Piper Sandler Companies — 2019 Form 10-K Summary
Business context and reporting period. The filing covers the fiscal year ended December 31, 2019, when the company was Piper Jaffray Companies. It operated as one investment banking and institutional securities segment. The statements do not include Sandler O’Neill, acquired January 3, 2020; its results are included prospectively. The company sold traditional asset manager Advisory Research, Inc. (ARI) in the third quarter of 2019 and reports it as discontinued operations.
Financial performance
Amounts below are in millions of dollars except per-share data. Annual figures are for fiscal years; Q4 figures are unaudited.
| Metric | FY 2019 | FY 2018 | Q4 2019 | Q4 2018 |
|---|---|---|---|---|
| Net revenue | $834.6 | $741.0 | $278.9 | $214.8 |
| Continuing-operations pretax income | $119.0 | $72.5 | $53.9 | $31.7 |
| Continuing-operations income attributable to Piper Sandler | $87.9 | $55.6 | $38.7 | $18.5 |
| Net income attributable to Piper Sandler, including discontinued operations | $111.7 | $57.0 | $38.7 | $18.2 |
| Diluted EPS, including discontinued operations | $7.69 | $3.72 | $2.70 | $1.21 |
| GAAP pretax margin | 14.3% | 9.8% | 19.3% | 14.8% |
Revenue mix and growth. FY 2019 investment banking revenue was $629.4 million, up 6.9%; institutional brokerage was $167.9 million, up 34.6%; interest revenue was $26.7 million, down 18.3%; and investment income was $22.3 million, up 101.8%. Advisory and debt financing grew, while equity financing declined. Management also presents non-GAAP adjusted results: adjusted net revenue of $823.8 million, adjusted net income attributable to the company of $106.2 million, adjusted diluted EPS of $7.36, and adjusted pretax margin of 16.6%. These measures exclude specified items and should be read alongside GAAP results.
Cash flow, balance sheet and funding. Cash and cash equivalents were $250.0 million at year-end, up $199.7 million. Operating activities generated $67.8 million, investing activities generated $26.7 million, and financing activities generated $104.7 million. FY 2018 operating cash flow was $509.8 million, substantially affected by a $534.4 million reduction in financial instruments and inventory positions. Total assets were $1.629 billion and total shareholders’ equity was $806.5 million. The company issued $175 million of unsecured senior notes in October 2019: $50 million at 4.74% due in 2021 and $125 million at 5.20% due in 2023. It also had $50 million of commercial paper outstanding; the balance-sheet short-term financing amount was approximately $50.0 million. A $125 million secured broker-dealer revolving facility and a new $50 million unsecured parent-company revolver had no year-end borrowings. Regulatory net capital at the U.S. broker-dealer was $236.9 million, $235.9 million above the stated minimum. The GAAP leverage ratio was 2.0, versus 1.8 in 2018; adjusted leverage was 2.2, versus 2.0.
Material changes and unusual items
- Net revenue rose 12.6% year over year; GAAP net income attributable to the company rose 95.9%, and diluted EPS rose from $3.72 to $7.69. The earnings comparison includes ARI discontinued operations and its sale gain.
- ARI’s sale generated $52.9 million in cash proceeds and a $33.0 million after-tax gain. FY 2019 discontinued-operations income was $23.8 million, despite a $9.3 million loss before the sale gain. Additional contingent proceeds may be earned, but are not assured.
- Weeden & Co. was acquired August 2, 2019. FY 2019 included $14.3 million of acquisition-related restructuring and integration costs; management expected additional Sandler O’Neill integration costs in the first half of 2020.
- Compensation expense rose 5.7% to $516.1 million, but declined to 61.8% of net revenue from 65.9%, partly because Simmons acquisition-related compensation ended in 2019. Management expected additional acquisition-related compensation and amortization in 2020.
- FY 2019 cash flow included the ARI sale proceeds and $175 million of senior-note proceeds. The $50.6 million of share purchases was primarily shares withheld or bought to meet employee tax obligations; the company repurchased only 501 shares under its expiring open-market authorization during 2019.
Outlook, risks and contingencies
Management expected moderate U.S. economic growth in 2020 and cited a strong advisory pipeline, potentially weighted toward the second half, and a strong combined corporate financing pipeline. It expected municipal issuance volumes to increase from 2019 levels. Management cautioned that advisory revenue depends on deal closings and that sustained equity-market volatility or a material correction could hurt advisory and capital-raising activity. The filing also identified geopolitical and macroeconomic uncertainty, including trade policy, Brexit, the 2020 U.S. election and a possible disease pandemic, as risks; its outlook is therefore subject to significant uncertainty.
Key business risks include cyclical transaction and market activity, competition for clients and talent, integration and retention after acquisitions, trading and investment losses, illiquid positions, counterparty and funding risk, cybersecurity and operational disruption, and extensive regulatory and legal exposure. Pershing financing is uncommitted and may be denied; the company also disclosed $19.2 million of uncollateralized derivative counterparty exposure, including $16.2 million with one counterparty. It had $71.0 million in investment commitments with no specified call dates. Management stated that reasonably possible legal losses above accruals were not material and expected pending matters to be resolved without material adverse effect, while noting outcomes remain uncertain. The auditor issued unqualified opinions on the financial statements and internal controls; valuation of Level III merchant banking investments was identified as a critical audit matter.
Important facts for investors to verify
- Assess recurring operating earnings separately from the $33.0 million after-tax ARI sale gain and other adjustments underlying non-GAAP results.
- Review the realized contribution, integration costs, retention arrangements and financing impact of Sandler O’Neill, whose 2020 results are absent from this filing, and of Weeden & Co.
- Monitor funding access, debt service and covenants, including the reliance on uncommitted Pershing financing and short-term secured funding.
- Evaluate the assumptions behind $132.3 million of Level III fair-value assets, primarily private-company investments, and the company’s concentrated derivative credit exposure.
- Confirm the timing and amount of contingent ARI sale proceeds, the $71.0 million investment commitments, and the sustainability of dividends, which the board may change.