Piper Jaffray Companies — Q1 2015 Form 10-Q
Business context and reporting period. The filing is for the three months ended March 31, 2015, and presents unaudited results. The registrant is named Piper Jaffray Companies in the filing; the request’s “Piper Sandler” name does not match the filing-era registrant name. The firm operates Capital Markets and Asset Management businesses.
Financial performance
- Revenue: Total revenue was $168.4 million, down 3.1% year over year. Net revenue was $161.9 million, down 3.7%. Investment banking revenue was $87.1 million; institutional brokerage $36.0 million; asset management $20.5 million; and investment income $12.6 million.
- Profit and margins: Pre-tax income was $31.3 million, down 4.3%; net income was $21.8 million, versus $22.9 million. Net income attributable to Piper Jaffray was $17.0 million, versus $17.7 million. Basic and diluted EPS were $1.03, down from $1.10. Pre-tax margin on net revenue was 19.3%, compared with 19.5%; compensation was 59.2% of net revenue versus 59.8%.
- Segment results: Capital Markets pre-tax income was $26.0 million, versus $27.5 million, with an 18.3% margin versus 18.5%. Asset Management pre-tax income was $5.3 million, versus $5.2 million, with a 27.0% margin versus 26.4%.
- Cash flow: Operating cash flow was negative $175.1 million, compared with negative $47.0 million in Q1 2014. Investing cash flow was negative $1.9 million; financing cash flow was positive $170.8 million. Cash and cash equivalents ended the quarter at $9.4 million, excluding $27.0 million segregated for regulatory purposes.
- Balance sheet and liquidity: Total assets were $2.92 billion and total shareholders’ equity $987.1 million at quarter-end. Short-term financing was $517.5 million, up from $377.8 million at year-end; variable-rate senior notes were $125 million. Reported leverage was 3.0x, up from 2.7x; adjusted leverage was 3.9x, up from 3.6x. Broker-dealer net capital was $148.9 million, $147.9 million above the SEC minimum.
Material changes versus the prior-year quarter
- Lower advisory and institutional brokerage revenue offset higher debt financing revenue and investment gains. Advisory services fell 26.3%; institutional sales and trading fell 19.0% on a segment basis. Debt financing revenue rose 60.6%.
- Investment income increased to $12.6 million from $6.8 million, reflecting higher gains on firm investments. Net interest income fell 28.5% to $5.6 million, attributed to lower income on merchant-banking-related investments and increased hedging-related interest expense.
- Non-interest expenses declined 3.6% to $130.6 million, primarily due to lower variable compensation. Compensation expense included $13.8 million of stock-based compensation, versus $5.3 million.
- Total assets and short-term financing increased from December 31, 2014. The company repurchased $32.7 million of shares under its authorization during the quarter and had $67.3 million remaining; it also bought $9.9 million of shares for employee tax withholding.
- Asset Management AUM was $11.4 billion, down from $11.5 billion at year-end. Value equity saw $311 million of quarterly net outflows, partly offset by market appreciation; MLP strategies recorded $182 million of net inflows.
Outlook, risks, and unusual items
- Management expected U.S. economic growth to strengthen in 2015 and anticipated higher municipal debt underwriting than in 2014, while noting refinancing activity depends on interest rates. It expected equity-market conditions to be generally supportive if the economy strengthened, but acknowledged possible corrections and that sustained declines could disrupt capital raising. No numerical earnings or revenue guidance was provided.
- Management highlighted sensitivity to market activity, interest rates, credit spreads, trading liquidity, asset valuations, client flows, and economic or geopolitical shocks. It noted reduced liquidity in fixed-income markets and said actual results may fluctuate materially between periods.
- Trading losses exceeded the one-day VaR measure on three occasions in Q1. Quarter-end VaR was $957,000, compared with $846,000 at year-end. Management cautioned that actual losses can exceed VaR estimates.
- Uncollateralized derivative credit exposure was $27.6 million across counterparties, including $18.4 million with one counterparty. The firm also had $42.2 million of investment commitments and no outstanding loan commitments.
- The company disclosed various legal, arbitration, regulatory, and investigative matters. Management believed, based on current information and reserves, that pending matters would not have a material adverse effect, but stated losses beyond reserves could materially affect results or cash flows.
- The $125 million senior notes include $75 million of Class B notes maturing November 30, 2015; the company reported covenant compliance at quarter-end. Its $250 million committed credit facility was due December 18, 2015. Most other short-term funding is collateralized; some bank lines and the prime-broker facility are discretionary or subject to collateral availability.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing provided no clear numerical full-year earnings outlook.
Key facts for investors to verify
- Whether weaker advisory and institutional brokerage activity persists, and whether higher debt underwriting and investment gains continue to offset it.
- Cash-flow drivers and funding needs, including the sharp quarterly operating cash outflow, rising short-term financing, and February incentive-compensation payments.
- Refinancing or repayment plans for the $75 million Class B notes maturing in November 2015 and the committed facility due in December 2015; monitor covenant headroom and collateral availability.
- Changes in derivative counterparty exposure, trading VaR and losses, fixed-income market liquidity, and Level III asset valuations.
- Asset-management client flows, AUM and investment performance, alongside developments in legal and regulatory matters and the remaining share-repurchase authorization.