Piper Sandler Companies — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. Comparisons are with Q1 2019 unless otherwise stated. Piper Sandler provides investment banking and institutional brokerage services and reports one business segment.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net revenues | $236.2 million | $182.5 million |
| Investment banking revenue | $159.0 million | $141.1 million |
| Institutional brokerage revenue | $89.1 million | $35.0 million |
| Investment income/(loss) | $(13.8) million | $1.6 million |
| Non-interest expenses | $270.2 million | $159.4 million |
| Pre-tax income/(loss) | $(34.0) million | $23.1 million |
| Net income/(loss) attributable to Piper Sandler | $(14.7) million | $19.4 million |
| Diluted EPS | $(1.07) | $1.32 |
- Net revenues rose 29.4%, reflecting the Sandler O’Neill and Weeden acquisitions and unusually strong brokerage activity amid market volatility. Investment banking increased 12.7%; institutional brokerage increased 154.9%.
- Investment banking included advisory revenue of $111.2 million, down 3.2%, while corporate financing rose to $25.2 million and municipal financing to $22.6 million. Management said March volatility curtailed capital raising and reduced deal activity.
- Expenses increased faster than revenue, with compensation up 60.6% and non-compensation expenses up 94.1%. The GAAP pre-tax margin was negative 14.4%, versus 12.7% a year earlier.
- Management’s non-GAAP adjusted results excluded specified acquisition, amortization, noncontrolling-interest and senior-note items. Adjusted net revenues were $244.9 million, adjusted net income attributable to Piper Sandler was $25.4 million, adjusted diluted EPS was $1.48, and adjusted pre-tax margin was 11.8% (versus 14.8% in Q1 2019). These are non-GAAP measures, not substitutes for GAAP results.
Cash flow, balance sheet and capital
- Operating cash flow was $237.6 million; investing cash flow was $(373.7) million, including $371.4 million for acquisitions; financing cash flow was $15.4 million. Cash decreased $121.4 million to $128.6 million during the quarter.
- At March 31, total assets were $1.52 billion, total liabilities $721.8 million and shareholders’ equity $796.1 million. The filing reports a GAAP leverage ratio of 1.9x and an adjusted leverage ratio of 2.7x; adjusted leverage is non-GAAP.
- Short-term financing was $100.0 million, comprising $50.0 million commercial paper and $50.0 million drawn on the unsecured revolving facility. Senior notes totaled $175.0 million, with fixed coupons of 4.74% and 5.20% and maturities in 2021 and 2023. The company also reported $205.9 million financed through its Pershing clearing arrangement and $91.7 million through its prime broker arrangement.
- Regulatory net capital was $190.8 million, $189.8 million above the SEC minimum. The company reported compliance with its debt covenants at quarter-end. Its $125 million secured committed line was undrawn.
- Q1 dividends paid totaled $16.1 million: $0.375 per share quarterly and $0.75 special. On May 1, the board declared a lower $0.20-per-share dividend, citing capital prudence and balance-sheet flexibility amid uncertainty.
Material changes, outlook and risks
- Acquisitions: Sandler O’Neill closed January 3 for a stated purchase price of $485 million, adding goodwill of $94.2 million and intangible assets of $157.6 million. Weeden & Co. had been acquired in August 2019. The Valence Group acquisition closed April 3, after quarter-end; its consideration included cash, restricted stock and a note, with possible additional revenue-based consideration.
- Unusual costs and items: Q1 included $9.9 million of intangible amortization, $1.9 million of restructuring and integration costs, and substantial acquisition-related compensation. The company accrued $18.5 million for the Weeden earnout and recorded $17.6 million of related non-interest expense; this included a $12.1 million fair-value adjustment for non-employee owners. A $5.7 million tax benefit related primarily to the CARES Act contributed $0.41 to Q1 earnings per diluted share.
- COVID-19 outlook: Management said the duration and severity of the economic and market downturn were uncertain. It expected advisory revenue to decline significantly, corporate capital raising to remain subdued until markets stabilized, and brokerage revenue to remain strong but below Q1’s elevated levels. Municipal and fixed-income activity was also expected to ease from Q1 levels. The company gave no numerical earnings or revenue guidance.
- Liquidity and market risks: Management described capital and liquidity as strong at quarter-end but warned that market access, funding costs, covenant compliance, dividends and repurchases could be affected by prolonged disruption. Market dislocations can impair inventory liquidity and hedging effectiveness. Trading losses exceeded one-day VaR on 12 occasions in Q1; quarter-end VaR was $514,000.
- Counterparty and legal exposures: Uncollateralized derivative credit exposure was $27.3 million, including $23.2 million with one counterparty. The company said reasonably possible legal losses above recorded reserves were not material, while noting outcomes and estimates remain uncertain.
Important facts for investors to verify
- Whether acquisition-related compensation, earnout charges and integration costs continue at the Q1 level, and how these affect GAAP versus adjusted profitability.
- Whether advisory, corporate financing and municipal issuance recover, and whether brokerage activity can offset any decline.
- How investment valuations and municipal-market dislocations affect reported investment results, inventory and liquidity.
- Available funding under clearing and broker arrangements, covenant headroom, regulatory capital and the impact of the Valence acquisition.
- Whether the reduced $0.20 quarterly dividend and share-repurchase authorization remain appropriate as COVID-19 effects evolve.