Piper Jaffray Companies (proposed future name: Piper Sandler Companies) — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. The filing was submitted under the name Piper Jaffray Companies. The company operated one reportable segment, Capital Markets, providing investment banking and institutional brokerage services. Traditional asset-management subsidiary Advisory Research, Inc. (ARI) was classified as held for sale and reported as discontinued operations.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Net revenues from continuing operations | $172.4 million | $162.4 million | $355.0 million | $320.2 million |
| Continuing-operations pretax income | $20.9 million | $4.9 million | $44.1 million | $13.0 million |
| Income from continuing operations | $21.1 million | $4.3 million | $40.1 million | $15.0 million |
| Net income attributable to Piper Jaffray Companies | $10.4 million | $6.2 million | $29.8 million | $16.8 million |
| Diluted EPS, including discontinued operations | $0.72 | $0.43 | $2.02 | $0.94 |
| Adjusted diluted EPS (non-GAAP) | $1.32 | $0.82 | $2.83 | $2.13 |
- Q2 GAAP net revenues increased 6.2%; first-half net revenues increased 10.8%. Q2 adjusted net revenues were essentially flat at $162.8 million; first-half adjusted net revenues rose 7.9% to $344.9 million.
- GAAP pretax margin was 12.1% in Q2 versus 3.0% a year earlier; adjusted pretax margin was 12.8% versus 9.3%. First-half GAAP and adjusted pretax margins were 12.4% and 13.9%, respectively, compared with 4.1% and 10.9%.
- Q2 investment banking revenue was $118.7 million, down 4.2%, as lower equity financing outweighed higher debt financing. Institutional brokerage revenue was $32.2 million, down 2.8%, as fixed-income gains were offset by weaker equities. Investment income rose to $17.6 million from $2.2 million, reflecting higher merchant-banking fund gains, including amounts attributable to noncontrolling interests.
- For the first half, advisory-services revenue increased 24.6% to $190.1 million and debt financing increased 27.5% to $31.3 million; equity financing fell 41.9% to $39.3 million. Fixed-income institutional brokerage improved, while equity brokerage declined.
- Q2 compensation and benefits fell 6.2% to $102.5 million, including lower acquisition-related compensation. First-half non-interest expenses increased 1.2% to $310.9 million, with higher restructuring and integration costs.
Cash flow, balance sheet and liquidity
- Operating cash flow was $44.2 million for the first half, down from $292.6 million in 2018. Investing activities used $3.1 million; financing activities used $68.2 million, including $25.2 million of dividends and $50.2 million of share purchases, primarily shares withheld or repurchased for employee tax obligations.
- Cash and cash equivalents were $23.4 million at June 30, 2019, versus $50.4 million at December 31, 2018. Total assets were $1.206 billion and total shareholders’ equity was $725.8 million. Reported leverage was 1.7x and adjusted leverage 1.8x, both lower than year-end.
- Short-term financing was $50.0 million, consisting of commercial paper. The company also reported $82.1 million of financing through its Pershing clearing arrangement and $72.6 million through a prime-broker arrangement. Its $175 million revolving credit facility had no advances outstanding at quarter-end and was due December 13, 2019.
- Broker-dealer net capital was $197.8 million, exceeding the SEC minimum by $196.8 million. Certain financing and clearing arrangements require higher capital thresholds. Funding through Pershing and prime brokers is collateral-dependent and may be reduced or denied; the company also noted that it had no credit rating.
- The company adopted lease accounting on January 1, 2019, recognizing a $44.0 million right-of-use asset and $59.0 million lease liability at adoption. At June 30, the reported right-of-use asset was $42.0 million and accrued lease liability was $56.0 million.
Material changes, outlook and notable items
- ARI sale: Agreements were signed to sell ARI’s MLP and energy-infrastructure strategies to Tortoise Capital Advisors and its remaining equity strategies to an existing management team. The transactions remained subject to closing conditions, including client consents. ARI recorded a $2.9 million trade-name impairment; discontinued operations produced a Q2 after-tax loss of $2.2 million.
- Acquisitions: Weeden & Co. was scheduled to close August 2, 2019, for approximately $34.5 million, with up to $31.5 million of additional consideration tied to revenue targets. The company signed a July 9 agreement to acquire Sandler O’Neill for $485 million of consideration, including $350 million cash and $135 million primarily in restricted stock, plus $115 million of retention awards. Closing was expected in early Q1 2020, subject to approvals and other conditions. Management expected to use operating cash flows and ARI sale proceeds and raise approximately $150 million of debt for part of the Sandler cash consideration.
- Q2 included $6.4 million of acquisition-related restructuring and integration costs; management expected additional such costs in the second half of 2019. The company also accrued $40.1 million for a Simmons acquisition-related performance award, expected to be paid in August 2019.
- Management expected moderate U.S. economic growth for the remainder of 2019, while citing trade-policy uncertainty, Brexit, global economic deceleration and potential market volatility. It described advisory and equity-capital-raising pipelines as strong, with advisory activity expected to be more weighted to the second half. Equity-market volatility or a material correction could hurt advisory and equity-raising activity. Low rates and a flat yield curve were expected to persist; municipal issuance was expected to be similar to 2018.
- Market, liquidity, credit, operational, human-capital, legal and regulatory risks remain relevant. The company reported $18.3 million of uncollateralized derivative credit exposure, including $16.0 million with one counterparty. Trading losses exceeded one-day VaR on three occasions in the first half. Management stated that reasonably possible legal losses above accrued reserves were not material, while noting that outcomes and estimates remain uncertain.
- The board declared a $0.375-per-share dividend on July 26, payable September 13, 2019. Q2 results also benefited from a $3.5 million tax benefit related to stock-based award vesting; management estimated this increased Q2 diluted EPS by $0.24.
Important facts for investors to verify
- Progress, client consents and closing terms for the two ARI sales, and the proceeds ultimately available to fund strategic plans.
- Completion, financing and integration costs for Weeden & Co. and Sandler O’Neill, including the planned debt financing and retention awards.
- How much of the reported earnings growth reflects recurring Capital Markets performance versus investment gains, noncontrolling interests, tax benefits and acquisition-related adjustments.
- Liquidity and collateral availability under Pershing, prime-broker and commercial-paper arrangements, alongside the company’s cash levels and capital covenants.
- Developments in the concentrated uncollateralized derivative exposure, legal proceedings and market conditions affecting advisory, equity-financing and brokerage revenues.