Business Context and Reporting Period
Company: Piper Jaffray Companies (Piper Jaffray)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: Piper Jaffray operates as a single reporting segment providing investment banking, institutional sales, trading, research, and asset management services. The firm focuses on middle-market companies, private equity groups, and institutional investors in the U.S., Europe, and Asia. The company exited its Private Client Services (PCS) business in 2006, with related costs now classified as discontinued operations.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2009 |
Six Months Ended June 30, 2009 |
Six Months Ended June 30, 2008 |
|---|---|---|---|
| Net Revenues | $132.3 million | $216.2 million | $193.5 million |
| Net Income (Continuing Ops) | $11.6 million | $8.9 million | ($2.9 million) Loss |
| Net Income (Total) | $11.6 million | $8.9 million | ($1.5 million) Loss |
| Earnings Per Share (Diluted) | $0.59 | $0.45 | ($0.09) |
| Total Assets | $1,359.9 million | As of June 30, 2009 | |
| Total Liabilities | $581.8 million | ||
| Shareholders' Equity | $778.1 million | As of June 30, 2009 | |
| Cash and Cash Equivalents | $42.5 million | ||
| Short-Term Bank Financing | $63.0 million | As of June 30, 2009 | |
| Net Capital (SEC Rule) | $293.0 million |
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 35.4% for the quarter and 11.7% for the six-month period compared to the prior year. This was driven primarily by a 43.0% increase in institutional brokerage revenues (specifically fixed income sales and trading) and a 93.1% increase in investment banking revenues for the quarter.
- Profitability Turnaround: The company returned to profitability, recording net income of $11.6 million for the quarter and $8.9 million for the six months, compared to net losses of $0.1 million and $1.5 million, respectively, in the prior year periods.
- Expense Management: Non-interest expenses decreased 3.8% for the six months ended June 30, 2009, compared to the prior year, due to cost-saving actions. However, compensation and benefits expenses increased 29.9% for the quarter due to higher variable compensation tied to revenue performance.
- Balance Sheet: Total assets increased to $1.36 billion from $1.32 billion at year-end 2008. Short-term bank financing increased to $63.0 million from $9.0 million at December 31, 2008.
Outlook, Risks, and Management Commentary
- Outlook: Management anticipates that equity financing activity will continue if market conditions remain conducive. Public finance business is expected to improve if the non-investment grade tax-exempt market functions better. Advisory activity is expected to be challenged in the second half of the year due to buyer caution. Fixed income trading results are expected to moderate as spreads tighten.
- Expense Run-Rate: Management projects non-compensation expenses to run at approximately $32 million to $33 million per quarter for the remainder of 2009.
- Market Risk: The company utilizes Value-at-Risk (VaR) models to monitor market risk. Total VaR decreased to $1.2 million as of June 30, 2009, from $2.4 million at year-end 2008, due to reduced exposure in the tender option bond program and lower volatility.
- Credit Risk: The firm has concentrated counterparty credit exposure of $22.6 million with six non-publicly rated entities, primarily related to matched-book derivative contracts. One bridge loan of $12.6 million is in default, though management believes collateral value exceeds the loan amount.
- Legal Proceedings: The SEC completed its investigation into Auction Rate Securities and did not recommend enforcement action as of July 10, 2009. A consolidated class action regarding municipal derivatives remains pending.
- Restructuring: The company recorded a pre-tax restructuring charge of $3.6 million in the second quarter, primarily for severance and leased office space.
Investor Verification Checklist
- Revenue Sustainability: Verify the durability of the fixed income trading environment that drove the 69.0% increase in fixed income institutional sales and trading revenues for the quarter.
- Level III Assets: Review the valuation of Level III assets ($68.0 million), which include auction-rate securities and asset-backed securities, as these rely on unobservable inputs and management judgment.
- Bridge Loan Default: Monitor the status of the $12.6 million bridge loan currently in default to ensure collateral coverage remains sufficient.
- Compensation Ratio: Track the compensation and benefits expense ratio (60.0% of net revenues for the quarter) to ensure it remains manageable as revenues fluctuate.
- Goodwill Impairment: Assess the risk of future goodwill impairment charges, given the $160.4 million goodwill balance and the company's history of impairment testing in volatile markets.