Piper Sandler Companies — Q1 2021 Form 10-Q
Business context and reporting period. Unaudited results for the three months ended March 31, 2021, compared with Q1 2020. Piper Sandler is a U.S.-focused investment banking and institutional securities firm operating as one reportable segment. The quarter’s results reflect strong capital-raising and advisory activity, increased fixed-income brokerage, and investment gains. The prior-year comparison was affected by pandemic-related market disruption and losses.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change / context |
|---|---|---|---|
| Total revenue | $431.4 million | $240.4 million | Up 79.5% |
| Net revenue | $428.6 million | $236.2 million | Up 81.5% |
| Investment banking revenue | $296.1 million | $159.0 million | Up 86.2%; corporate financing was a major driver |
| Institutional brokerage revenue | $109.5 million | $89.1 million | Up 22.8%; fixed income strength partly offset lower equity brokerage |
| Investment income/(loss) | $23.8 million | $(13.8) million | Gains versus prior-year losses; includes noncontrolling-interest effects |
| Compensation and benefits | $280.3 million | $188.1 million | Up 49.0% with higher revenue and profitability |
| Pre-tax income/(loss) | $82.9 million | $(34.0) million | Pre-tax margin 19.3%, versus (14.4)% |
| Net income/(loss) attributable to Piper Sandler | $49.5 million | $(14.7) million | Basic EPS $3.44; diluted EPS $3.00 |
| Adjusted non-GAAP diluted EPS | $4.13 | $1.48 | Up 179.1%; excludes specified acquisition-related items and other adjustments |
GAAP compensation ratio improved to 65.4% from 79.7%; adjusted compensation ratio was 61.5% versus 64.8%. Adjusted operating margin was 24.8%, compared with 11.8%. Non-GAAP measures are management-defined and should be considered alongside, not instead of, GAAP results.
Cash flow, balance sheet and liquidity
- Operating cash flow was a use of $263.6 million, compared with a source of $237.6 million in Q1 2020. The filing attributes cash movements in part to changes in broker receivables, inventory and accrued compensation; incentive compensation payments are generally made in February.
- Cash and cash equivalents were $151.8 million at March 31, 2021, down from $507.9 million at year-end 2020. Total assets were $1.76 billion and total shareholders’ equity was $991.2 million.
- Long-term financing was $175 million, down from $195 million at year-end after repayment of the $20 million Valence notes. The remaining senior notes are $50 million at 4.74% due October 2021 and $125 million at 5.20% due October 2023.
- No advances were outstanding under the $65 million unsecured revolving facility or $100 million committed secured bank line. The company reported $24.9 million outstanding under its prime broker arrangement at quarter-end; Pershing financing outstanding was less than $0.1 million.
- Broker-dealer regulatory net capital was $219.2 million, exceeding the SEC minimum by $218.2 million. The company reported compliance with applicable covenants. Adjusted leverage was 2.3x, down from 3.2x at year-end 2020.
- The company paid quarterly and special dividends totaling $2.25 per share during the quarter. On April 30, the board declared a further $0.45 quarterly dividend, payable June 11, 2021.
Material changes, outlook and risks
- Investment banking benefited from record corporate financing revenue of $116.1 million, higher advisory revenue ($152.8 million) and municipal financing revenue ($27.1 million). Equity brokerage revenue fell 9.7% year over year, while fixed income services revenue rose 60.5%.
- Management expected the economy and advisory pipeline to remain supportive, describing the pipeline as robust and building. It expected 2021 capital-raising activity to remain strong but moderate from record levels; equity brokerage revenue was expected to decline as volatility and trading volumes moderated. Management expected municipal issuance to remain strong, with governmental issuance moderating from 2020 records, and anticipated continued fixed-income client activity amid interest-rate uncertainty. No specific earnings or revenue guidance was provided.
- Management cited economic recovery, vaccine rollout, federal policy, market activity, interest rates, credit spreads and liquidity as important variables. It cautioned that financial-services earnings can fluctuate significantly between periods and that results for one quarter are not necessarily indicative of future results.
- Derivative counterparty credit exposure without collateral was $18.4 million, including $15.2 million to one counterparty. The company also depends on securities collateral and third-party funding; Pershing financing is uncommitted and could be denied. Market illiquidity could require longer holding periods or sales at adverse prices.
- Legal proceedings arise in the ordinary course of business. Management said reasonably possible losses above reserves were not material at quarter-end, while noting that outcomes and estimates remain uncertain. No material changes to previously disclosed risk factors were reported.
- Unusual and potentially nonrecurring comparison items include the swing from Q1 2020 investment losses to Q1 2021 investment gains, pandemic-related prior-year trading conditions, and prior-year CARES Act tax benefits of $4.6 million. Q1 2021 also included $26.1 million of acquisition-related compensation excluded from the company’s adjusted non-GAAP measure. The $27.2 million Weeden earnout liability was accrued, and the company expected the maximum earnout to be earned.
Important facts for investors to verify
- Whether unusually strong corporate financing and advisory activity, and the resulting margins, persist as management anticipates some moderation in capital raising and equity trading.
- How much reported earnings depend on investment gains, noncontrolling interests, acquisition-related compensation and other adjustments; compare GAAP results with reconciled non-GAAP measures.
- Cash conversion and funding needs in subsequent quarters, including the October 2021 maturity of the $50 million Class A notes and available secured and uncommitted funding sources.
- Exposure to the $18.4 million of uncollateralized derivative credit risk and the company’s ability to manage market, liquidity, counterparty and operational risks.
- Dividend and repurchase capacity alongside compensation obligations, including the expected acquisition-related expense schedule and the Weeden earnout.