Piper Jaffray Companies — Q1 2017 Form 10-Q
Business context and period. The filing is for the three months ended March 31, 2017, compared with the three months ended March 31, 2016. The issuer identifies itself as Piper Jaffray Companies and reports two segments: Capital Markets and Asset Management.
Financial performance and position
- Revenue and earnings: Net revenues were $200.5 million, up 30.6% from $153.6 million. Net income attributable to Piper Jaffray was $20.3 million, versus $2.4 million; diluted EPS was $1.31, versus $0.16. Results included a $7.0 million stock-compensation tax benefit, which management said added $0.45 to diluted EPS.
- Revenue drivers: Investment banking revenue rose 27.2% to $132.3 million; institutional brokerage rose 22.1% to $39.1 million; asset-management revenue rose 15.6% to $16.0 million. Investment income increased to $10.4 million from $0.9 million, reflecting higher investment gains.
- Expenses and margins: Non-interest expenses increased 18.4% to $177.7 million, while compensation and benefits rose 28.7% to $134.4 million. Pre-tax operating margin improved to 11.4% from 2.2%. The prior-year quarter included $6.8 million of restructuring and integration costs; none were recorded in Q1 2017. Adjusted diluted EPS, a non-GAAP measure, was $1.77 versus $0.70.
- Segments: Capital Markets pre-tax income was $22.2 million, versus $2.8 million, with an 11.9% margin versus 2.0%. Asset Management pre-tax income was $0.6 million, versus $0.6 million, and its margin declined to 4.1% from 5.4%. Assets under management ended at $8.76 billion, up from $7.51 billion a year earlier; quarterly net outflows were $164 million, partly offset by $195 million of market appreciation.
- Cash flow: Operating activities provided $139.8 million, compared with $74.3 million used in Q1 2016. Financing activities used $160.7 million, including a $121.7 million reduction in short-term financing, $19.8 million of share repurchases and a $4.7 million dividend payment. Cash and cash equivalents fell $22.5 million during the quarter to $18.9 million; regulatory-segregated cash was $53.0 million.
- Debt and liquidity: Short-term financing was $297.1 million at quarter-end, down from $418.8 million at December 31, 2016; senior notes remained $175.0 million. The $50 million variable-rate Class A Notes mature May 31, 2017; management said it was considering options, including repayment. The $125 million fixed-rate Class C Notes mature in October 2018. The company reported $208.4 million of broker-dealer net capital, $207.4 million above the SEC minimum, and compliance with debt covenants. Total shareholders’ equity was $822.0 million; reported leverage was 2.6x and adjusted leverage 3.3x.
Changes, outlook and risks
- Management attributed stronger results mainly to advisory services, equity financing, fixed-income brokerage and investment gains. It noted lower municipal refunding activity as rates rose and constrained customer trading flow amid uncertainty about tax policy, interest rates and economic growth.
- Management expected generally constructive equity-market conditions and steady capital raising if the economic outlook held, but cautioned that volatility or a market correction could weaken equity financing and advisory activity. It expected municipal underwriting activity to decline from 2016 record levels and identified the shift from active to passive investing as a concern for Asset Management.
- The company expected to complete its transition from self-clearing to a fully disclosed clearing model in the second half of 2017. It estimated total conversion costs of approximately $3.0 million across 2016–2017 and anticipated lower trade-clearing expenses afterward; conversion execution could cause disruption or unexpected charges.
- Key risks include market and liquidity volatility, financing availability and collateral requirements, counterparty credit risk, trading and valuation risk, and legal, regulatory and operational risks. Uncollateralized derivative credit exposure was $22.1 million, including $15.1 million to one counterparty. The company disclosed pending legal and regulatory matters; it said reasonably possible losses above recorded reserves were not material, while noting that outcomes and estimates remain uncertain.
- The quarter’s results also reflect adoption of new stock-compensation accounting, which moved tax effects of vested awards into the income statement. The $7.0 million benefit may vary in future periods. No specific earnings guidance was provided.
Important facts for investors to verify
- Whether operating performance remains strong after excluding the $7.0 million tax benefit and volatile investment gains; compare GAAP and adjusted results.
- How the May 2017 Class A Notes were addressed and whether committed and discretionary short-term funding remains available on acceptable terms.
- Progress, final costs and realized expense savings from the clearing-model conversion.
- Asset-management flows, fee yields and performance, particularly continued equity-strategy outflows and growth in MLP assets.
- Developments in legal or regulatory matters, derivative counterparty exposure, and the market conditions underlying management’s outlook.