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PJC > SEC Filings for PJC > Form 10-Q on 31-Oct-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


31-Oct-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.

Explanation of Non-GAAP Financial Measures

We have included financial measures that are not prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). These non-GAAP financial measures exclude the effects of restructuring, integration and transaction costs recognized in the third quarter of 2013 and affect the following financial measures: income from continuing operations, earnings per diluted common share and Capital Markets pre-tax operating margin. Management believes these non-GAAP financial measures provide useful information to investors because it excludes restructuring, integration and transaction costs which are unrelated to our primary business operations, and the exclusion of these charges helps investors understand our operating results and underlying operational trends as compared to prior periods.

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 bonds, mortgage-backed securities, equity 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, on July 12, 2013, 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.

On July 16, 2013, we completed the purchase of Edgeview Partners, L.P. ("Edgeview"), a middle-market equity advisory firm specializing in mergers and acquisitions. The acquisition further strengthens our mergers and acquisitions leadership in the middle market and adds resources dedicated to the private equity community.

For more information on our acquisitions of Seattle-Northwest and Edgeview, see Note 4 of our accompanying unaudited consolidated financial statements included in this report. We incurred $3.8 million of restructuring, integration and transaction costs in the third quarter of 2013 related to these acquisitions.


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Asset Management - The Asset Management segment provides traditional asset management services by taking a value-driven approach to managing assets in 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.

Discontinued Operations - Our discontinued operations for all periods presented include the operating results of our Hong Kong capital markets business, which we shut down as of September 30, 2012, and Fiduciary Asset Management, LLC ("FAMCO"), an asset management subsidiary we sold in the second quarter of 2013. See Note 5 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 nine months ended September 30, 2013

For the three months ended September 30, 2013, net income applicable to Piper Jaffray Companies, including continuing and discontinued operations, was $5.3 million, or $0.33 per diluted common share. Net income applicable to Piper Jaffray Companies from continuing operations for the third quarter of 2013 was $6.9 million, or $0.42 per diluted common share, compared with $14.5 million, or $0.82 per diluted common share, for the prior-year period. The results from continuing operations for the third quarter of 2013 included $2.3 million after-tax ($3.8 million pre-tax), or $0.15 per diluted common share, of restructuring, integration and transaction costs associated with the acquisitions of Seattle-Northwest and Edgeview. Excluding these costs, net income from continuing operations would have been $9.2 million, or $0.57 per diluted common share. Net revenues for the three months ended September 30, 2013 were $128.3 million, a decline of 2.4 percent from $131.5 million reported in the year-ago period. Lower fixed income institutional brokerage revenues were offset in part by higher equity financing and equity institutional brokerage revenues. For the three months ended September 30, 2013, non-compensation expenses increased 31.1 percent to $36.8 million, compared to $28.1 million in the third quarter of 2012. Non-compensation expenses in the third quarter of 2013 included $5.0 million of restructuring and intangible amortization expenses related to our recent acquisitions of Seattle-Northwest and Edgeview.

For the nine months ended September 30, 2013, net income applicable to Piper Jaffray Companies, including continuing and discontinued operations, was $18.0 million, or $1.06 per diluted common share. Net income applicable to Piper Jaffray Companies from continuing operations in the first nine months of 2013 was $21.9 million, or $1.29 per diluted common share, compared with $31.5 million, or $1.71 per diluted common share, for the prior-year period. Net revenues from continuing operations for the nine months ended September 30, 2013 were $337.6 million, down 3.0 percent from $348.0 million in the year-ago period. For the nine months ended September 30, 2013, non-compensation expenses from continuing operations were $93.5 million, compared with $92.3 million for the nine months ended September 30, 2012.

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.


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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 throughout the remainder of 2013 with the potential to benefit several of our businesses. We are mindful, however, that certain factors, such as the ongoing political debate regarding the federal budget and 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 throughout the remainder of 2013 and into 2014.

Mixed economic and financial market conditions in the first nine months of 2013 resulted in varied financial results across our businesses. Interest rates gradually increased through most of the third quarter of 2013 in reaction to the Federal Reserve's guidance that they intend to taper bond purchases under its quantitative easing program. This adversely impacted trading volumes as investors reduced trading activities while they assessed uncertainties related to the Federal Reserve's activities, which resulted in lower fixed income institutional brokerage revenues in the third quarter of 2013. The rising interest rates also negatively impacted fixed income financing revenues as public finance issuances decreased and debt refinancing activity became less attractive. Going forward, we anticipate interest rates to be sensitive to Federal Reserve actions and to continue rising over the medium to longer term, which could impact our fixed income revenues. We will continue to manage our inventories and hedging strategies to mitigate market volatility as much as possible. The equity markets continued to build on their strong performance in the first half of the year and volatility remained low. Our equity-related businesses benefited in the third quarter of 2013 from these favorable market conditions as both our equity financing and advisory services activity increased. We believe that the environment for U.S. capital markets activity will continue to be positive for the remainder of 2013 if the key economic metrics remain strong. In particular, if key economic metrics do remain strong in the fourth quarter of 2013, we anticipate increased levels of merger and acquisition activity. However, this can change rapidly as economic and market indicators fluctuate. Asset management revenues 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 September 30, 2013 and
September 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.
                                                                          As a Percentage of
                                     Three Months Ended                  Net Revenues for the
                                        September 30,                     Three Months Ended
                                                           2013              September 30,
(Dollars in thousands)        2013           2012          v2012          2013            2012
Revenues:
Investment banking        $   62,373     $   51,083         22.1  %       48.6  %          38.8 %
Institutional brokerage       37,218         58,719        (36.6 )        29.0             44.7
Asset management              18,309         16,136         13.5          14.3             12.3
Interest                      16,259         12,457         30.5          12.7              9.5
Other income                   4,679            235          N/M           3.6              0.2
Total revenues               138,838        138,630          0.2         108.2            105.4

Interest expense              10,524          7,125         47.7           8.2              5.4

Net revenues                 128,314        131,505         (2.4 )       100.0            100.0

Non-interest expenses:
Compensation and benefits     79,426         78,070          1.7          61.9             59.4
Occupancy and equipment        6,509          6,057          7.5           5.1              4.6
Communications                 5,778          5,276          9.5           4.5              4.0
Floor brokerage and
clearance                      2,109          1,825         15.6           1.6              1.4
Marketing and business
development                    5,447          4,259         27.9           4.2              3.2
Outside services               8,082          6,747         19.8           6.3              5.1
Restructuring and
integration costs              3,823              -          N/M           3.0                -
Intangible asset
amortization expense           2,899          1,736         67.0           2.3              1.3
Other operating expenses       2,181          2,183         (0.1 )         1.7              1.7
Total non-interest
expenses                     116,254        106,153          9.5          90.6             80.7

Income from continuing
operations before income
tax expense                   12,060         25,352        (52.4 )         9.4             19.3

Income tax expense             2,886         10,194        (71.7 )         2.2              7.8

Income from continuing
operations                     9,174         15,158        (39.5 )         7.1             11.5

Discontinued operations:
Income/(loss) from
discontinued operations,
net of tax                    (1,529 )        5,171          N/M          (1.2 )            3.9

Net income                     7,645         20,329        (62.4 )         6.0             15.5

Net income applicable to
noncontrolling interests       2,323            665        249.3           1.8              0.5

Net income applicable to
Piper Jaffray Companies   $    5,322     $   19,664        (72.9 )%        4.1  %          15.0 %

N/M - Not meaningful

For the three months ended September 30, 2013, we recorded net income applicable to Piper Jaffray Companies, including continuing and discontinued operations, of $5.3 million. Net revenues from continuing operations for the three months ended September 30, 2013 were $128.3 million, a 2.4 percent decrease from the year-ago period. In the third quarter of 2013, investment


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banking revenues were $62.4 million, compared with $51.1 million in the prior-year period, due to an increase in equity financing revenues resulting from favorable equity market conditions. For the three months ended September 30, 2013, institutional brokerage revenues decreased 36.6 percent to $37.2 million, compared with $58.7 million in the corresponding period in the prior year, due to lower fixed income institutional brokerage revenues. Results from our strategic trading activities, particularly in the mortgage-backed securities strategy, were lower in the current quarter compared to the robust year-ago period. In the third quarter of 2013, asset management fees increased 13.5 percent to $18.3 million, driven by higher management fees from increased assets under management. Net interest income in the third quarter of 2013 increased 7.6 percent to $5.7 million compared with $5.3 million in the prior-year period. For the three months ended September 30, 2013, other income was $4.7 million, compared with $0.2 million in the prior-year period as we recorded higher investment gains associated with our firm investments and merchant banking activities. Non-interest expenses from continuing operations increased to $116.3 million for the three months ended September 30, 2013, from $106.2 million in the corresponding period of the prior year. The third quarter of 2013 included $3.8 million of acquisition-related restructuring, integration and transaction costs, and an additional $1.2 million of intangible amortization expense.

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 September 30, 2013, compensation and benefits expenses increased to $79.4 million from $78.1 million in the corresponding period of 2012. Compensation and benefits expenses as a percentage of net revenues was 61.9 percent in the third quarter of 2013, compared with 59.4 percent in the third quarter of 2012. The higher compensation expense ratio in the third quarter of 2013 was driven by a change in our revenue mix as we recorded strong strategic trading revenues in the prior year, which has a lower compensation payout. Additionally, the compensation ratio of 61.9 percent includes retention-related compensation associated with the acquisitions of Edgeview and Seattle-Northwest.

Occupancy and Equipment - In the third quarter of 2013, occupancy and equipment expenses increased to $6.5 million, compared with $6.1 million in the corresponding period of 2012. The increase was due to the incremental occupancy expense from our acquisitions of Seattle-Northwest and Edgeview.

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 September 30, 2013, communication expenses increased 9.5 percent to $5.8 million, compared with $5.3 million for the three months ended September 30, 2012. The increase resulted from higher market data service expenses.

Floor Brokerage and Clearance - For the three months ended September 30, 2013, floor brokerage and clearance expenses increased 15.6 percent to $2.1 million, compared with $1.8 million in the three months ended September 30, 2012. The increase was due to higher trading expenses.

Marketing and Business Development - Marketing and business development expenses include travel and entertainment and promotional and advertising costs. In the third quarter of 2013, marketing and business development expenses increased 27.9 percent to $5.4 million, compared with $4.3 million for the three months ended September 30, 2012, due to higher travel expenses.

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 19.8 percent to $8.1 million in the third quarter of 2013, compared with $6.7 million in the corresponding period in 2012, due to higher computer consulting and fund expenses.

Restructuring and Integration Costs - In the third quarter of 2013, we recorded restructuring and integration costs of $3.8 million primarily related to the acquisitions of Seattle-Northwest and Edgeview. The expense consisted of $2.1 million of severance benefits, $0.9 million of transaction costs, $0.5 million for vacating redundant leased office space, and $0.3 million of contract


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termination costs. We anticipate incurring approximately $1.0 million of additional restructuring and integration costs in the fourth quarter of 2013.

Intangible Asset Amortization Expense - Intangible asset amortization expense includes the amortization of definite-lived intangible assets consisting of customer relationships and non-competition agreements. For the three months ended September 30, 2013, intangible asset amortization expense was $2.9 million, compared with $1.7 million in the corresponding period of 2012. The increase was attributable to 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 were $2.2 million in the third quarter of 2013, essentially flat compared with the third quarter of 2012.

Income Taxes - For the three months ended September 30, 2013, our provision for income taxes was $2.9 million equating to an effective tax rate, excluding noncontrolling interests, of 29.6 percent, compared with $10.2 million equating to an effective tax rate, excluding noncontrolling interests, of 41.3 percent in the prior-year period. The reduced effective tax rate for the three months ended September 30, 2013 was due to the impact of tax-exempt interest income representing a larger proportion of our pre-tax income.

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 September 30,
                                                                           2013
(Dollars in thousands)                2013                 2012           v2012
Net revenues
Capital Markets                $       110,263       $       115,249      (4.3 )%
Asset Management                        18,051                16,256      11.0
Total net revenues             $       128,314       $       131,505      (2.4 )%

Pre-tax operating income
Capital Markets                $         6,357       $        20,578     (69.1 )%
Asset Management                         5,703                 4,774      19.5
Total pre-tax operating income $        12,060       $        25,352     (52.4 )%

Pre-tax operating margin
Capital Markets                            5.8 %                17.9 %
Asset Management                          31.6 %                29.4 %
Total pre-tax operating margin             9.4 %                19.3 %


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Capital Markets
                                         Three Months Ended September 30,
                                                                                  2013
(Dollars in thousands)                       2013                 2012           v2012
Net revenues:
Investment banking
Financing
Equities                              $        30,010       $        18,781      59.8  %
Debt                                           12,808                16,573     (22.7 )
Advisory services                              20,215                16,317      23.9
Total investment banking                       63,033                51,671      22.0

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