Piper Sandler Companies — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020; unaudited. Piper Sandler is an investment banking and institutional securities firm operating as one reportable segment.
Financial performance and position
- Q2 revenue: Net revenues were $292.4 million, up 69.6% year over year. Investment banking revenue was $199.8 million (+68.3%) and institutional brokerage revenue was $89.3 million (+177.4%). Corporate financing revenue reached a record $83.4 million.
- Q2 earnings and margins: Net income attributable to Piper Sandler was $1.5 million, or $0.10 per diluted share, versus $10.4 million, or $0.72, a year earlier. GAAP pretax margin was 2.5%, down from 12.1%; adjusted non-GAAP pretax margin was 17.7%, up from 12.8%. Adjusted diluted EPS was $1.93, versus $1.32.
- First-half results: Net revenues increased 48.9% to $528.6 million, while the company reported a $13.3 million attributable net loss, or $0.96 per diluted share, compared with $29.8 million net income and $2.02 EPS in H1 2019. GAAP pretax margin was negative 5.0%, versus 12.4%; adjusted margin was 15.0%, versus 13.9%. Adjusted diluted EPS was $3.35, versus $2.83.
- Expense and investment items: Q2 compensation and benefits rose 108.4% to $213.6 million, partly reflecting acquired businesses and acquisition-related awards. H1 compensation rose 82.9% to $401.7 million. H1 investment results were a $10.1 million loss versus $19.2 million income a year earlier, primarily reflecting unrealized losses in merchant banking investments and related noncontrolling interests.
- Cash flow and liquidity: H1 operating cash flow was $374.3 million; investing cash outflow was $400.1 million, including $393.5 million for acquisitions. Cash and cash equivalents were $235.9 million at June 30, versus $250.0 million at year-end 2019.
- Debt and capital: Short-term financing was $100.0 million and long-term financing $195.0 million, for $295.0 million total, versus $225.0 million at year-end. Regulatory net capital was $153.4 million, $152.4 million above the SEC minimum; financing and clearing arrangements impose higher covenant thresholds, including $120 million minimums.
- Balance sheet: Total assets were $1.71 billion and shareholders’ equity $813.7 million. Adjusted leverage was 3.2x, compared with 2.2x at year-end, primarily due to acquisition-related goodwill and intangibles.
Material changes versus prior periods
- Results reflect the January 2020 acquisition of Sandler O’Neill and April 2020 acquisition of Valence, alongside the 2019 Weeden acquisition. The additions expanded advisory, corporate financing, fixed-income and equity brokerage capabilities.
- Revenue growth was strongest in corporate financing and institutional brokerage. However, higher compensation, acquisition-related awards, amortization and other acquisition costs weighed on GAAP earnings and margins.
- First-half acquisition-related costs included $57.2 million of compensation adjustments, $21.5 million of acquired-intangible amortization, $5.6 million of restructuring and integration costs, and a $12.1 million non-compensation adjustment related to the Weeden earnout.
- Weeden earnout expense increased with the company’s expectation that the revenue target would be achieved; the filing reports $20.7 million accrued at June 30 and an expectation that the maximum earnout will be earned.
Outlook, risks and unusual items
- Management expected advisory revenue in H2 2020 to be below Q2 levels as COVID-19 uncertainty delayed or paused deals. Corporate capital-raising activity was expected to continue if market conditions remained favorable.
- Management expected equity brokerage revenue to decline from H1 levels as volatility subsided and seasonal trading slowed. Fixed-income activity was expected to remain strong; public finance revenue was expected to moderate in Q3.
- Management described capital and liquidity as strong and leverage as low, while emphasizing prudent capital allocation. The July 31 quarterly dividend was set at $0.30 per share, below 2019 quarterly payouts; the company also repaid $25 million of its revolving credit facility early in Q3.
- COVID-19, economic conditions, market volatility, funding availability, inventory liquidity and covenant compliance could affect results and liquidity. Management cautioned that actual effects and duration remained uncertain.
- Derivative counterparty credit exposure without collateral was $27.5 million, including $23.2 million with one counterparty. Trading losses exceeded one-day VaR on 17 occasions in H1; VaR is not a cap on potential losses.
- The company reported ongoing litigation and regulatory matters; reasonably possible losses above accruals were described as not material, though outcomes and estimates remain uncertain. Management expected additional restructuring and integration costs in Q3.
Investor verification points
- Reconcile GAAP losses and margins with adjusted results, noting the substantial acquisition-related exclusions and the additional shares used in adjusted diluted EPS.
- Track whether the Weeden earnout is achieved and paid, and whether acquisition synergies and integration benefits offset continuing compensation and amortization costs.
- Monitor H2 advisory, equity brokerage, fixed-income and municipal financing activity against management’s outlook and the evolving COVID-19 environment.
- Review liquidity sources, covenant headroom, regulatory capital and the effect of dividends or repurchases, particularly if markets or funding conditions weaken.
- Assess the valuation sensitivity of investment holdings and the concentration of uncollateralized derivative exposure.