Piper Sandler Companies — FY2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. Piper Sandler is an investment bank and institutional securities firm operating in one reportable segment, with investment banking, equity and fixed-income brokerage and research, and alternative asset management businesses.
Financial results and liquidity
| Metric | 2022 | 2021 |
|---|---|---|
| Net revenues | $1.426 billion | $2.031 billion |
| Investment banking revenue | $1.010 billion | $1.553 billion |
| Institutional brokerage revenue | $405.3 million | $387.6 million |
| Income before tax | $134.4 million | $441.5 million |
| Net income applicable to Piper Sandler | $110.7 million | $278.5 million |
| Diluted EPS | $6.52 | $16.43 |
| GAAP pre-tax margin | 9.4% | 21.7% |
Management’s non-GAAP adjusted net income was $201.3 million, adjusted diluted EPS was $11.26, and adjusted operating margin was 18.8%, down from $399.0 million, $21.92, and 27.8%, respectively, in 2021. These measures exclude specified acquisition-related items, financing expense, and noncontrolling interests; they supplement, not replace, GAAP results.
- Cash flow: Operating activities used $224.9 million in 2022, versus providing $707.1 million in 2021. Investing activities used $127.1 million, including $96.5 million for acquisitions; financing activities used $250.1 million, including $107.5 million of dividends and $187.3 million of share repurchases.
- Cash and capital: Cash and cash equivalents were $365.6 million at year-end, down from $971.0 million. Total assets were $2.182 billion and total shareholders’ equity was $1.254 billion. Adjusted leverage was 2.4 times, down from 2.8 times.
- Debt and facilities: Long-term financing was $125 million of 5.20% Class B notes due October 15, 2023. The company reported no borrowings against its $80 million committed broker-dealer line or $75 million unsecured revolving facility at year-end. Some clearing-related funding is uncommitted and may be withdrawn at the providers’ discretion.
- Regulatory capital: U.S. broker-dealer net capital was $198.5 million, $197.5 million above the SEC minimum; the company reported compliance with applicable covenants and U.K. and Hong Kong capital requirements.
Changes and business drivers
- Net revenues fell 29.8%, with investment banking down 35.0%. Advisory revenue declined 24.3%, corporate financing 65.5%, and municipal financing 34.4%, reflecting fewer completed deals, subdued equity issuance, higher rates, and weaker municipal issuance and investor demand.
- Equity brokerage revenue rose 36.5% to $210.3 million, benefiting from Cornerstone Macro and elevated market volatility. Fixed-income services revenue fell 16.5% to $195.0 million as client activity, especially among depository clients, weakened.
- Investment income was essentially breakeven in 2022, compared with $94.0 million in 2021; adjusted investment income was $1.6 million versus $35.0 million. Higher interest rates increased interest income to $20.4 million from $7.0 million.
- Total non-interest expenses declined 18.8% to $1.291 billion, mainly with lower compensation, but the compensation ratio rose to 69.0% from 64.3%. Non-compensation expenses increased 8.2%, including higher travel, occupancy, communications, and acquisition-related costs.
- The firm acquired Cornerstone Macro, Stamford Partners, and DBO Partners during 2022, expanding research, European food and beverage advisory, and technology investment banking. Corporate investment banking managing directors increased 7.4% to 159.
Outlook, risks, and notable items
- Management gave no quantified earnings or revenue guidance. It cited heightened recession risk, persistent inflation, higher interest rates, geopolitical uncertainty, and an uncertain outlook for converting its investment banking pipeline.
- Management expects equity capital markets activity could increase in 2023 from depressed 2022 levels, but says timing and conversion remain uncertain. It anticipates potentially more fixed-income client activity than in the second half of 2022, while expecting continued challenges for municipal refinancing and issuance.
- The board’s dividend policy targets returning 30%–50% of fiscal-year adjusted net income, but dividends are discretionary. Including the $1.25-per-share special dividend declared for payment in March 2023, the company said its 2022 shareholder return would total $3.65 per share, about 32% of adjusted net income. It repurchased $161.8 million of shares under authorizations during 2022 and had $138.2 million remaining under its newer authorization at year-end.
- The SEC is investigating the company’s recordkeeping for business communications sent over unapproved electronic messaging channels. Piper Sandler is cooperating; no loss accrual was recorded because the matter was not then considered probable or reasonably estimable. Management said reasonably possible losses above legal accruals were not material overall.
- Other exposures include cyclical deal activity, market and interest-rate volatility, competition for talent, cyber and operational risks, fair-value estimation for private investments, and counterparty and funding concentration. The company reported $96.3 million in investment commitments and $10.8 million of uncollateralized derivative counterparty credit exposure.
- The 2022 tax provision included a $4.6 million benefit from reversing a U.K. deferred-tax valuation allowance and a $5.6 million benefit related to vesting stock awards. No goodwill or intangible-asset impairment was recorded.
Investor verification priorities
- Verify the durability of advisory and capital-markets pipelines and whether subdued equity and municipal issuance improves.
- Assess the effect of lower deal revenues, elevated compensation ratios, and acquisition-related costs on margins and earnings.
- Review cash conversion and liquidity after incentive compensation payments, dividends, buybacks, acquisitions, and the October 2023 note maturity; consider reliance on uncommitted funding.
- Monitor the SEC electronic-communications recordkeeping investigation and any later estimate, accrual, or resolution.
- Evaluate private-investment valuations: $191.8 million of investments were classified as Level III, involving significant unobservable inputs.
- Confirm the terms and funding implications of the 2023 note maturity, new Minneapolis headquarters lease, acquisition earnouts, and remaining share-repurchase authorization.