Piper Sandler Companies — Q2 2021 Form 10-Q
Business context and period. The filing covers the quarter and six months ended June 30, 2021. Piper Sandler is a single-segment investment banking and institutional securities firm, with alternative asset management activities. Comparisons are with the prior-year periods; Q2 2020 was affected by COVID-19-related market uncertainty.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net revenues | $508.6 million | $292.4 million | $937.3 million | $528.6 million |
| Investment banking revenue | $387.1 million | $199.8 million | $683.2 million | $358.8 million |
| Institutional brokerage revenue | $95.8 million | $89.3 million | $205.3 million | $178.5 million |
| Investment income/(loss) | $26.7 million | $3.7 million | $50.5 million | $(10.1) million |
| Net income attributable to Piper Sandler | $69.8 million | $1.5 million | $119.3 million | $(13.3) million |
| Diluted EPS | $4.12 | $0.10 | $7.14 | $(0.96) |
| GAAP pre-tax margin | 22.4% | 2.5% | 21.0% | (5.0)% |
- Q2 net revenues increased 73.9%; first-half net revenues rose 77.3%. Advisory activity and higher corporate and municipal financing drove investment banking growth. Fixed income services improved, while equity brokerage revenue declined.
- Investment income benefited from gains in merchant banking fund investments; these gains included amounts attributable to noncontrolling interests. First-half adjusted investment income, excluding those interests, was $15.1 million versus a $5.8 million loss in 2020.
- Compensation and benefits were $325.3 million in Q2 and $605.6 million for the first half, increasing with revenue and profitability. The GAAP compensation ratio improved to 63.9% in Q2 from 73.0%, and was 64.6% for the first half versus 76.0%.
- Management also reported non-GAAP adjusted diluted EPS of $5.37 for Q2 and $9.51 for the first half, versus $1.93 and $3.35, respectively. These measures exclude specified acquisition-related items, financing interest and noncontrolling-interest effects; they supplement, not replace, GAAP results.
Cash flow, balance sheet and funding
- First-half operating cash flow was $11.3 million, compared with $374.3 million in 2020. The filing attributes cash-flow movements in part to changes in broker receivables, inventory, investments and accrued compensation.
- Cash and cash equivalents were $397.5 million at June 30, 2021, down from $507.9 million at year-end 2020. Total assets were $2.11 billion; total shareholders’ equity was $1.07 billion.
- Long-term financing was $175 million. Of the senior notes, $50 million bears 4.74% interest and matures October 15, 2021; $125 million bears 5.20% and matures October 15, 2023. The $20 million Valence acquisition notes were repaid in Q1 2021.
- The $65 million unsecured revolving facility and $100 million committed secured line had no advances at quarter-end. The company also reported $122.2 million outstanding under its prime broker financing arrangement. Funding availability under broker arrangements can depend on collateral and provider discretion.
- Regulatory net capital was $257.6 million, $256.6 million above the SEC minimum. The adjusted leverage ratio was 2.6, down from 3.2 at year-end 2020.
- The company paid $41.0 million in dividends during the first half, including a $1.85-per-share special dividend, and repurchased $23.1 million of shares under its authorization. A $0.55 quarterly dividend was declared July 30, payable September 10, 2021.
Outlook, risks and notable items
- No specific full-year earnings or revenue guidance was provided. Management expected capital raising to remain strong, though potentially moderate from elevated levels; it described the advisory pipeline as robust and broad-based. Management expected equity brokerage activity to remain somewhat muted and anticipated moderation in fixed income client activity. It expected municipal issuance to remain robust in the second half.
- Results are sensitive to market activity, deal volumes, volatility, interest rates, credit spreads, liquidity and valuations. Management cautioned that period results may fluctuate significantly and may not indicate future performance.
- At June 30, the company reported $20.1 million of uncollateralized derivative counterparty exposure, including $17.2 million with one counterparty. The company noted that hedging may not be effective in all market environments and that collateral or funding could become less available.
- Legal and regulatory matters arise in the ordinary course. Management said reasonably possible losses above accrued reserves were not material, while noting that outcomes and estimates remain uncertain.
- Acquisition-related compensation and integration costs continued to affect reported expenses. The Weeden earnout accrual was $29.3 million and was expected to be paid by September 30, 2021; the filing also described potential revenue-based earnouts for acquired businesses.
- The company retired its secured commercial paper program in April 2021. The $50 million Class A senior note maturity in October 2021 is a near-term refinancing or repayment item to monitor.
Investor verification points
- Assess how much of the earnings increase reflects recurring advisory and financing activity versus merchant banking investment gains and the unusually weak Q2 2020 comparison.
- Review operating cash flow and liquidity needs, particularly seasonal incentive compensation payments, broker financing availability and the October 2021 note maturity.
- Track advisory pipeline conversion, equity brokerage volumes, fixed income activity and the pace of municipal issuance against management’s qualitative outlook.
- Monitor uncollateralized counterparty exposure, collateral requirements, and the valuation sensitivity of Level III assets and private investments.
- Reconcile non-GAAP results with GAAP results and follow acquisition-related compensation, earnouts and integration costs.