Piper Sandler Companies — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Piper Sandler is an investment banking and institutional securities firm operating in one reportable segment. Figures below are in U.S. dollars; financial results are unaudited.
Financial performance
- Q3 net revenues: $331.8 million, down 25.5% from $445.6 million a year earlier. Investment banking revenue fell 28.1% to $241.4 million; institutional brokerage was nearly flat at $89.7 million.
- Q3 earnings: Income before tax was $18.9 million, down 75.0%; net income applicable to Piper Sandler was $14.5 million, down 68.2%. Diluted GAAP EPS was $0.87 versus $2.68. GAAP pre-tax margin fell to 5.7% from 17.0%.
- Adjusted Q3 results: Non-GAAP adjusted net revenues were $335.4 million, adjusted net income was $40.9 million, adjusted diluted EPS was $2.32, and adjusted operating margin was 17.3%, versus 26.3% a year earlier. These company-defined non-GAAP measures exclude specified acquisition-related items, financing interest and noncontrolling interests; they are not substitutes for GAAP results.
- Nine-month results: Net revenues were $1.035 billion, down 25.2%; income before tax was $91.7 million, down 66.4%; net income applicable to Piper Sandler was $72.6 million, down 56.0%; diluted GAAP EPS was $4.27 versus $9.81. GAAP pre-tax margin was 8.9%, compared with 19.7%.
- Revenue drivers: For the first nine months, investment banking revenue declined 28.0%, with corporate financing down 70.3%. Institutional brokerage increased 1.3%: equity brokerage rose 37.2%, partly offset by a 20.7% decline in fixed income services. Investment income shifted to a $4.3 million loss from $71.5 million of income, reflecting unrealized losses on investments and managed funds. Higher interest rates lifted interest income to $13.8 million from $5.2 million.
- Expenses: Q3 compensation and benefits fell 22.8% to $233.0 million, less than the decline in revenue; compensation was 70.2% of net revenues versus 67.7%. Non-compensation expenses rose 17.5% to $79.9 million, including $6.5 million of restructuring and integration costs. Nine-month non-interest expenses declined 15.1% to $942.9 million.
Cash, liquidity and capital
- Cash and balance sheet: Cash and cash equivalents were $274.5 million at September 30, down from $971.0 million at year-end 2021. Total assets were $2.042 billion; total shareholders’ equity was $1.193 billion.
- Cash flow: Net cash used in operating activities was $385.7 million for the first nine months, compared with $219.6 million provided in the prior-year period. The filing attributes liquidity fluctuations in part to the timing of annual incentive compensation, generally paid in February. Investing activities used $57.6 million and financing activities used $247.8 million, including $99.0 million of cash dividends and $185.8 million of share repurchases.
- Debt and facilities: Long-term financing was $125 million of 5.20% Class B senior notes due October 2023. The company reported no borrowings on its $65 million unsecured revolving facility or $100 million committed secured bank line at quarter-end. It had $71.7 million outstanding under its convertible-securities bank financing arrangement. The $100 million facility was due December 9, 2022; the $65 million facility was scheduled to terminate December 20, 2022, with a one-year extension available.
- Regulatory capital: Broker-dealer net capital was $223.5 million, $222.5 million above the SEC minimum; the filing also describes $120 million minimum-net-capital covenants. The company reported compliance with its covenants and applicable U.K. and Hong Kong capital requirements.
- Capital returns: Nine-month dividends were $6.30 per share, including a $4.50 special dividend. The board declared a further $0.60 quarterly dividend on October 28, payable December 9, 2022. The company repurchased 1.245 million shares for $161.8 million under authorizations and had $138.2 million remaining under its May 2022 authorization at quarter-end.
Outlook, changes and risks
- Management cited recession risk, persistent inflation, higher energy prices, geopolitical uncertainty, Federal Reserve tightening and elevated market volatility. It cautioned that results can vary significantly and that any period is not necessarily indicative of future results.
- Advisory demand and the pipeline were described as active and strong, but deal timing and conversion depended on market conditions. Equity capital raising remained largely shut; management anticipated possible increased activity in future quarters if conditions stabilized.
- Management expected a strong Q4 for equity brokerage, citing continued volatility, market-share gains and client portfolio positioning. It expected challenging Q4 conditions in fixed income services and municipal financing, including muted client activity and lower municipal issuance.
- Acquisitions expanded the platform: Cornerstone Macro closed in February and Stamford Partners in June 2022. DBO Partners, a technology investment banking firm, closed October 7, after quarter-end; additional consideration may depend on revenue targets. Q3 included $6.5 million of acquisition-related restructuring and integration costs, and management expected additional costs in Q4.
- Other exposures include market, liquidity, counterparty, operational, legal and regulatory risks. At quarter-end, the company reported $10.0 million of uncollateralized derivative credit exposure, including $6.3 million to one counterparty. Legal claims and regulatory matters were pending; management said reasonably possible losses above reserves were not material, while noting outcomes and estimates remain uncertain.
- Management anticipated completing its annual goodwill and intangible-asset impairment testing in Q4. The filing reported no material changes to previously disclosed risk factors and no material Q3 change in internal control over financial reporting.
Important facts for investors to verify
- How transaction activity and revenue convert from the advisory pipeline, and whether equity capital raising and municipal markets recover.
- Whether Q4 brokerage expectations are realized and how prolonged rate volatility affects fixed income activity, inventory and funding.
- The drivers of the sharp cash decline and negative operating cash flow, including incentive payments, dividends and buybacks, and the company’s liquidity under stressed markets.
- Renewal or extension of short-term credit facilities, the 2023 maturity of the $125 million notes, and ongoing compliance with capital covenants.
- Acquisition integration, DBO Partners’ contribution and contingent consideration, future restructuring costs, and the results of impairment testing.
- Valuation sensitivity in investments and Level III assets, derivative counterparty exposure, and developments in legal or regulatory proceedings.