Business Context and Reporting Period
Company: Piper Jaffray Companies (Piper Jaffray)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2008
Business Overview: The Company provides investment banking, institutional brokerage, and asset management services to middle-market companies, private equity groups, and institutional investors in the U.S., Europe, and Asia. The Company operates as one reporting segment. In 2007, it acquired Fiduciary Asset Management (FAMCO) and Goldbond Capital Holdings, which contributed to 2008 results. The Company previously exited its Private Client Services (PCS) business in 2006, with related results reported as discontinued operations.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2008 |
Six Months Ended June 30, 2008 |
|---|---|---|
| Net Revenues | $94.9 million | $190.6 million |
| Net Income/(Loss) | $(3.6) million | $(7.1) million |
| Net Income/(Loss) from Continuing Ops | $(5.1) million | $(8.5) million |
| Earnings Per Share (Basic) | $(0.23) | $(0.44) |
| Cash and Cash Equivalents | $33.2 million (as of June 30, 2008) | N/A |
| Total Assets | $1.62 billion (as of June 30, 2008) | N/A |
| Short-term Bank Financing | $161.5 million (as of June 30, 2008) | N/A |
| Net Capital (SEC Rule) | $246.2 million (as of June 30, 2008) | N/A |
Material Changes vs. Prior Comparable Period
- Revenue Decline: Net revenues from continuing operations decreased 22.6% for the quarter and 26.5% for the six months ended June 30, 2008, compared to the prior year periods.
- Investment Banking: Revenues dropped significantly, down 57.0% for the quarter and 44.9% for the six months. This was primarily driven by a collapse in equity financing activity (down 78.3% for the quarter) due to challenging market conditions and a freeze in the IPO market.
- Institutional Brokerage: Revenues increased 32.6% for the quarter but were essentially flat for the six months. The quarterly increase was due to higher U.S. equity and municipal revenues, partially offset by lower high-yield and structured product revenues.
- Asset Management: Revenues surged to $4.7 million for the quarter (from $0.1 million in 2007) and $8.7 million for the six months, largely due to the 2007 acquisition of FAMCO.
- Profitability: The Company reported a net loss from continuing operations of $5.1 million for the quarter and $8.5 million for the six months, compared to net income of $10.4 million and $25.1 million, respectively, in the prior year periods.
- Expenses: Non-interest expenses increased slightly for the quarter (1.7%) but decreased for the six months (5.6%). Compensation expenses declined due to lower revenues, but were offset by increased litigation-related expenses and costs associated with uncompleted deals.
Guidance, Outlook, Risks, and Unusual Items
- Outlook: Management anticipates challenging market conditions to persist through the remainder of 2008. Equity financing activity is expected to remain depressed, and no near-term improvement is seen in the high-yield market. Continued volatility and recession fears are expected to adversely impact results.
- Liquidity and Capital: The Company maintains a strong liquidity position with $33.2 million in cash and $246.2 million in net capital, significantly exceeding regulatory minimums. However, the Company has increased short-term bank financing to $161.5 million to fund inventory and operations. A $600 million revolving credit facility was established in February 2008, with $13.5 million drawn as of June 30, 2008.
- Market Risk (Level III Assets): The Company holds $189.2 million in Level III assets (low pricing observability), including $85.0 million in auction-rate municipal securities. The Company has been working to restructure these securities as the market has ceased to function. Trading losses exceeded the 95% one-day Value-at-Risk (VaR) on three occasions during the second quarter.
- Legal Contingencies: The Company has established reserves of $7.0 million for legal proceedings. It is subject to indemnification obligations to UBS regarding the sold PCS business, having exceeded the $6.0 million threshold for indemnification costs. U.S. Bancorp has agreed to indemnify the Company up to $17.5 million for certain matters, with $12.8 million remaining available.
- Discontinued Operations: Recorded a net income of $1.4 million for the quarter and six months, primarily due to a litigation settlement related to the former PCS business.
Investor Verification Checklist
- Equity Financing Pipeline: Verify the current status of the IPO market and the Company's specific pipeline for middle-market equity financings, given the 78% drop in this revenue stream.
- Auction-Rate Securities Exposure: Confirm the current valuation and liquidity status of the $85 million in auction-rate municipal securities held in inventory and the progress of restructuring efforts.
- Level III Asset Valuations: Review the specific assumptions used to value the $189.2 million in Level III assets, particularly given the lack of observable market prices.
- Legal Reserve Adequacy: Assess the sufficiency of the $7.0 million legal reserve against pending litigation, including the potential for costs exceeding the U.S. Bancorp indemnity cap.
- Compensation Ratio: Monitor the compensation-to-revenue ratio, which rose to 69.4% in the second quarter, and its impact on future profitability as revenues remain under pressure.