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PJC > SEC Filings for PJC > Form 10-Q on 31-Jul-2013All Recent SEC Filings

Show all filings for PIPER JAFFRAY COMPANIES

Form 10-Q for PIPER JAFFRAY COMPANIES


31-Jul-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.

As part of our strategy to grow our public finance business, we completed the acquisition of Seattle-Northwest Securities Corporation ("Seattle-Northwest"), a Seattle-based investment bank and broker dealer focused on public finance in the Northwest region of the U.S., for $19.5 million in cash. The tangible book value of Seattle-Northwest was approximately $11.7 million at closing. The transaction closed on July 12, 2013.

We also entered into a definitive agreement on June 17, 2013 to acquire Edgeview Partners, L.P. ("Edgeview"), a middle-market equity advisory firm specializing in mergers and acquisitions. The transaction closed on July 16, 2013. The acquisition further strengthens our mergers and acquisitions leadership in the middle market and adds resources dedicated to the private equity community.

Seattle-Northwest and Edgeview's results of operations will be included in our consolidated financial statements prospectively from their respective dates of acquisition. We expect to incur approximately $3.0 million to $3.5 million of restructuring and integration costs in the second half of 2013 related to these acquisitions.

Asset Management - The Asset Management segment provides traditional asset management services by taking a value-driven approach to managing assets in the domestic and international equity markets. Additionally, the asset management segment manages master limited partnership ("MLP") and energy infrastructure strategies for 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.


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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 former 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. The sale of FAMCO was completed on April 30, 2013. 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.

Results for the three and six months ended June 30, 2013

For the three months ended June 30, 2013, net income applicable to Piper Jaffray Companies, including continuing and discontinued operations, was $2.5 million, or $0.15 per diluted common share. Net income applicable to Piper Jaffray Companies from continuing operations for the second quarter of 2013 was $4.4 million, or $0.25 per diluted common share, compared with $10.8 million, or $0.58 per diluted common share, for the prior-year period. The year-ago period included a $7.1 million, or $0.35 per diluted common share, tax benefit resulting from resolution of a state income tax matter and $2.2 million, after-tax, or $0.12 per diluted common share, restructuring charge for severance and occupancy-related charges. Net revenues for the three months ended June 30, 2013 were $99.8 million, a decline of 3.2 percent from $103.1 million reported in the year-ago period. Lower fixed income institutional brokerage and mergers and acquisitions revenues were offset in part by higher equity financing and equity institutional brokerage revenues. For the three months ended June 30, 2013, non-compensation expenses decreased 9.8 percent to $31.4 million, compared to $34.8 million in the second quarter of 2012, due to a $3.6 million, pre-tax, restructuring charge in the year-ago period.

For the six months ended June 30, 2013, net income applicable to Piper Jaffray Companies, including continuing and discontinued operations, was $12.6 million, or $0.73 per diluted common share. Net income applicable to Piper Jaffray Companies from continuing operations in the first half of 2013 was $15.0 million, or $0.86 per diluted common share, compared with $17.0 million, or $0.91 per diluted common share, for the prior-year period. Net revenues from continuing operations for the six months ended June 30, 2013 were $209.3 million, down 3.3 percent from the $216.5 million reported in the year-ago period due primarily to lower fixed income institutional brokerage revenues. For the six months ended June 30, 2013, non-compensation expenses from continuing operations decreased 11.8 percent to $56.7 million, compared with $64.3 million for the six months ended June 30, 2012. Non-compensation expenses from continuing operations were reduced in the first half of 2013 by the receipt of insurance proceeds for the 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, as experienced this quarter), 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


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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, such as the future political debate regarding the U.S. debt ceiling limit, expectations on the timing of curtailing the Federal Reserve's quantitative easing program and revisions to the U.S. tax code, could result in a challenging and volatile economic environment in the second half of 2013.

Mixed economic and financial market conditions in the first half of 2013 resulted in varied financial results across our businesses. Turbulent conditions in the fixed income markets negatively impacted our fixed income institutional brokerage revenues in the second quarter of 2013. Signals from the Federal Reserve regarding its intentions to curtail its quantitative easing program triggered immediate and substantial interest rate increases and widening credit spreads. These changes were even more pronounced in the municipal bond market, which has been experiencing accelerating mutual fund outflows and decreased demand as investors wait for interest rates to find a new equilibrium. Going forward, we anticipate interest rates to be sensitive to Federal Reserve actions and to continue rising over the medium to longer term. The equity markets continued to build on their strong first quarter performance and volatility remained low. Our equity-related businesses benefited in the second quarter of 2013 from these favorable market conditions. We believe that the environment for U.S. capital markets activity will continue to be positive in 2013 if the key economic metrics remain strong. However, this can change rapidly as economic and market indicators fluctuate. Despite the favorable equity markets, advisory services activity remained slow, but we expect the level of activity to improve in the second half of 2013. In addition, our recent acquisition of Edgeview Partners strengthens our equity advisory business going forward. Our public finance business continues to benefit from our geographic expansion over the past few years. The recent acquisition of Seattle-Northwest expands our geographic presence in the Northwest and should increase our market share and revenue contributions from this business. Asset management revenues benefited from the performance of the equity markets in the first half of 2013. Revenues 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.


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Results of Operations

Financial Summary for the three months ended June 30, 2013 and June 30, 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 June 30,              As a Percentage of Net Revenues for
                                                            2013            the Three Months Ended June 30,
(Dollars in thousands)        2013            2012          v2012             2013                   2012
Revenues:
Investment banking        $    52,846     $   49,368          7.0  %           53.0  %                47.9  %
Institutional brokerage        20,560         31,207        (34.1 )            20.6                   30.3
Asset management               18,031         16,030         12.5              18.1                   15.5
Interest                       14,360         12,139         18.3              14.4                   11.8
Other income                    3,310            979        238.1               3.3                    0.9

Total revenues                109,107        109,723         (0.6 )           109.4                  106.4

Interest expense                9,335          6,625         40.9               9.4                    6.4

Net revenues                   99,772        103,098         (3.2 )           100.0                  100.0

Non-interest expenses:
Compensation and benefits      65,000         62,601          3.8              65.1                   60.7
Occupancy and equipment         6,543          6,752         (3.1 )             6.6                    6.5
Communications                  5,030          4,939          1.8               5.0                    4.8
Floor brokerage and
clearance                       2,247          2,002         12.2               2.3                    1.9
Marketing and business
development                     5,957          5,845          1.9               6.0                    5.7
Outside services                8,449          7,225         16.9               8.5                    7.0
Restructuring-related
expense                             -          3,642          N/M                 -                    3.5
Intangible asset
amortization expense            1,661          1,736         (4.3 )             1.7                    1.7
Other operating expenses        1,552          2,701        (42.5 )             1.6                    2.6

Total non-interest
expenses                       96,439         97,443         (1.0 )            96.7                   94.5

Income from continuing
operations before income
tax expense/(benefit)           3,333          5,655        (41.1 )             3.3                    5.5

Income tax
expense/(benefit)               1,644         (5,699 )        N/M               1.6                   (5.5 )

Income from continuing
operations                      1,689         11,354        (85.1 )             1.7                   11.0

Discontinued operations:
Loss from discontinued
operations, net of tax         (1,871 )       (3,934 )      (52.4 )            (1.9 )                 (3.8 )

Net income/(loss)                (182 )        7,420          N/M              (0.2 )                  7.2

Net income/(loss)
applicable to
noncontrolling interests       (2,670 )          569          N/M              (2.7 )                  0.6

Net income applicable to
Piper Jaffray Companies   $     2,488     $    6,851        (63.7 )%            2.5  %                 6.6  %

N/M - Not meaningful

For the three months ended June 30, 2013, we recorded net income applicable to Piper Jaffray Companies, including continuing and discontinued operations, of $2.5 million. Net revenues from continuing operations for the three months ended June 30, 2013 were $99.8 million, a 3.2 percent decrease from the year-ago period. In the second quarter of 2013, investment banking revenues were $52.8 million, compared with $49.4 million in the prior-year period due to an increase in equity financing revenues resulting from more favorable equity market conditions, partially offset by a decline in merger and acquisition revenues. For the three months ended June 30, 2013, institutional brokerage revenues decreased 34.1 percent to $20.6 million, compared with $31.2 million in the corresponding period in the prior year, due to lower fixed income institutional brokerage revenues resulting from the rapid rise in interest rates and widening of credit spreads, which led to market volatility in the second quarter of 2013. The decrease was partially offset by higher equity institutional brokerage revenues. In the second quarter of 2013, asset management fees increased 12.5 percent to $18.0 million, compared with $16.0 million in the second quarter of 2012, driven by higher management fees from increased assets under management. Net interest income in the second quarter of 2013 decreased slightly to $5.0 million compared with the prior-year period. For the three months ended June 30, 2013, other income was $3.3 million, compared with $1.0 million in the prior-year period as we recorded higher investment gains associated with our merchant banking activities. Non-interest


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expenses from continuing operations were $96.4 million for the three months ended June 30, 2013, down slightly from $97.4 million in the corresponding period of the prior year.

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 June 30, 2013, compensation and benefits expenses increased 3.8 percent to $65.0 million from $62.6 million in the corresponding period in 2012. Compensation and benefits expenses as a percentage of net revenues was 65.1 percent in the second quarter of 2013, compared with 60.7 percent in the second quarter of 2012. The higher compensation expense ratio was due to a change in our revenue mix driven primarily by fixed income trading losses, and the impact of fixed compensation costs on a reduced revenue base.

Occupancy and Equipment - In the second quarter of 2013, occupancy and equipment expenses decreased to $6.5 million, compared with $6.8 million in the corresponding period in 2012. The decrease was primarily the result of lower occupancy costs associated with our headquarters office space.

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 June 30, 2013, communication expenses were $5.0 million, essentially flat compared with the three months ended June 30, 2012.

Floor Brokerage and Clearance - For the three months ended June 30, 2013, floor brokerage and clearance expenses increased 12.2 percent to $2.2 million, compared with $2.0 million in the three months ended June 30, 2012. The increase was due to higher trading fees resulting from higher U.S. equity client volumes.

Marketing and Business Development - Marketing and business development expenses include travel and entertainment and promotional and advertising costs. In the second quarter of 2013, marketing and business development expenses were $6.0 million, essentially flat compared with the three months ended June 30, 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 16.9 percent to $8.4 million in the second quarter of 2013, compared with $7.2 million in the corresponding period in 2012, due to increased professional fees.

Restructuring-related Expenses - In the second quarter of 2012, we recorded a pre-tax restructuring charge of $3.6 million, consisting of $2.4 million of employee severance costs and $1.2 million for the reduction of leased office space, as a measure to better align our cost infrastructure with our revenues. We expect to incur approximately $3.0 million to $3.5 million of restructuring and integration expenses in the second half of 2013 related to the acquisitions of Seattle-Northwest and Edgeview.

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 June 30, 2013, intangible asset amortization expense was $1.7 million, essentially flat compared with the corresponding period in 2012. Beginning in the third quarter of 2013, we anticipate incurring additional intangible asset amortization expense related to the acquisitions of Seattle-Northwest and Edgeview.

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 decreased to $1.6 million in the second quarter of 2013, compared with $2.7 million in the second quarter of 2012. The reduction in other operating expenses was primarily attributable to lower insurance costs and lower value-added tax expense related to our London office.


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Income Taxes - For the three months ended June 30, 2013, our provision for income taxes was $1.6 million equating to an effective tax rate, excluding noncontrolling interests, of 27.4 percent, compared with a benefit of $5.7 million in the prior-year period. The reduced effective tax rate for the three months ended June 30, 2013 was due to the impact of tax-exempt interest income representing a larger proportion of our pre-tax income. In the second quarter of 2012, we recorded a reversal of a previously accrued uncertain state income tax position of $7.1 million, net of federal tax.

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 our 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 June 30,
                                                                        2013
(Dollars in thousands)                2013               2012          v2012
Net revenues
Capital Markets                 $     81,809        $      87,586      (6.6 )%
Asset Management                      17,963               15,512      15.8
Total net revenues              $     99,772        $     103,098      (3.2 )%

Pre-tax operating income/(loss)
Capital Markets                 $     (2,128 )      $       1,783       N/M
Asset Management                       5,461                3,872      41.0  %
Total pre-tax operating income  $      3,333        $       5,655     (41.1 )%

Pre-tax operating margin
Capital Markets                         (2.6 )%               2.0 %
Asset Management                        30.4  %              25.0 %
Total pre-tax operating margin           3.3  %               5.5 %

N/M - Not meaningful


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Capital Markets
                                         Three Months Ended June 30,
                                                                             2013
(Dollars in thousands)                      2013               2012         v2012
Net revenues:
Investment banking
Financing
Equities                              $     21,772        $     13,132      65.8  %
Debt                                        22,131              22,256      (0.6 )
Advisory services                            9,409              14,631     (35.7 )
Total investment banking                    53,312              50,019       6.6

Institutional sales and trading
Equities                                    21,392              16,682      28.2
Fixed income                                 4,959              20,620     (76.0 )
Total institutional sales and trading       26,351              37,302     (29.4 )

Other income                                 2,146                 265     709.8

Total net revenues                    $     81,809        $     87,586      (6.6 )%
. . .
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