Business context and reporting period
Piper Sandler Companies’ unaudited Form 10-Q covers the quarter and nine months ended September 30, 2020. The company operates one reportable segment, providing investment banking and institutional brokerage services. Results include Sandler O’Neill, acquired in January 2020, and Valence, acquired in April 2020; Weeden & Co., acquired in August 2019, is also included. The traditional asset management business sold in 2019 is reported as discontinued operations.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net revenues | $303.7 million | $200.7 million | $832.3 million | $555.7 million |
| Continuing-operations pretax income (loss) | $24.6 million | $21.0 million | $(2.0) million | $65.1 million |
| Net income (loss) attributable to Piper Sandler | $11.6 million | $43.2 million | $(1.7) million | $73.1 million |
| GAAP diluted EPS | $0.78 | $3.01 | $(0.12) | $5.01 |
- Q3 investment banking revenue rose 34% to $203.2 million, led by record corporate financing revenue of $99.5 million. Advisory revenue declined 28% to $77.3 million. Institutional brokerage revenue increased 85% to $86.8 million.
- For the first nine months, investment banking revenue rose 37% and institutional brokerage revenue rose 133%. Investment income fell to $5.0 million from $17.6 million, while interest income declined to $11.2 million from $20.9 million.
- GAAP pretax margin was 8.1% in Q3 versus 10.5% a year earlier, and negative 0.2% for the nine months versus 11.7%. Acquisition-related compensation, amortization and other costs weighed on reported results. On the company’s non-GAAP basis, Q3 adjusted diluted EPS was $2.38 versus $1.64, and nine-month adjusted diluted EPS was $5.73 versus $4.47; adjusted pretax margins were 20.4% and 17.0%, respectively.
- Q3 GAAP comparisons include $26.1 million of income from discontinued operations in 2019; nine-month 2019 results include $23.8 million. Continuing-operations diluted EPS was $0.78 versus $1.20 in Q3 and a loss of $0.12 versus income of $3.37 for the nine months.
- Cash and cash equivalents were $371.8 million at September 30, 2020, up from $250.0 million at year-end 2019. Nine-month operating cash flow was $532.8 million; investing cash flow was negative $403.7 million, including $393.5 million for acquisitions; financing cash flow was negative $7.1 million. Cash increased $121.8 million.
- Total assets were $1.82 billion and shareholders’ equity was $858.4 million. Short-term financing was $75.0 million and long-term financing was $195.0 million. The company reported a 2.1x total leverage ratio and a 3.2x adjusted leverage ratio, which excludes goodwill, intangibles, lease assets and noncontrolling interests.
Material changes and notable items
- The Sandler O’Neill and Valence acquisitions expanded investment banking and brokerage capabilities, but added substantial compensation and amortization expenses. Goodwill and intangible assets increased to $371.5 million combined from $104.3 million at year-end 2019.
- Acquisition-related compensation was $85.1 million and acquisition-related intangible amortization was $33.1 million for the nine months. The company also recorded $22.0 million of nine-month expense related to the Weeden earnout and expected the maximum earnout to be earned.
- The 2020 nine-month GAAP loss contrasts with positive adjusted results. Management’s non-GAAP measures exclude, among other items, acquisition-related compensation, integration costs and amortization, and should be considered alongside—not instead of—GAAP results.
Outlook, liquidity and risks
- Management said corporate financing activity was expected to remain relatively strong in Q4 based on October activity. It viewed the advisory pipeline as building, with re-initiated and new engagements potentially supporting Q4 2020 and 2021. It expected equity brokerage revenue to rise with market volumes and fixed income activity to remain strong. These are management expectations, not formal earnings guidance.
- Management cited ongoing uncertainty from COVID-19 and its economic effects, market volatility, interest rates, credit spreads, trading volumes, geopolitical developments and the U.S. elections. It cautioned that earnings can fluctuate significantly between periods.
- The company reported $174.7 million of regulatory net capital, $173.7 million above the SEC minimum, and said it was in compliance with applicable financing covenants. It described its capital and liquidity as strong, but relies on short-term, often collateralized funding; Pershing financing is uncommitted and may be denied. It repaid the $50 million of commercial paper at maturity and the $25 million revolving-credit advance in October 2020.
- Uncollateralized derivative credit exposure was $26.1 million, including $22.0 million with one counterparty. Trading losses exceeded the company’s one-day VaR measure on 22 occasions in the first nine months. Market, liquidity, credit, operational, legal and regulatory risks remain relevant.
- The company is party to legal and regulatory matters; it said reasonably possible losses above accrued amounts were not material, while noting outcomes and estimates remain uncertain. It planned to complete its annual goodwill and intangible-asset impairment testing in Q4.
- The board declared a $0.375-per-share quarterly dividend on October 30, payable December 11, 2020. The company had $136.9 million remaining under its share-repurchase authorization at September 30.
Important facts for investors to verify
- Whether announced and newly initiated advisory engagements convert to completed transactions and revenue, and whether Q4 corporate financing strength persists.
- How acquisition integration, retention awards, earnouts and amortization affect future GAAP expenses, margins and share dilution.
- Whether cash generation and liquidity remain resilient given seasonal incentive-compensation payments, short-term funding needs and collateral availability.
- How the company’s investment portfolio, derivative counterparty exposure and market volatility affect earnings and capital.
- The outcome of the Q4 goodwill and intangible-asset impairment testing and any material developments in legal or regulatory matters.