Filing summary
Issuer and period: The supplied filing is Piper Jaffray Companies’ Form 10-K for the fiscal year ended December 31, 2012, filed February 27, 2013. The request metadata says “Piper Sandler Companies,” but the filing identifies the issuer as Piper Jaffray Companies (NYSE: PJC); verify the intended issuer.
Business context
The firm operated through Capital Markets, including investment banking and institutional sales and trading, and Asset Management. Its businesses were sensitive to capital-markets activity, trading conditions, interest rates, and assets under management. The 2012 results exclude Hong Kong capital markets and FAMCO, which were reported as discontinued operations.
Financial performance
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Total revenues | $518.2 million | $463.7 million |
| Net revenues | $489.0 million | $432.1 million |
| Income (loss) from continuing operations | $49.5 million | $(89.3) million |
| Net income (loss) attributable to Piper Jaffray Companies | $41.3 million | $(102.0) million |
| Diluted EPS | $2.26 | $(6.51) |
| Cash and cash equivalents at year-end | $105.4 million | $85.0 million |
| Total assets | $2.09 billion | $1.66 billion |
| Variable-rate senior notes | $125 million | None outstanding at year-end |
FY 2011 included a $120.3 million non-cash Capital Markets goodwill impairment. Excluding that charge, 2011 continuing-operations income attributable to the company was $27.7 million, or $1.44 per diluted share. FY 2012 pre-tax income from continuing operations was $69.0 million; the pre-tax margin was 14.1% of net revenues. Compensation and benefits were $296.9 million, or 60.7% of net revenues.
Revenue drivers: Investment banking revenue increased 15% to $230.9 million, led by debt financing and advisory services. Institutional brokerage increased 26% to $172.0 million, principally on stronger fixed-income strategic trading. Asset management revenue rose 3% to $65.2 million; performance fees fell to $0.8 million from $2.2 million. AUM increased to $9.1 billion from $8.6 billion, with value-equity outflows partly offset by MLP inflows and market appreciation.
Cash flow, debt and liquidity
- Operating activities used $211.8 million of cash in 2012, primarily reflecting increased inventory positions; investing activities used $2.1 million, and financing activities provided $234.3 million. Cash increased $20.3 million for the year.
- Short-term financing was $477.0 million at year-end, including $304.4 million of secured commercial paper and $172.6 million under a prime-broker arrangement. The firm also had a $250 million committed secured credit facility with no year-end borrowings, plus discretionary uncommitted lines.
- In November 2012, the company issued $125 million of unsecured variable-rate notes and used proceeds to repay its bank syndicated financing. The notes mature in May 2014 ($50 million) and November 2015 ($75 million); financial covenants applied, and the company reported compliance at year-end.
- Broker-dealer regulatory net capital was $178.9 million, $177.9 million above the SEC minimum. The firm reported leverage of 2.6x and adjusted leverage of 3.4x, both higher than in 2011 as inventory grew.
Material changes, outlook and risks
- Hong Kong capital-markets operations ceased September 30, 2012; related discontinued operations recorded a $0.4 million after-tax loss for the year, alongside a $21.1 million U.S. tax benefit from the realized investment loss. FAMCO was classified as held for sale, and its goodwill was fully impaired with a $5.5 million non-cash charge. The company said a FAMCO sale was expected within one year.
- Management expected a gradual economic recovery in 2013 and potentially improving capital-markets activity, but gave no quantified earnings or revenue guidance. It anticipated historically low interest rates and noted that strong 2012 fixed-income strategic-trading revenue could vary substantially by period. Management also cautioned that fourth-quarter advisory activity may have been accelerated ahead of expected tax increases.
- Key risks include market and interest-rate volatility, inventory valuation and liquidity, reliance on short-term and partly uncommitted funding, counterparty exposure, dependence on key employees and clients, regulatory change, and the cyclical and transaction-dependent nature of investment banking. Level III assets were $152.3 million at year-end, up from $80.6 million.
- DOJ, SEC and state authorities were investigating alleged antitrust and securities violations involving municipal derivatives, with related class and individual litigation. Management considered a material loss reasonably possible but said it could not estimate a loss range; no reserve was recorded for this matter.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls were effective.
Most important facts to verify
- Confirm issuer identity: the filing is for Piper Jaffray Companies, not Piper Sandler Companies.
- Review the composition, liquidity, and valuation sensitivity of the expanded securities inventory and Level III positions, particularly asset-backed securities.
- Assess funding concentration and rollover exposure in commercial paper and prime-broker financing, alongside note covenants and maturities.
- Track progress and terms of the FAMCO sale and any remaining costs or effects from the Hong Kong exit.
- Monitor developments in the municipal-derivatives investigations and litigation, for which potential losses were not estimable in the filing.