Piper Jaffray Companies — Form 10-Q Summary
Reporting period: Three months ended March 31, 2014, compared with the three months ended March 31, 2013. The filing identifies the issuer as Piper Jaffray Companies.
Business context
The company provides investment banking, institutional brokerage and asset management services through its Capital Markets and Asset Management segments. Results include the Seattle-Northwest Securities and Edgeview Partners acquisitions, completed in July 2013. Hong Kong capital markets and FAMCO are reported as discontinued operations.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change or context |
|---|---|---|---|
| Total net revenues | $168.1 million | $109.5 million | Up 53.5% |
| Income before tax | $32.7 million | $18.2 million | Up 80.1% |
| Net income from continuing operations | $22.9 million | $12.6 million | Up 82.1% |
| Net income attributable to Piper Jaffray | $17.7 million | $10.7 million | Continuing operations |
| Net income attributable to common shareholders | $16.1 million | $9.0 million | — |
| Diluted EPS from continuing operations | $1.10 | $0.60 | GAAP |
| Pre-tax operating margin | 19.5% | 16.6% | Up 2.9 percentage points |
| Net cash used in operating activities | $44.5 million | $183.5 million | Cash outflow in both periods |
Investment banking revenue rose to $88.5 million from $40.8 million, led by equity financing and advisory services. Institutional brokerage revenue increased 9.7% to $44.0 million; asset management revenue increased 13.6% to $21.0 million. Compensation and benefits rose 52.0% to $100.5 million, primarily reflecting the larger revenue base. The compensation ratio improved slightly, to 59.8% of net revenues from 60.4%.
Capital Markets reported $27.5 million of GAAP pre-tax operating income and an 18.5% margin, versus $12.8 million and 14.0%. Asset Management reported $5.2 million and a 26.4% margin, versus $5.4 million and 29.5%. Total assets were $2.32 billion at quarter-end, broadly unchanged from year-end 2013; total shareholders’ equity was $917.1 million, up from $882.1 million.
Liquidity, funding and debt
Cash and cash equivalents fell to $34.8 million from $123.7 million at December 31, 2013; an additional $44.1 million was segregated for regulatory purposes. Short-term financing was $435.8 million, down from $514.7 million, and included $274.8 million of secured commercial paper and $161.1 million under a prime-broker arrangement. The company also had $52.0 million of repurchase liabilities and $125.0 million of variable-rate senior notes.
The $50 million Class A notes mature May 31, 2014; management said it expected to refinance them before maturity. The $75 million Class B notes mature November 30, 2015. The company reported compliance with debt covenants and $185.2 million of broker-dealer net capital, $184.2 million above the SEC minimum. A $250 million committed secured revolving facility was undrawn; $185 million of uncommitted secured lines were also undrawn but are discretionary.
Material changes, outlook and risks
- Revenue growth was concentrated in equity financing and advisory activity. Equity financing revenue more than doubled, while advisory revenue rose to $39.7 million from $9.6 million. Debt financing revenue declined 20.5%, reflecting fewer completed transactions and weak refinancing activity.
- Management expected U.S. economic growth to continue improving in 2014, with modest equity-market appreciation and gradually rising interest rates. It anticipated less favorable debt underwriting conditions as refinancing demand subsided; it provided no numerical earnings or revenue guidance.
- Asset Management ended the quarter with $11.5 billion of assets under management. Value-equity strategies had $301 million of quarterly net outflows; MLP strategies had $335 million of net inflows.
- First-quarter 2013 non-compensation expenses benefited from insurance proceeds reimbursing prior legal settlements. Q1 2014 expenses also included acquisition-related costs. These items affect year-over-year comparability.
- Management cited sensitivity to market activity, interest rates, credit spreads, trading liquidity, client flows and extensive financial regulation. It disclosed $23.0 million of uncollateralized derivative credit exposure, including $11.4 million to one counterparty. Derivative notionals were substantially larger than fair values and do not represent expected payouts.
- The company described pending legal, regulatory and arbitration matters, including claims seeking unspecified damages. Management expected no material adverse effect based on information then available, while noting that outcomes and potential losses are uncertain.
- Off-balance-sheet private-equity investment commitments were $42.9 million, including $31.6 million to an affiliated merchant banking fund. Operating lease commitments totaled $85.0 million; a new San Francisco lease added $12.1 million over 10.3 years.
Important facts for investors to verify
- Whether the $50 million Class A notes were refinanced before their May 31, 2014 maturity, and on what terms.
- Whether strong equity financing and advisory revenues persisted, given management’s warning that market corrections could disrupt capital raising and that debt refinancing activity was weak.
- How operating cash flow and unrestricted cash changed after quarter-end, considering the seasonal timing of incentive compensation payments and reliance on short-term, collateralized funding.
- Whether value-equity client outflows continued and whether MLP inflows and market appreciation supported asset-management fees.
- Developments in the disclosed legal matters and uncollateralized derivative exposures, including the concentrated $11.4 million exposure to one counterparty.