Piper Sandler Companies — Q3 2021 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2021. Piper Sandler is an investment banking and institutional securities firm operating as one reportable segment. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless noted.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | First 9 months 2021 | First 9 months 2020 |
|---|---|---|---|---|
| Net revenues | $445.6 | $303.7 | $1,382.8 | $832.3 |
| Income before tax | $75.7 | $24.6 | $272.6 | $(2.0) |
| Net income attributable to Piper Sandler | $45.7 | $11.6 | $165.0 | $(1.7) |
| Diluted EPS | $2.68 | $0.78 | $9.81 | $(0.12) |
| GAAP pre-tax margin | 17.0% | 8.1% | 19.7% | (0.2)% |
- Q3 net revenues rose 46.7%; investment banking revenues increased 65.1% to $335.6, while institutional brokerage rose 3.8% to $90.1. Advisory revenue more than doubled to $214.2; corporate financing declined 20.6% to $79.1; municipal financing increased 60.2% to a record $42.4.
- For the first nine months, net revenues increased 66.1%. Investment banking rose 81.3% to $1,018.8 and institutional brokerage rose 11.4% to $295.4. Investment income was $71.5 versus $5.0 a year earlier, reflecting higher investment gains; this includes amounts attributable to noncontrolling interests.
- Q3 compensation expense increased 44.0% to $301.9, primarily with higher revenue and profitability. Compensation was 67.7% of net revenues versus 69.0% a year ago. Nine-month compensation expense rose 48.4% to $907.4.
- Management’s non-GAAP adjusted diluted EPS was $4.55 for Q3 and $14.08 for the first nine months, versus $2.38 and $5.73, respectively. These measures exclude specified acquisition-related costs, intangible amortization, long-term financing interest and noncontrolling interests; they are not GAAP results.
- Cash and cash equivalents were $571.1 at September 30, up from $507.9 at year-end 2020. Operating cash flow was $219.6 for the nine months, compared with $532.8 in 2020; investing cash outflow was $16.0 and financing cash outflow was $140.0. Cash flow comparisons reflect, among other factors, large working-capital movements in 2020.
- Total assets were $2,194.2 and total shareholders’ equity was $1,114.1. Long-term financing was $175.0 at quarter-end; the company repaid $50.0 of Class A notes at maturity on October 15, 2021, leaving $125.0 of Class B notes due in 2023. The $20.0 Valence notes were repaid in Q1 2021.
- Management-reported adjusted leverage declined to 2.6 from 3.2 at December 31, 2020; GAAP total-assets-to-equity leverage was 2.0 versus 2.2. Regulatory net capital was $279.4, $278.4 above the SEC minimum.
Material changes, outlook and risks
- Management expected moderate economic improvement through year-end 2021, while noting COVID-19 uncertainty, supply-chain constraints, labor shortages, higher energy prices, inflation and possible changes in federal policy. It expected continued transaction execution in conducive capital markets.
- Management described the advisory pipeline as robust and broad-based and expected a strong Q4. It also expected municipal issuance to remain strong. Equity brokerage had been affected by lower summer market volumes; management anticipated elevated activity after late-quarter volatility. Fixed-income client activity had increased as rates moved higher.
- The board declared a $3.00-per-share special dividend and a $0.55 quarterly dividend on October 29, payable December 10, 2021. Management expected the full-year payout ratio near the midpoint of its 30%–50% adjusted-net-income policy range and said a further special dividend in Q1 2022 was expected, subject to board approval.
- The company announced an agreement to acquire Cornerstone Macro on October 14, 2021. Cash purchase price and potential earnout amounts are not specified in the filing text; closing was expected in Q1 2022, subject to approvals and customary conditions. The company anticipated further integration costs and additional intangible amortization.
- Funding includes Pershing and prime-broker arrangements, which are collateral-dependent and may be discretionary, as well as committed credit facilities. There were no advances on the $65 million unsecured revolver or $100 million secured committed line at quarter-end. The $100 million line was due December 10, 2021, and management anticipated renewal.
- Derivative counterparty exposure included $19.8 million uncollateralized, with $16.4 million attributable to one counterparty. The company also had $81.6 million of investment commitments without specified call dates. Legal and regulatory matters are ongoing; management said reasonably possible losses above reserves were not material, but outcomes and estimates remain uncertain.
- Results are sensitive to market activity, deal timing, interest rates, credit spreads, liquidity, investment valuations and compensation. Management cautioned that period results may fluctuate and are not necessarily indicative of future performance. It reported no material change in risk factors from its 2020 annual report.
Important facts for investors to verify
- How much of the unusually strong investment banking and investment income performance is repeatable, particularly merchant-banking gains and large municipal fees.
- Whether the advisory pipeline converts to completed transactions and whether capital-raising, equity brokerage and fixed-income activity hold up against changing market conditions.
- The impact of compensation, acquisition-related awards and earnouts on future GAAP earnings, cash requirements and the gap between GAAP and adjusted results.
- Completion terms, purchase price, integration costs and expected financial contribution of the Cornerstone Macro acquisition.
- Renewal of the $100 million committed line, ongoing collateral availability, and repayment schedule for the remaining $125 million of senior notes.
- Concentration and collectability of uncollateralized derivative exposure, investment commitment funding needs, and developments in legal or regulatory matters.