Oppenheimer Holdings Inc. — 2017 Form 10-K
Business context and reporting period. Filed March 2, 2018, this audited annual report covers the fiscal year ended December 31, 2017; it is 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 $86.9 billion in client assets under administration and $28.3 billion in assets under management at year-end.
Financial performance and position
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue from continuing operations | $920.3 million | $857.8 million |
| Income (loss) before tax, continuing operations | $19.7 million | $(21.9) million |
| Net income (loss) attributable to Oppenheimer Holdings | $22.8 million | $(1.2) million |
| Basic earnings (loss) per share | $1.72 | $(0.09) |
| Cash used in operating activities | $16.1 million | $66.9 million |
| Cash and cash equivalents at year-end | $48.2 million | $64.9 million |
| Total assets | $2.439 billion | $2.237 billion |
| Total liabilities | $1.915 billion | $1.724 billion |
| Oppenheimer Holdings stockholders’ equity | $523.6 million | $510.7 million |
Continuing-operations pretax margin was approximately 2.1% in 2017, compared with approximately negative 2.6% in 2016. Compensation and related expenses were 65.4% of revenue, down from 68.2%. The filing does not present a conventional gross margin for this financial-services business.
Fourth-quarter 2017 revenue was $265.0 million and continuing-operations pretax income was $16.6 million. Net income attributable to the company was $21.2 million, including the effect of a substantial tax benefit.
Revenue mix and segment results
- Commissions fell 10.8% to $336.6 million, reflecting lower retail and institutional activity and fewer financial advisers.
- Advisory fees rose 19.2% to $320.7 million, supported by traditional managed-product fees and alternative-investment incentive fees. Client AUM grew 14.1% to $28.3 billion, from market appreciation of $2.5 billion and net contributions of $1.0 billion.
- Investment banking revenue declined 3.5% to $78.2 million; higher equity underwriting was offset by lower M&A and debt-capital-markets fees. Net principal-transactions revenue increased 13.6% to $23.3 million.
- Other revenue rose 81.6% to $113.0 million, driven in part by higher FDIC-insured bank-deposit program fees, increased cash surrender value of company-owned life insurance, and a favorable arbitration award.
- Private Client revenue increased 17.6% to $592.8 million and pretax income rose to $128.8 million. Capital Markets revenue declined 9.1% to $231.6 million and its pretax loss widened to $40.0 million. Asset Management revenue was $89.9 million, down 3.2%, and pretax income was $26.7 million, down 15.0%.
Debt, liquidity and capital
- In June 2017, the parent issued $200 million of 6.75% senior secured notes due 2022 and used proceeds in part to redeem the prior 8.75% notes due 2018. Year-end carrying value of the new notes was $198.8 million; the indenture restricts, among other things, dividends, equity repurchases, additional debt and asset sales. The company reported compliance with covenants.
- Year-end bank call loans were $118.3 million, down from $145.8 million; repurchase-agreement liabilities were $586.5 million. These are material funding and financing obligations in addition to the senior notes.
- Management said available operating funds, capital and credit facilities should meet foreseeable liquidity needs, while noting funding access and costs depend on market conditions. Operating cash flow remained negative in 2017, and cash declined by $16.8 million.
- Oppenheimer broker-dealer net capital was $142.0 million, $121.7 million above its regulatory minimum. The company paid $0.44 per share in dividends during 2017 and repurchased 450,350 Class A shares for $7.5 million.
Changes, outlook and material matters
- Tax item: The Tax Cuts and Jobs Act produced a provisional $9.0 million net discrete after-tax benefit in 2017. The company had not completed its accounting for all provisions; the reported annual tax benefit and unusually strong Q4 earnings therefore include a significant, potentially nonrecurring item.
- Business outlook: Management described plans to grow private client and asset management through hiring experienced advisers and investment professionals, expand capital markets capabilities, invest in technology and compliance, manage expenses, and consider acquisitions. No quantified earnings or revenue guidance was provided.
- Auction-rate securities (ARS): The company held $113.9 million principal value of ARS at year-end, with fair value of $111.9 million, and had $11.0 million of additional purchase commitments under client settlements and awards through 2020. Eligible clients held a further $25.3 million that could be covered by future offers subject to periodic financial reviews and regulatory constraints. Future obligations and related losses are uncertain.
- Legal and regulatory exposure: For matters where a loss was reasonably estimable and reasonably possible, the company disclosed an aggregate range of $0 to approximately $37.0 million in losses above accrued amounts; some matters could not be estimated. The filing says this range excludes potential additional ARS buyback losses. A securities-fraud-related bankruptcy case was remanded for further proceedings in February 2018; other customer, trust, regulatory and environmental matters remain pending.
- Compliance history: Oppenheimer previously agreed to $10 million in SEC penalties and related payments to FinCEN, completed in 2017. Independent consultant reports identified governance and compliance recommendations; the company said it had implemented many and expected to address most remaining recommendations. SEC and FINRA inquiries were ongoing.
- Other risks and accounting: Management highlighted market and interest-rate sensitivity, commission and trading-price pressure, adviser retention, regulatory change including MiFID II and retirement-account fiduciary rules, cybersecurity, liquidity, and Brexit-related uncertainty. Goodwill and indefinite-lived intangibles were not impaired. The company reported effective internal control over financial reporting and received unqualified audit opinions on its financial statements and internal controls.
Important facts for investors to verify
- How much of 2017’s profit improvement is sustainable after excluding the $9.0 million tax benefit, favorable arbitration award and other unusual revenue items?
- Whether advisory-fee growth and AUM net inflows continue, and whether commission declines and weaker Capital Markets results persist.
- The timing and potential cash cost of remaining ARS offers, legal-settlement commitments and other litigation; the disclosed $0–$37.0 million range does not capture all uncertain exposures.
- Liquidity and refinancing capacity under stress, including repo and bank-call-loan funding, cash generation, and the secured-note covenants.
- Progress on compliance recommendations and open regulatory inquiries, along with implementation costs from new regulation and technology needs.
- The effect of the discontinued mortgage-banking business on comparisons: 2016 included significant proceeds and gains from asset sales, while 2017 discontinued-operations income was much lower.