Piper Jaffray Companies (now identified in the request as Piper Sandler) — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. The filing is by Piper Jaffray Companies, the registrant name shown on the 2017 report. Amounts below are in U.S. dollars; financial statement figures are generally in millions unless stated otherwise.
Business context
The company operated through Capital Markets, providing investment banking and institutional sales, trading and research, and Asset Management, providing investment advisory services. Results are sensitive to capital-markets activity, interest rates, trading conditions, and client flows and investment performance.
Financial performance and key metrics
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenues | $204.0 | $176.4 | $409.5 | $336.0 |
| Net revenues | $197.7 | $170.5 | $398.3 | $324.0 |
| Income before tax | $19.9 | $6.5 | $42.7 | $10.0 |
| Net income attributable to Piper Jaffray Companies | $13.6 | $1.9 | $33.8 | $4.4 |
| Diluted EPS | $0.89 | $0.12 | $2.21 | $0.28 |
| GAAP pretax operating margin | 10.0% | 3.8% | 10.7% | 3.1% |
- Revenue drivers: Q2 investment banking revenue rose 42% to $138.5 million, led by advisory services and equity financing; institutional brokerage fell 23% to $37.1 million, mainly on weaker fixed-income activity. Asset-management revenue increased 4% to $15.2 million. For the first half, investment banking rose 35%, while institutional brokerage declined 5%.
- Expenses and margins: Q2 non-interest expense increased 8.5% to $177.9 million, with compensation up 14.7% as revenue grew. The compensation-to-net-revenue ratio improved to 67.9% from 68.7%. First-half non-interest expense rose 13.2% to $355.6 million; lower prior-year-comparable restructuring costs partly offset higher compensation and back-office conversion costs.
- Non-GAAP results: Adjusted diluted EPS was $1.40 in Q2 versus $0.88, and $3.18 for the first half versus $1.58. These company-defined measures exclude items including acquisition-related compensation, intangible amortization, restructuring and noncontrolling interests; they are not substitutes for GAAP results.
- Cash flow: Operating cash flow was $173.2 million for the first half, compared with $61.3 million in 2016. Investing activities used $3.0 million; financing activities used $186.0 million, including $50.0 million to repay Class A notes, $9.5 million in dividends and $23.6 million in share repurchases and employee tax-withholding share purchases. Cash and equivalents ended at $26.2 million, down from $41.4 million at year-end 2016.
- Balance sheet and funding: At June 30, total assets were $1.93 billion and shareholders’ equity was $834.7 million. Short-term financing was $330.4 million and senior notes were $125.0 million, for total reported financing of $455.4 million. The remaining Class C notes carry a 5.06% fixed rate and mature October 2018. The company had $104 million drawn on a $200 million committed secured facility; $185 million of uncommitted secured lines were available but subject to bank approval and collateral.
- Capital: Broker-dealer regulatory net capital was $215.1 million, $214.1 million above the SEC minimum; the company reported compliance with financing covenants. Adjusted leverage was 2.9x, down from 3.4x at year-end 2016.
Material changes and notable items
- Strong advisory and equity-financing activity drove Capital Markets improvement; Q2 advisory revenue was $92.5 million versus $48.1 million, and equity-financing revenue was $24.7 million versus $16.8 million. Debt financing weakened: $22.0 million versus $33.3 million.
- Asset Management remained under pressure despite higher fees. Its GAAP pretax margin fell to 2.3% in Q2 from 13.1%; for the first half it was 3.2% versus 9.5%. Total AUM was $8.58 billion at June 30, up from $8.09 billion a year earlier but down from $8.73 billion at the start of 2017.
- The first-half effective tax rate, excluding noncontrolling interests, was 11.8% versus 34.0%. Adoption of new stock-compensation accounting produced an $8.7 million tax benefit in the first half; management said it increased first-half diluted EPS by $0.57. The Q2 tax benefit was $1.8 million, adding $0.12 to diluted EPS.
- The company began quarterly cash dividends in 2017, declaring and paying $0.625 per share in the first half. A further $0.3125 dividend was declared July 27, payable September 15, 2017.
- Management planned to move to a fully disclosed clearing model in Q3 2017 and cease self-clearing. It incurred $0.9 million in Q2 conversion costs and expected approximately $3.0 million of costs across 2016–2017; it anticipates lower trade-clearing expenses after migration.
Outlook, commentary and risks
- Management expected slow, steady U.S. economic growth in the second half of 2017 and equity-market conditions to remain supportive of equity financing and advisory work. It expected advisory performance to continue well, while noting quarterly revenue can vary with deal timing and size. No numerical earnings or revenue guidance was provided.
- Management expected municipal debt underwriting activity to decline in 2017 following record 2016 issuance. Low volatility, a flattening yield curve and low absolute rates constrained institutional brokerage; higher or volatile rates could affect businesses differently.
- Asset Management faced ongoing pressure from passive investing and underperforming value-equity products. The company intended to exit Japan value and related international strategies, reducing AUM by about $1.0 billion in Q3, partly offset by inflows to a new global dividend strategy. Management warned continued weakness could lead to impairment of Asset Management goodwill; $114.4 million of goodwill was allocated to that segment.
- Risks include volatile capital-markets revenues, funding and collateral availability, market and counterparty exposure, fair-value estimation, clearing-conversion disruption, and legal or regulatory matters. Uncollateralized derivative credit exposure was $20.1 million, including $15.5 million with one counterparty. Management said reasonably possible legal losses beyond accrued reserves were not material, but outcomes remain uncertain.
- One-day VaR was $0.8 million at June 30, up from $0.7 million at year-end 2016; trading losses exceeded VaR once in the first half. The filing cautions that actual losses can exceed modeled VaR.
Most important facts for investors to verify
- Whether advisory and equity-financing momentum persists and offsets weaker debt financing and institutional brokerage.
- Asset Management AUM flows, margins, strategy exits, and assumptions underlying the $114.4 million segment goodwill balance and impairment testing.
- The size and recurrence of stock-vesting tax benefits when assessing earnings quality and comparing reported EPS with adjusted EPS.
- Clearing-model migration costs, execution risks, and whether anticipated clearing-expense savings materialize.
- Liquidity under market stress, availability of collateral-dependent and uncommitted funding, and repayment or refinancing plans for the October 2018 Class C notes.