Piper Sandler Companies — Q1 2023 Form 10-Q
Business and period: The company provides investment banking and institutional brokerage services through one reportable segment. This summary covers the unaudited quarter ended March 31, 2023, compared with the quarter ended March 31, 2022, unless otherwise noted.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenues | $300.5 million | $352.8 million | Down 14.8% |
| Net revenues | $297.9 million | $350.6 million | Down 15.0% |
| Investment banking revenue | $184.4 million | $257.5 million | Down 28.4% |
| Institutional brokerage revenue | $96.3 million | $104.6 million | Down 7.9% |
| Income before tax | $25.8 million | $35.6 million | Down 27.6% |
| Net income attributable to Piper Sandler | $25.6 million | $36.7 million | Down 30.1% |
| Diluted EPS | $1.49 | $2.12 | Down 29.7% |
| GAAP pre-tax margin | 8.7% | 10.2% | Down 1.5 percentage points |
Adjusted, non-GAAP diluted EPS was $2.35 versus $3.12, and adjusted operating margin was 14.1% versus 20.8%. The filing defines these measures by excluding specified noncontrolling-interest, acquisition-related, and financing items; they supplement rather than replace GAAP results.
Investment banking weakness reflected lower advisory and municipal financing revenue, partly offset by stronger corporate financing. Equity brokerage rose 8.1%, benefiting from market-share gains and the Cornerstone Macro acquisition, while fixed income services fell 22.4% amid weaker client activity. Investment income swung to a gain of $11.1 million from a loss of $13.1 million, including gains attributable to noncontrolling interests in managed funds. Net interest income increased to $6.1 million from $1.7 million.
Non-interest expenses declined 13.6% to $272.1 million, mainly because lower revenue reduced compensation expense. Compensation and benefits were $199.4 million, down 19.6%; non-compensation expenses increased 8.3% to $72.7 million. The $7.6 million income tax benefit included $14.1 million of benefits related to stock-based compensation and accrued forfeitable dividends. The reported effective tax rate was negative 29.6%; management cited a 35.9% rate excluding specified benefits and noncontrolling interests.
Cash flow, liquidity and capital
- Operating cash flow was negative $201.9 million, compared with negative $484.2 million a year earlier. The filing attributes the major quarterly cash outflow to the $362.2 million decrease in accrued compensation, reflecting the timing of annual incentive compensation payments.
- Cash and cash equivalents were $46.0 million at March 31, 2023, down from $365.6 million at December 31, 2022. Cash declined by $319.7 million during the quarter.
- Financing cash outflows included $50.9 million of dividends and $60.8 million of employee-related share repurchases. No shares were repurchased under the public program during the quarter; $138.2 million remained authorized.
- Long-term financing was $125 million of unsecured senior notes bearing 5.20% interest and maturing October 15, 2023. The filing reports compliance with related covenants at quarter-end.
- The company had no advances on its $75 million unsecured revolving credit facility or its $80 million committed secured line. It reported $15.7 million outstanding under the Pershing arrangement and $57.5 million under the CIBC clearing financing arrangement; these funding arrangements are subject to collateral terms and, for clearing arrangements, lender discretion.
- Broker-dealer net capital was $198.4 million, $197.4 million above the SEC minimum; several financing and clearing covenants require at least $120 million of regulatory net capital. The adjusted leverage ratio was 1.8 at quarter-end, down from 2.4 at year-end 2022.
- Shareholders’ equity totaled $1.24 billion. The board declared and paid quarterly and special dividends of $0.60 and $1.25 per share, respectively, during Q1; it also declared a $0.60 quarterly dividend payable in June 2023.
Outlook, risks and contingencies
Management gave no numerical earnings or revenue guidance. It expects near-term advisory activity to remain soft because economic uncertainty and difficult debt-financing conditions are slowing transaction timelines and pipeline conversion. Management was cautiously optimistic about the second half of 2023, contingent on sustained market improvement. It expected capital-markets activity to improve over the year but said Q1 activity remained below historical levels. Fixed income and municipal financing outlooks were described as challenging; municipal issuance depends on more stable rates and sustained fund inflows.
Management identified higher interest rates, persistent inflation, recession risk, banking-sector liquidity concerns, geopolitical tensions and market volatility as factors affecting client activity and results. It emphasized that financial-services earnings can fluctuate substantially between periods. Funding availability, collateral values, inventory liquidity, counterparty exposure, valuation estimates, cyber and operational risks, and the ability to attract and retain employees are additional risks.
The SEC is investigating the company’s compliance with recordkeeping requirements for business communications on unapproved electronic messaging channels. The company is cooperating; no loss contingency was recorded because a loss was not considered probable or reasonably estimable, and management could not estimate a possible loss range. The company also disclosed $99.4 million of investment commitments and $11.6 million of uncollateralized derivative counterparty exposure, including $7.2 million with one counterparty. Management stated that reasonably possible legal losses above accrued amounts were not material, while noting that outcomes remain uncertain.
The company said disclosure controls were effective and that there were no material changes to internal control over financial reporting during the quarter. It reported no material changes to the risk factors in its 2022 annual report.
Important facts for investors to verify
- Whether advisory and municipal financing pipelines convert as market conditions evolve, and whether management’s second-half optimism is borne out.
- Cash and liquidity after annual incentive payments, including the maturity and refinancing or repayment of the $125 million notes in October 2023.
- The sustainability of reported earnings and tax benefits, and the effect of investment gains, noncontrolling interests, acquisition-related compensation and other non-GAAP adjustments.
- Developments in the SEC recordkeeping investigation, derivative counterparty exposure, and the company’s ability to maintain regulatory capital and access collateral-dependent funding.