Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
PJC > SEC Filings for PJC > Form 10-Q on 3-May-2013All Recent SEC Filings

Show all filings for PIPER JAFFRAY COMPANIES | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for PIPER JAFFRAY COMPANIES


3-May-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following information should be read in conjunction with the accompanying unaudited consolidated financial statements and related notes and exhibits included elsewhere in this report. Certain statements in this report may be considered forward-looking. Statements that are not historical or current facts, including statements about beliefs and expectations, are forward-looking statements. These forward looking statements include, among other things, statements other than historical information or statements of current condition and may relate to our future plans and objectives and results, and also may include our belief regarding the effect of various legal proceedings, as set forth under "Legal Proceedings" in Part I, Item 3 of our Annual Report on Form 10-K for the year ended December 31, 2012 and in our subsequent reports filed with the SEC. Forward-looking statements involve inherent risks and uncertainties, and important factors could cause actual results to differ materially from those anticipated, including those factors discussed below under "External Factors Impacting Our Business" as well as the factors identified under "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2012, as updated in our subsequent reports filed with the SEC. These reports are available at our Web site at www.piperjaffray.com and at the SEC Web site at www.sec.gov. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update them in light of new information or future events.

Executive Overview

Our continuing operations are principally engaged in providing investment banking, institutional brokerage, asset management and related financial services to corporations, private equity groups, public entities, non-profit entities and institutional investors in the United States and Europe. We operate through two reportable business segments:

Capital Markets - The Capital Markets segment provides institutional sales, trading and research services and investment banking services. Institutional sales, trading and research services focus on the trading of equity and fixed income products with institutions, government and non-profit entities. Revenues are generated through commissions and sales credits earned on equity and fixed income institutional sales activities, net interest revenues on trading securities held in inventory, and profits and losses from trading these securities. Investment banking services include management of and participation in underwritings, merger and acquisition services and public finance activities. Revenues are generated through the receipt of advisory and financing fees. Also, we generate revenue through strategic trading activities, which focus on proprietary investments in municipal bond and non-agency mortgage-backed securities, and merchant banking activities, which involve equity or debt investments in late stage private companies. As certain of these efforts have matured and an investment process has been developed, we have created alternative asset management funds in merchant banking and municipal securities in order to invest firm capital as well as seek capital from outside investors. We receive management and performance fees for managing these funds.

On April 16, 2013 we entered into a definitive agreement to purchase Seattle-Northwest Securities Corporation ("Seattle-Northwest") in a transaction valued at approximately $21.0 million. Upon closing, the tangible book value of Seattle-Northwest is estimated to be $13.2 million. The transaction is expected to close in the third quarter of 2013, subject to approval by Seattle-Northwest's shareholders, regulatory approvals and other customary closing conditions.

Asset Management - The Asset Management segment provides traditional asset management services with product offerings in equity and master limited partnership ("MLP") securities to institutions and individuals. Revenues are generated in the form of management and performance fees. Revenues are also generated through investments in the partnerships and funds that we manage.

Discontinued Operations - Our discontinued operations for all periods presented include the operating results of our Hong Kong capital markets business and Fiduciary Asset Management, LLC ("FAMCO"), a division of our asset management segment. As of September 30, 2012, we ceased operations related to our Hong Kong capital markets business. The results of the Hong Kong capital markets business were previously reported in our Capital Markets segment. On March 8, 2013, we signed a definitive agreement to sell FAMCO. The transaction, valued at $4.0 million, is subject to customary closing conditions and is expected to close during the second quarter of 2013. FAMCO is classified as held for sale and reported in discontinued operations for all periods presented. The results of FAMCO were previously reported in our Asset Management segment. See Note 4 to our unaudited consolidated financial statements for further discussion of our discontinued operations.

Our business is a human capital business. Accordingly, compensation and benefits comprise the largest component of our expenses, and our performance is dependent upon our ability to attract, develop and retain highly skilled employees who are motivated and committed to providing the highest quality of service and guidance to our clients.


Table of Contents

Results for the three months ended March 31, 2013

For the three months ended March 31, 2013, net income applicable to Piper Jaffray Companies, including continuing and discontinued operations, was $10.1 million, or $0.57 per diluted common share. Net income applicable to Piper Jaffray Companies from continuing operations in the first quarter of 2013 was $10.7 million, or $0.60 per diluted common share, compared with net income applicable to Piper Jaffray Companies from continuing operations of $6.2 million, or $0.33 per diluted common share, for the prior-year period. Net revenues from continuing operations for the three months ended March 31, 2013 were $109.5 million, down 3.4 percent from the $113.4 million reported in the year-ago period due primarily to lower equity financing revenues. For the three months ended March 31, 2013, non-compensation expenses from continuing operations were $25.3 million, compared with $29.4 million for the three months ended March 31, 2012. Non-compensation expenses from continuing operations were reduced in the first quarter of 2013 by the receipt of insurance proceeds for reimbursement of prior legal settlements.

External Factors Impacting Our Business

Performance in the financial services industry in which we operate is highly correlated to the overall strength of economic conditions and financial market activity. Overall market conditions are a product of many factors, which are beyond our control and mostly unpredictable. These factors may affect the financial decisions made by investors, including their level of participation in the financial markets. In turn, these decisions may affect our business results. With respect to financial market activity, our profitability is sensitive to a variety of factors, including the demand for investment banking services as reflected by the number and size of equity and debt financings and merger and acquisition transactions, the volatility of the equity and fixed income markets, changes in interest rates (especially rapid and extreme changes), the level and shape of various yield curves, the volume and value of trading in securities, and the demand for asset management services as reflected by the amount of assets under management.

Factors that differentiate our business within the financial services industry may also affect our financial results. For example, our business focuses on a middle-market clientele in specific industry sectors. If the business environment for our focus sectors is impacted disproportionately as compared to the economy as a whole, or does not recover on pace with other sectors of the economy, our business and results of operations will be negatively impacted. In addition, our business could be affected differently than overall market trends. Given the variability of the capital markets and securities businesses, our earnings may fluctuate significantly from period to period, and results for any individual period should not be considered indicative of future results.

As a participant in the financial services industry, we are subject to complex and extensive regulation of our business. In recent years and following the credit crisis of 2008, legislators and regulators increased their focus on the regulation of the financial services industry, resulting in fundamental changes to the manner in which the industry is regulated and increased regulation in a number of areas. For example, the Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted in 2010 bringing sweeping change to financial services regulation in the U.S. Changes in the regulatory environment in which we operate could affect our business and the competitive environment, potentially adversely.

Outlook for the remainder of 2013

We believe a gradual U.S. economic recovery will continue in 2013 with the potential to benefit several of our businesses. We are mindful, however, that certain factors could cause a more challenging economic environment to emerge in 2013. The impact of recent tax increases and spending cuts may have a negative impact on economic growth. In addition, the ongoing political debate related to the U.S. debt ceiling limit, the federal budget, and the level of federal deficit spending continues to pose downside risk to the economic recovery. As we have seen in recent years, global issues like the European debt crisis also can impact the U.S. economy and our businesses. Throughout the first quarter of 2013, equity market volatility remained near a five-year low and the equity market reached record levels. While volatility has increased somewhat into the second quarter of 2013, we believe that the environment for U.S. capital markets activity will be positive in 2013 if the key economic metrics remain strong. However, this can change rapidly as economic and market indicators fluctuate. In the fourth quarter of 2012, we recorded strong advisory services revenues attributed to sellers' desire to complete deals prior to year-end and pending tax increases. Advisory services activity declined in the first quarter of 2013 with fewer completed transactions, but we expect the level of activity to improve in the second half of 2013. We anticipate that interest rates will remain at low levels throughout 2013, however, increasing uncertainty over the timing of rising interest rates has resulted in headwinds in the fixed income markets, which may negatively impact our client flow business. We generated solid strategic trading results in the first quarter of 2013. These revenues will continue to vary from period to period based on market opportunities and other economic factors. Our asset management performance in 2013 will continue to be dependent upon equity valuations and our investment performance, which can impact the amount of client inflows and outflows of assets under management. Lastly, over the past few years, there has been a market trend of assets flowing out of equities into fixed income or alternative asset classes. In the first quarter of 2013, equity markets registered net inflows. If this trend continues, it will result in a more favorable environment for our cash equities and asset management businesses.


Table of Contents

Results of Operations

Financial Summary for the three months ended March 31, 2013 and March 31, 2012

The following table provides a summary of the results of our operations and the
results of our operations as a percentage of net revenues for the periods
indicated.
                                 Three Months Ended March 31,              As a Percentage of Net Revenues for
                                                             2013           the Three Months Ended March 31,
(Dollars in thousands)         2013            2012          v2012             2013                   2012
Revenues:
Investment banking        $    40,362      $   48,085        (16.1 )%           36.8  %                42.4  %
Institutional brokerage        43,260          44,080         (1.9 )            39.5                   38.9
Asset management               18,211          16,533         10.1              16.6                   14.6
Interest                       13,363          11,146         19.9              12.2                    9.8
Other income                    2,953              28          N/M               2.7                      -

Total revenues                118,149         119,872         (1.4 )           107.9                  105.7

Interest expense                8,616           6,434         33.9               7.9                    5.7

Net revenues                  109,533         113,438         (3.4 )           100.0                  100.0

Non-interest expenses:
Compensation and benefits      66,105          68,796         (3.9 )            60.4                   60.6
Occupancy and equipment         5,817           6,862        (15.2 )             5.3                    6.0
Communications                  5,232           5,897        (11.3 )             4.8                    5.2
Floor brokerage and
clearance                       2,150           2,107          2.0               2.0                    1.9
Marketing and business
development                     4,980           4,878          2.1               4.5                    4.3
Outside services                7,214           5,838         23.6               6.6                    5.1
Intangible asset
amortization expense            1,661           1,736         (4.3 )             1.5                    1.5
Other operating expenses       (1,794 )         2,102          N/M              (1.6 )                  1.9

Total non-interest
expenses                       91,365          98,216         (7.0 )            83.4                   86.6

Income from continuing
operations before income
tax expense                    18,168          15,222         19.4              16.6                   13.4

Income tax expense              5,600           7,553        (25.9 )             5.1                    6.7

Income from continuing
operations                     12,568           7,669         63.9              11.5                    6.8

Discontinued operations:
Loss from discontinued
operations, net of tax           (521 )        (3,303 )      (84.2 )            (0.5 )                 (2.9 )

Net income                     12,047           4,366        175.9              11.0                    3.8

Net income applicable to
noncontrolling interests        1,901           1,437         32.3               1.7                    1.3

Net income applicable to
Piper Jaffray Companies   $    10,146      $    2,929        246.4  %            9.3  %                 2.6  %

N/M - Not meaningful

For the three months ended March 31, 2013, we recorded net income applicable to Piper Jaffray Companies, including continuing and discontinued operations, of $10.1 million. Net revenues from continuing operations for the three months ended March 31, 2013 were $109.5 million, a 3.4 percent decrease from the year-ago period. In the first quarter of 2013, investment banking revenues were $40.4 million, compared with $48.1 million in prior-year period due to a decline in equity financing revenues. For the three months ended March 31, 2013, institutional brokerage revenues were $43.3 million, essentially flat to the corresponding period of the prior year. In the first quarter of 2013, asset management fees increased 10.1 percent to $18.2 million, compared with $16.5 million in the first quarter of 2012, driven by higher management fees from increased assets under management. Net interest income in the first three months of 2013 was $4.7 million, flat compared to the prior-year period. For the three months ended March 31, 2013, other income was $3.0 million, compared with a minimal gain in the prior-year period as we recorded higher investment gains associated with our merchant banking activities and firm investments. Non-interest expenses from continuing operations decreased 7.0 percent to $91.4 million for the three months ended March 31, 2013, from $98.2 million in the corresponding period in the prior year. This decrease was primarily attributable to the receipt of insurance proceeds for the reimbursement of prior legal settlements and lower compensation and benefits expenses.


Table of Contents

Consolidated Non-Interest Expenses from Continuing Operations

Compensation and Benefits - Compensation and benefits expenses, which are the largest component of our expenses, include salaries, incentive compensation, benefits, stock-based compensation, employment taxes, income associated with the forfeiture of stock-based compensation and other employee costs. A portion of compensation expense is comprised of variable incentive arrangements, including discretionary incentive compensation, the amount of which fluctuates in proportion to the level of business activity, increasing with higher revenues and operating profits. Other compensation costs, primarily base salaries and benefits, are more fixed in nature. The timing of incentive compensation payments, which generally occur in February, has a greater impact on our cash position and liquidity than is reflected on our consolidated statements of operations.

For the three months ended March 31, 2013, compensation and benefits expenses decreased 3.9 percent to $66.1 million from $68.8 million in the corresponding period in 2012, due to lower financial results. Compensation and benefits expenses as a percentage of net revenues was 60.4 percent in the first three months of 2013, consistent with 60.6 percent in the first three months of 2012.

Occupancy and Equipment - For the three months ended March 31, 2013, occupancy and equipment expenses decreased 15.2 percent to $5.8 million, compared with $6.9 million in the corresponding period in 2012. The decrease was primarily the result of lower occupancy costs associated with our headquarters office space and lower software maintenance costs.

Communications - Communication expenses include costs for telecommunication and data communication, primarily consisting of expenses for obtaining third-party market data information. For the three months ended March 31, 2013, communication expenses decreased 11.3 percent to $5.2 million, compared with $5.9 million in the three months ended March 31, 2012. The decrease was primarily attributable to lower market data service expenses.

Floor Brokerage and Clearance - For the three months ended March 31, 2013, floor brokerage and clearance expenses were $2.2 million, essentially flat compared with the three months ended March 31, 2012.

Marketing and Business Development - Marketing and business development expenses include travel and entertainment and promotional and advertising costs. In the first quarter of 2013, marketing and business development expenses were $5.0 million, essentially flat compared with the three months ended March 31, 2012.

Outside Services - Outside services expenses include securities processing expenses, outsourced technology functions, outside legal fees, fund expenses associated with our consolidated alternative asset management funds and other professional fees. Outside services expenses increased 23.6 percent to $7.2 million in the first quarter of 2013, compared with $5.8 million in the corresponding period in 2012. Excluding the portion of expenses from non-controlled equity interests in our consolidated alternative asset management funds, outside services expenses increased 13.2 percent due primarily to increased professional fees.

Intangible Asset Amortization Expense - Intangible asset amortization expense includes the amortization of definite-lived intangible assets consisting of asset management contractual relationships. For the three months ended March 31, 2013, intangible asset amortization expense was $1.7 million, essentially flat compared with the corresponding period in 2012.

Other Operating Expenses - Other operating expenses include insurance costs, license and registration fees, expenses related to our charitable giving program and litigation-related expenses, which consist of the amounts we reserve and/or pay out related to legal and regulatory matters. Other operating expenses represented income of $1.8 million in the first quarter of 2013, compared with expenses of $2.1 million in the first quarter of 2012. The reduction in other operating expenses was due to receipt of insurance proceeds for the reimbursement of prior legal settlements.

Income Taxes - For the three months ended March 31, 2013, our provision for income taxes was $5.6 million equating to an effective tax rate, excluding noncontrolling interests, of 34.4 percent, compared with $7.6 million in the prior-year period equating to an effective tax rate, excluding noncontrolling interests, of 54.8 percent. Income tax expense recorded in the first quarter of 2012 was high compared to pre-tax income because of a $3.4 million write-off of deferred tax assets related to equity grants that were forfeited or vested at share prices lower than the grant date share price.


Table of Contents

Segment Performance from Continuing Operations

We measure financial performance by business segment. Our two reportable segments are Capital Markets and Asset Management. We determined these segments based upon the nature of the financial products and services provided to customers and the Company's management organization. Segment pre-tax operating income and segment pre-tax operating margin are used to evaluate and measure segment performance by our management team in deciding how to allocate resources and in assessing performance in relation to our competitors. Revenues and expenses directly associated with each respective segment are included in determining segment operating results. Revenues and expenses that are not directly attributable to a particular segment are allocated based upon the Company's allocation methodologies, generally based on each segment's respective net revenues, use of shared resources, headcount or other relevant measures.

The following table provides our segment performance for the periods presented:

                                   Three Months Ended March 31,
                                                                        2013
(Dollars in thousands)               2013                 2012          v2012
Net revenues
Capital Markets                $       91,209       $       96,795     (5.8 )%
Asset Management                       18,324               16,643     10.1
Total net revenues             $      109,533       $      113,438     (3.4 )%

Pre-tax operating income
Capital Markets                $       12,751       $       10,740     18.7  %
Asset Management                        5,417                4,482     20.9
Total pre-tax operating income $       18,168       $       15,222     19.4  %

Pre-tax operating margin
Capital Markets                          14.0 %               11.1 %
Asset Management                         29.6 %               26.9 %
Total pre-tax operating margin           16.6 %               13.4 %



Capital Markets
                                         Three Months Ended March 31,
                                                                              2013
(Dollars in thousands)                      2013               2012          v2012
Net revenues:
Investment banking
Financing
Equities                              $      14,303       $      23,228     (38.4 )%
Debt                                         17,032              14,769      15.3
Advisory services                             9,556              10,722     (10.9 )
Total investment banking                     40,891              48,719     (16.1 )

Institutional sales and trading
Equities                                     20,735              20,980      (1.2 )
Fixed income                                 28,043              28,463      (1.5 )
Total institutional sales and trading        48,778              49,443      (1.3 )

Other income/(loss)                           1,540              (1,367 )     N/M

Total net revenues                    $      91,209       $      96,795      (5.8 )%

Pre-tax operating income              $      12,751       $      10,740      18.7  %

Pre-tax operating margin                       14.0 %              11.1 %

N/M - Not meaningful


Table of Contents

Investment banking revenues comprise all the revenues generated through financing and advisory services activities, including derivative activities related to our public finance business. To assess the profitability of investment banking, we aggregate investment banking fees with the net interest income or expense associated with these activities.

In the first quarter of 2013, investment banking revenues decreased 16.1 percent to $40.9 million compared with $48.7 million in the corresponding period of the prior year, due primarily to lower equity financing revenues. For the three months ended March 31, 2013, equity financing revenues were $14.3 million, compared with $23.2 million in the prior-year period, due to fewer completed transactions and lower revenue per transaction. During the first quarter of 2013, we completed 17 equity financings, raising $6.2 billion for our clients, compared with 22 equity financings, raising $3.4 billion in the first quarter of 2012. Equity financing revenues per transaction were lower as revenue from book run deals represented 52 percent of our fees in the first quarter of 2013, versus 66 percent in the first quarter of 2012. Debt financing revenues in the three months ended March 31, 2013 increased 15.3 percent to $17.0 million, compared with $14.8 million in the three months ended March 31, 2012, due to an increase in public finance revenues. Throughout 2012, we made investments in our public finance business to expand geographically. In the first quarter of 2013, we realized market share gains attributed to this geographic expansion. During the first quarter of 2013, we completed 152 public finance issues with a total par value of $2.5 billion, compared with 139 public finance issues with a total par value of $2.3 billion during the prior-year period. For the three months ended March 31, 2013, advisory services revenues decreased 10.9 percent to $9.6 million due to lower U.S. advisory services revenue, partially offset by increased European advisory services revenue. In the U.S., we experienced very strong advisory services revenue in the fourth quarter of 2012 as sellers were motivated to complete transactions prior to year-end and pending tax increases. This resulted in fewer transactions in the first quarter of 2013.

Institutional sales and trading revenues comprise all of the revenues generated through trading activities, which consist of facilitating customer trades and our strategic trading activities in municipal and structured mortgage securities. Also, it includes gains and losses on our investments in the municipal bond funds that we manage. To assess the profitability of institutional brokerage activities, we aggregate institutional brokerage revenues with the net interest income or expense associated with financing, economically hedging and holding long or short inventory positions. Our results may vary from quarter to quarter as a result of changes in trading margins, . . .

  Add PJC to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for PJC - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial      Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.