; its pretax loss improved by $6.6 million. Investment banking gains were partly offset by lower institutional equities, fixed-income and municipal trading revenue.
- AUM increased 9.3% year over year to $28.2 billion, including $1.3 billion of appreciation and $1.1 billion of net contributions during the quarter.
- Operating cash outflow improved from the prior-year quarter but remained negative. Cash paid for interest was $12.6 million versus $2.0 million in Q1 2017.
- Revenue from contracts with customers was adopted under the new accounting standard using the modified retrospective method; adoption had no material impact and required no cumulative-effect adjustment.
Outlook, risks, contingencies and unusual items
No numerical earnings or revenue guidance was provided. Management described long-term priorities of expanding private-client, asset-management and capital-markets capabilities, recruiting experienced advisers, investing in technology and controlling expenses; it may pursue acquisitions where strategically and economically appropriate.
- Legal and regulatory exposure: For proceedings where a loss or additional loss was considered reasonably possible and estimable, the company reported an aggregate range of $0 to approximately $38 million in excess of amounts accrued. Some matters could not be estimated, and actual losses could exceed the range.
- Auction-rate securities (ARS): At March 31, the company held ARS with $88.5 million principal and $87.4 million fair value. It had $16.0 million present-value principal of purchase commitments, with fair value of $15.8 million, including $5.0 million related to regulator settlements and $11.0 million under legal settlements and awards through 2020. Eligible investors held a further $21.9 million principal of ARS potentially subject to future offers; these were not yet company commitments. Client ARS holdings at the firm were approximately $42.3 million under the filing’s stated exclusions. ARS valuations depend on less-observable assumptions and are sensitive to interest rates and liquidity.
- Pending matters and investigations: The filing describes continuing SEC and FINRA inquiries, including matters involving supervision of a former adviser and unit investment trust sales. It also describes significant litigation, including an appeal/remand in the International Management Associates matter and a Florida trust case scheduled for trial. The company said it intended to defend itself; outcomes remain uncertain.
- Regulatory and market risks: The filing identifies uncertainty around the DOL fiduciary rule following a court ruling and the SEC’s proposed Regulation Best Interest; MiFID II’s effect on research compensation; Brexit; evolving AML requirements; cybersecurity and business-continuity risks; market activity and interest-rate changes; and access to financing.
- Tax and accounting: The company’s accounting for certain effects of the 2017 Tax Cuts and Jobs Act remained provisional. The 2018 tax rate reflects the lower federal rate, foreign income inclusion and nondeductible expenses. Adoption of the lease standard was expected to create a significant right-of-use asset and lease liability because the company leases more than 100 locations.
- Other items: The company declared a $0.11-per-share quarterly dividend payable May 25, 2018. No Class A shares were repurchased in Q1; 508,906 remained authorized for repurchase. Disclosure controls were reported effective, with no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether revenue gains in sweep income and investment banking persist, and whether commission and trading trends recover.
- Whether operating cash flow and cash balances improve without relying on additional short-term borrowing.
- The extent and timing of ARS repurchases, including any future regulator-directed offers, and sensitivity of Level 3 valuations to rates and liquidity.
- Developments in the $0–$38 million estimated range of reasonably possible legal and regulatory losses, and matters for which the company cannot estimate exposure.
- Effects of regulatory changes, compliance costs, cybersecurity investment and foreign-market developments on revenues and expenses.
- Final accounting for tax reform and the anticipated balance-sheet impact of lease-accounting adoption.