Piper Jaffray Companies — Q2 2014 Form 10-Q
Issuer and period: The filing is for Piper Jaffray Companies (not “Piper Sandler Companies”), for the quarter and six months ended June 30, 2014. The company provided investment banking, institutional brokerage and asset management services, primarily in the United States and Europe.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net revenues | $170.0 million | $99.8 million | $338.2 million | $209.3 million |
| Income before tax | $30.4 million | $3.3 million | $63.1 million | $21.5 million |
| Net income attributable to Piper Jaffray Companies | $18.2 million | $4.4 million | $36.0 million | $15.0 million |
| Diluted EPS from continuing operations | $1.11 | $0.25 | $2.21 | $0.86 |
| Pre-tax operating margin | 17.9% | 3.3% | 18.7% | 10.3% |
Q2 investment banking revenue increased 94.9% to $103.8 million, including stronger equity financing and advisory activity. Institutional brokerage revenue rose 40.3% to $34.5 million, while asset management revenue increased 20.8% to $22.3 million. Compensation and benefits rose 58.6% to $103.1 million, but declined to 60.6% of net revenue from 65.1% a year earlier. Q2 GAAP net income attributable to the company was $18.2 million; management’s adjusted non-GAAP figure was $20.5 million, or $1.25 per diluted share.
For the first half, net revenues increased 61.6% and attributable net income rose to $36.0 million. Management reported adjusted non-GAAP net income of $40.5 million, or $2.49 per diluted share. Adjustments exclude specified noncontrolling-interest items, acquisition-related intangible amortization and acquisition-related compensation; these adjusted figures are not GAAP measures.
Cash flow, balance sheet and funding
- Operating cash flow was $106.1 million in the first half, versus cash used of $123.1 million in the comparable 2013 period. Investing activities used $2.3 million; financing activities used $172.3 million. Cash and cash equivalents ended at $55.2 million, down from $123.7 million at year-end 2013. A further $44.0 million was segregated for regulatory purposes.
- Total assets were $2.43 billion and shareholders’ equity $929.8 million at June 30, 2014. Short-term financing was $362.4 million, down from $514.7 million at year-end. Variable-rate senior notes totaled $125 million. The filing reports a 2.6x total-assets-to-equity leverage ratio and 3.5x adjusted leverage.
- Short-term funding included $271.5 million of secured commercial paper and $90.9 million under a prime-broker arrangement. The company had no borrowings against its $250 million committed revolving facility or its $185 million of uncommitted secured bank lines. Uncommitted funding is discretionary and may be unavailable.
- Regulatory net capital at the U.S. broker-dealer was $160.5 million, $159.1 million above the SEC-rule minimum. The company reported compliance with debt covenants, including a $120 million broker-dealer net-capital requirement.
Material changes and management outlook
- Capital Markets drove most of the earnings improvement: Q2 segment pre-tax income was $23.4 million versus a $2.1 million loss a year earlier. Asset Management Q2 pre-tax income increased to $7.0 million from $5.5 million.
- Q2 advisory revenue rose to $39.7 million from $9.4 million; equity financing revenue rose to $44.1 million from $21.8 million. Debt financing revenue fell to $20.2 million from $22.1 million as municipal issuance was lower. Equity institutional brokerage fell 14.1%, reflecting low volatility and reduced client trading activity.
- Assets under management were $12.6 billion at quarter-end, up from $10.2 billion a year earlier. For the quarter, market appreciation added $1.1 billion, while net flows were a $24 million outflow; value-equity outflows were partly offset by MLP inflows.
- Management expected improving U.S. growth, modest equity-market appreciation and gradually rising interest rates in the second half of 2014. It anticipated continued strength in M&A advisory, but muted debt underwriting and subdued equity trading. Management cautioned that a market correction could disrupt equity capital raising and that rising rates could produce varied results across debt financing and fixed-income brokerage. No numerical earnings guidance was provided.
- Notable items include the $1.2 million second-quarter goodwill measurement-period adjustment related to the 2013 Seattle-Northwest and Edgeview acquisitions, and higher legal and litigation-related costs. The 2013 comparison included losses from discontinued operations and insurance proceeds that reduced first-half 2013 expenses.
Risks, contingencies and other disclosures
Results remain sensitive to capital-market activity, interest rates, credit spreads, trading volumes, market volatility and client asset flows. The company disclosed $25.5 million of uncollateralized derivative counterparty credit exposure, including $12.9 million to one counterparty. It also reported $42.8 million of private-equity investment commitments and approximately $3.0 billion of variable-rate demand notes for which it acts as remarketing agent. Pending legal and regulatory matters could involve substantial or indeterminate claims; management did not expect currently known matters to have a material adverse effect, but noted that estimates and reserves may change. Fair-value estimates for some instruments rely on unobservable inputs; Level III assets were $190.4 million. Management described the risks of market, funding, operational, legal and regulatory exposures.
Important facts for investors to verify
- Confirm the issuer identity: this 2014 filing names Piper Jaffray Companies; the request metadata names Piper Sandler Companies.
- Review the composition and durability of investment banking growth, particularly advisory and equity financing, and the outlook for municipal debt issuance.
- Assess funding resilience, including the decline in cash, collateral requirements, discretionary prime-broker and uncommitted bank funding, and upcoming facility maturity on December 27, 2014.
- Evaluate AUM flows by strategy, especially ongoing value-equity outflows, MLP growth and reliance on market appreciation.
- Review derivative counterparty exposure, Level III valuation assumptions, investment commitments, and developments in legal or regulatory matters.
- Reconcile management’s adjusted non-GAAP results with GAAP results and assess the continuing impact of compensation, acquisition-related costs and litigation expenses.