Piper Jaffray Companies — 2011 Form 10-K Summary
Reporting period and business: The filing is for the fiscal year ended December 31, 2011, with unaudited quarterly results also presented. Although the request identifies Piper Sandler Companies, the registrant named in this filing is Piper Jaffray Companies. Its businesses are Capital Markets—investment banking, institutional sales and trading—and Asset Management.
Financial performance
| Metric | 2011 | 2010 |
|---|---|---|
| Total revenue | $489.7 million | $565.1 million |
| Net revenue | $458.1 million | $530.1 million |
| Net income (loss) attributable to Piper Jaffray Companies | $(102.0) million | $24.4 million |
| Diluted EPS | $(6.51) | $1.23 |
| Cash from operating activities | $203.2 million | $(28.8) million |
| Cash and cash equivalents at year-end | $85.8 million | $50.6 million |
| Total assets | $1.656 billion | $2.034 billion |
| Total shareholders’ equity | $750.6 million | $818.1 million |
- The 2011 loss included a $120.3 million non-cash goodwill impairment charge ($118.4 million after tax), eliminating all goodwill assigned to Capital Markets. Excluding the charge, management reported non-GAAP net income attributable to the company of $16.4 million and diluted EPS of $0.86.
- Revenue fell 13.6% as investment banking declined 21.1% to $210.3 million and institutional brokerage declined 15.3% to $142.3 million. Asset management revenue rose 4.6% to $69.9 million, supported by a full year of ARI results.
- Non-interest expense was $547.8 million, including the impairment. Excluding it, expenses were $427.5 million versus $472.8 million in 2010. Compensation and benefits were $288.1 million; compensation was 62.9% of net revenue, up from 59.5%.
- Capital Markets reported a $104.3 million pre-tax loss including impairment; excluding it, segment pre-tax income was $16.0 million and margin was 4.1%, versus 8.9% in 2010. Asset Management earned $14.6 million pre-tax, with a 20.5% margin versus 24.0%.
- Assets under management were $12.2 billion at year-end, approximately flat year over year: $648 million of net outflows were offset by $576 million of market appreciation.
- Operating cash flow benefited from reduced long inventory and related settlement receivables. Investing activities used $7.7 million; financing activities used $160.2 million.
Material changes and fourth-quarter results
- Fourth-quarter 2011 total revenue was $106.0 million, net revenue $99.2 million, and pre-tax loss $118.6 million. Net loss attributable to the company was $116.4 million, or $(7.38) per diluted share, principally reflecting the goodwill impairment.
- Asia net revenue dropped to $16.6 million from $42.3 million in 2010 amid weaker IPO activity and concerns about China-based issuer quality. Europe returned to profitability following its 2010 restructuring.
- Industry municipal underwriting value fell 31.5% in 2011. Piper Jaffray’s public finance issues totaled $6.9 billion in par value, down from $8.1 billion in 2010.
- Year-end assets declined 18.6%, while cash and cash equivalents increased. The company attributed the cash increase in part to reducing inventory and associated funding needs.
Outlook, risks and other notable matters
- Management expected challenging market conditions to continue in 2012, citing uncertain global growth, European sovereign debt concerns, U.S. deficits and elections, weak IPO activity, and a difficult fixed-income environment. It expected municipal underwriting to improve from 2011 but remain below historical levels.
- Management anticipated further cost-infrastructure actions in 2012; timing and magnitude were not determined, and resulting restructuring charges could be material.
- Liquidity included $85.8 million of cash and cash equivalents, plus $25.0 million segregated exclusively for customer liabilities. Year-end short-term financing was $166.2 million, primarily secured commercial paper; bank syndicated financing was $115.0 million, including $90.0 million term debt and $25.0 million drawn on the revolver. The company had no borrowings on its $250 million committed revolving facility at year-end, and reported compliance with credit covenants.
- U.S. broker-dealer regulatory net capital was $227.4 million, $226.4 million above the SEC minimum. Capital requirements and restrictions can limit distributions or business activity. The company said it had no credit rating and relied partly on uncommitted funding lines.
- A municipal-derivatives antitrust and securities investigation and related litigation remained pending. Management considered a material loss reasonably possible, but said it could not estimate a loss range; no contingency reserve was recorded for this matter.
- Other key exposures include market and inventory valuation risk, counterparty credit risk, funding-market disruptions, regulatory change, litigation, and sensitivity of fee income to market levels and client asset flows. The company reported $35.8 million of uncollateralized derivative counterparty exposure at year-end.
- The company did not intend to pay cash dividends for the foreseeable future. It repurchased $6.0 million of shares in 2011; credit-agreement covenants constrain repurchases and dividends.
- Management and Ernst & Young reported effective internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
Most important facts for investors to verify
- Reconcile GAAP loss and EPS with management’s non-GAAP figures, and assess the effect of the impairment and any future impairment risk, particularly for Asset Management goodwill.
- Review the full debt, collateral, covenant and liquidity disclosures, including commercial-paper dependence, uncommitted facilities, upcoming term-loan amortization and regulatory capital constraints.
- Track Asia and U.S. equity underwriting activity, municipal issuance, institutional trading revenue, and whether the expected 2012 cost reductions and market recovery materialized.
- Monitor assets under management, net flows, investment performance and performance fees, including concentration in significant clients and products.
- Follow the municipal-derivatives litigation and investigations: potential damages are unspecified and the filing provides no estimable loss range.