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PJC > SEC Filings for PJC > Form 10-K on 28-Feb-2014All Recent SEC Filings

Show all filings for PIPER JAFFRAY COMPANIES

Form 10-K for PIPER JAFFRAY COMPANIES


28-Feb-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following information should be read in conjunction with the accompanying audited 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, 2013 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, 2013, 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 include adjustments to exclude (1) revenues and expenses related to noncontrolling interests, (2) amortization of intangible assets related to acquisitions, (3) compensation from acquisition-related agreements, (4) restructuring and acquisition integration costs and (5) a goodwill impairment charge recognized in 2011. These adjustments affect the following financial measures: net revenues, non-compensation expenses, net income applicable to Piper Jaffray Companies, earnings per diluted common share, segment net revenues, segment operating expenses, segment pre-tax operating income and segment pre-tax operating margin. Management believes that presenting these results and measures on an adjusted basis in conjunction with U.S. GAAP measures provides the most meaningful basis for comparison of its operating results across 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 to 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 advisory firm specializing in mergers and acquisitions. The acquisition further strengthens our mergers and acquisitions position 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 consolidated financial statements. We incurred $4.3 million of restructuring, integration and transaction costs in the year ended December 31, 2013 related to these acquisitions.


Table of Contents

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 partnerships ("MLPs") focused on the energy sector 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 and Fiduciary Asset Management, LLC ("FAMCO"), an asset management subsidiary. As of September 30, 2012, we ceased operations related to our Hong Kong capital markets business. As a result of discontinuing this business, we realized net cash proceeds of approximately $19.1 million, due principally to a U.S. tax benefit for the realized loss on the investment in our Hong Kong subsidiaries. We sold FAMCO in the second quarter of 2013. FAMCO was classified as held for sale as of December 31, 2012. See Note 5 to our consolidated financial statements for further discussion of our discontinued operations.


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Results for the year ended December 31, 2013

For the year ended December 31, 2013, net income applicable to Piper Jaffray Companies, including continuing and discontinued operations, was $45.1 million, or $2.70 per diluted common share. Net income applicable to Piper Jaffray Companies from continuing operations in 2013 was $49.8 million, or $2.98 per diluted common share, compared with $47.1 million, or $2.58 per diluted common share, for the prior-year period. The current period results of operations include a $4.0 million, or $0.24 per diluted common share, tax benefit from reversing the full amount of our U.K. subsidiary's deferred tax asset valuation allowance. In 2013, we generated a return on average common shareholders' equity of 6.2 percent, compared with 5.7 percent for 2012. Net revenues from continuing operations for the year ended December 31, 2013 were $525.2 million, up 7.4 percent from $489.0 million in the year-ago period. In 2013, we recorded increased revenues from our equity-related businesses, asset management services and merchant banking activities, offset in part by lower advisory services and fixed income institutional brokerage revenues. For the year ended December 31, 2013, non-compensation expenses from continuing operations were $127.1 million, up from $123.1 million in 2012.

For the year ended December 31, 2013, adjusted net income applicable to Piper Jaffray Companies from continuing operations was $59.5 million(1), or $3.56(1) per diluted common share, compared with $54.3 million(1), or $2.98(1) per diluted common share, for the prior-year period. Adjusted net revenues for the year ended December 31, 2013 were $516.4 million(1), an increase of 6.5 percent from $484.8 million(1) reported in the year-ago period. For the year ended December 31, 2013, adjusted non-compensation expenses were $111.0 million(1), essentially flat compared to $110.8 million(1) for the year ended December 31, 2012.

(1) Reconciliation of U.S. GAAP to adjusted non-GAAP financial information

                                                              Year Ended December 31,
(Dollars in thousands)                                         2013              2012
 Net revenues:
Net revenues - U.S. GAAP basis                           $     525,195      $    488,952
Adjustments:
Revenue related to noncontrolling interests                     (8,794 )          (4,174 )
Adjusted net revenues                                    $     516,401      $    484,778

Non-compensation expenses:
Non-compensation expenses - U.S. GAAP basis              $     127,118      $    123,059
Adjustments:
Non-compensation expenses related to noncontrolling
interests                                                       (3,400 )          (1,708 )
Restructuring and integration costs                             (4,689 )          (3,642 )
Amortization of intangible assets related to
acquisitions                                                    (7,993 )          (6,944 )
Adjusted non-compensation expenses                       $     111,036      $    110,765

Net income from continuing operations applicable to
Piper Jaffray Companies:
Net income from continuing operations applicable to
Piper Jaffray Companies - U.S. GAAP basis                $      49,829      $     47,075
 Adjustments:
Compensation from acquisition-related agreements                 1,774               785
Restructuring and integration costs                              2,865             2,225
Amortization of intangible assets related to
acquisitions                                                     5,079             4,243
Adjusted net income from continuing operations
applicable to Piper Jaffray Companies                    $      59,547      $     54,328

Earnings per diluted common share from continuing
operations:
 U.S. GAAP basis                                         $        2.98      $       2.58
 Adjustments:
Compensation from acquisition-related agreements                  0.11              0.04
Restructuring and integration costs                               0.17              0.12
Amortization of intangible assets related to
acquisitions                                                      0.30              0.23
 Non-U.S. GAAP basis, as adjusted                        $        3.56      $       2.98


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Market Data

The following table provides a summary of relevant market data over the past
three years.
                                                                             2013         2012
Year Ended December 31,               2013         2012         2011        v2012        v2011
Dow Jones Industrials Average
(a)                                  16,577       13,104       12,218        26.5  %       7.3  %
NASDAQ (a)                            4,177        3,020        2,605        38.3  %      15.9  %
NYSE Average Daily Number of
Shares Traded
(millions of shares)                  1,034        1,146        1,552        (9.8 )%     (26.2 )%
NASDAQ Average Daily Number of
Shares Traded
(millions of shares)                  1,762        1,741        2,042         1.2  %     (14.7 )%
Mergers and Acquisitions
(number of transactions in U.S.)
(b)                                   9,146        8,400        8,539         8.9  %      (1.6 )%
Public Equity Offerings
(number of transactions in U.S.)
(c) (e)                               1,125          748          663        50.4  %      12.8  %
Initial Public Offerings
(number of transactions in U.S.)
(c)                                     221          139          138        59.0  %       0.7  %
Managed Municipal Underwritings
(number of transactions in
U.S.) (d)                            11,321       13,115       10,574       (13.7 )%      24.0  %
Managed Municipal Underwritings
(value of transactions in
billions in U.S.) (d)              $  331.0     $  379.6     $  287.7       (12.8 )%      31.9  %
10-Year Treasuries Average Rate        2.35 %       1.72 %       2.79 %      36.6  %     (38.4 )%
3-Month Treasuries Average Rate        0.06 %       0.07 %       0.05 %     (14.3 )%      40.0  %

(a) Data provided is at period end.

(b) Source: Securities Data Corporation.

(c) Source: Dealogic (offerings with reported market value greater than $20 million).

(d) Source: Thomson Financial.

(e) Number of transactions includes convertible offerings.

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.


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Outlook for 2014

In 2014, we expect continuing improvement in U.S. economic growth, modest appreciation in the equity markets and gradually increasing U.S. interest rates as the U.S. economy continues to improve by building on momentum that emerged in the second half of 2013. We believe that the interest rate environment has largely factored in the Federal Reserve's intention to taper bond purchases under its quantitative easing program, and interest rates generally will move in response to the rate of economic growth going forward. We are cognizant, however, that quantitative easing may have influenced capital flows into certain asset classes. We will monitor the potential impact on our markets as these capital flows normalize in the absence of quantitative easing.

Rising interest rates and mixed financial market conditions in 2013 resulted in varied financial results across our debt financing and fixed income institutional brokerage businesses. Our fixed income institutional brokerage business reported stronger financial results in the second half of 2013 after overcoming turbulent conditions earlier in the year. Rising interest rates negatively impacted our debt financing revenues as public finance issuances decreased as debt refinancing activity became less attractive. We anticipate that interest rates will continue to increase gradually throughout 2014, which could impact our debt financing and fixed income institutional brokerage revenues. We expect less favorable public finance underwriting conditions in 2014 as the demand for refinancing activity subsides in a rising interest rate environment and new issuance activity is not expected to entirely offset this decline. Our public finance underwriting business is expected to benefit from increased market share and our fixed income institutional sales and trading activities is expected to benefit from the expansion of our middle market sales force. We will continue to manage our inventories and hedging strategies to mitigate market volatility and our exposure to rising interest rates.

The equity markets experienced significant appreciation in 2013 and volatility remained low. Each of our equity-related businesses benefited from these favorable market conditions. We believe that the equity markets will continue to appreciate in 2014, but at more modest levels that may include a period of market correction. Conditions should continue to be accommodative for our equity-related businesses, however, a period of market correction may be disruptive to our capital raising, while our trading business should benefit from higher volatility. In 2014, we expect to reap the full-year benefits of the investments we made in 2013.

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.

Results of Operations

To provide comparative information of our operating results for the periods presented, a discussion of adjusted segment results follows the discussion of our total consolidated U.S. GAAP results. Our adjusted segment results exclude certain revenue and expenses required under U.S. GAAP. See the sections titled "Explanation of Non-GAAP Financial Measures" and "Segment Performance from Continuing Operations" in Management's Discussion and Analysis of Financial Condition and Results of Operations for additional discussion and reconciliations.


Table of Contents

Financial Summary

The following table provides a summary of the results of our operations on a
U.S. GAAP basis and the results of our operations as a percentage of net
revenues for the periods indicated.
                                                                                             As a Percentage of
                                                                                            Net Revenues for the
                                         Year Ended December 31,                          Year Ended December 31,
                                                                   2013       2012
(Dollars in
thousands)               2013          2012           2011        v2012      v2011       2013       2012       2011
Revenues:
Investment banking    $ 248,563     $ 232,958     $  202,513       6.7  %    15.0  %    47.3  %    47.6  %    46.9  %
Institutional
brokerage               146,648       166,642        135,358     (12.0 )     23.1       27.9       34.1       31.3
Asset management         83,045        65,699         63,307      26.4        3.8       15.8       13.4       14.7
Interest                 50,409        37,845         43,447      33.2      (12.9 )      9.6        7.7       10.1
Investment income        21,566         4,903          8,178     339.9      (40.0 )      4.1        1.0        1.9
Total revenues          550,231       508,047        452,803       8.3       12.2      104.8      103.9      104.8

Interest expense         25,036        19,095         20,720      31.1       (7.8 )      4.8        3.9        4.8

Net revenues            525,195       488,952        432,083       7.4       13.2      100.0      100.0      100.0

Non-interest
expenses:
Compensation and
benefits                322,464       296,882        265,015       8.6       12.0       61.4       60.7       61.3
Occupancy and
equipment                25,493        26,454         28,430      (3.6 )     (7.0 )      4.9        5.4        6.6
Communications           21,431        20,543         22,121       4.3       (7.1 )      4.1        4.2        5.1
Floor brokerage and
clearance                 8,270         8,054          8,925       2.7       (9.8 )      1.6        1.6        2.1
Marketing and
business development     21,603        19,908         22,640       8.5      (12.1 )      4.1        4.1        5.2
Outside services         32,982        27,998         27,570      17.8        1.6        6.3        5.7        6.4
Restructuring and
integration costs         4,689         3,642              -      28.7        N/M        0.9        0.7          -
Goodwill impairment           -             -        120,298       N/M        N/M          -          -       27.8
Intangible asset
amortization expense      7,993         6,944          7,256      15.1       (4.3 )      1.5        1.4        1.7
Other operating
expenses                  4,657         9,516         10,017     (51.1 )     (5.0 )      0.9        1.9        2.3
Total non-interest
expenses                449,582       419,941        512,272       7.1      (18.0 )     85.6       85.9      118.6

Income/(loss) from
continuing operations
before income tax
expense                  75,613        69,011        (80,189 )     9.6        N/M       14.4       14.1      (18.6 )

Income tax expense       20,390        19,470          9,120       4.7      113.5        3.9        4.0        2.1

Income/(loss) from
continuing operations    55,223        49,541        (89,309 )    11.5        N/M       10.5       10.1      (20.8 )

Discontinued
operations:
Loss from
discontinued
operations, net of
tax                      (4,739 )      (5,807 )      (11,248 )   (18.4 )    (48.4 )     (0.9 )     (1.2 )     (2.6 )

Net income/(loss)        50,484        43,734       (100,557 )    15.4        N/M        9.6        8.9      (23.3 )

Net income applicable
to noncontrolling
interests                 5,394         2,466          1,463     118.7       68.6  %     1.0        0.5        0.3

Net income/(loss)
applicable to Piper
Jaffray Companies     $  45,090     $  41,268     $ (102,020 )     9.3  %     N/M        8.6  %     8.4  %   (23.6 )%

N/M - Not meaningful


Table of Contents

For the year ended December 31, 2013, we recorded net income applicable to Piper Jaffray Companies, including continuing and discontinued operations, of $45.1 million. The current period results of operations include a $4.0 million tax benefit from reversing the full amount of our U.K. subsidiary's deferred tax asset valuation allowance. Net revenues from continuing operations for the year ended December 31, 2013 were $525.2 million, a 7.4 percent increase compared to $489.0 million in the year-ago period. In 2013, investment banking revenues were $248.6 million, compared with $233.0 million in the prior-year period due to higher equity financing revenues, offset in part by a decline in advisory revenues. For the year ended December 31, 2013, institutional brokerage revenues decreased 12.0 percent to $146.6 million, compared with $166.6 million in 2012. The decline was driven by lower fixed income strategic trading results in 2013. In 2013, asset management fees increased 26.4 percent to $83.0 million, compared with $65.7 million in 2012, due to higher management fees from increased assets under management and higher performance fees earned in the fourth quarter of 2013. In 2013, net interest income increased 35.3 percent to $25.4 million, compared with $18.8 million in 2012. The increase was primarily the result of higher net interest income attributable to noncontrolling interests from our municipal bond fund, as well as higher inventory balances in mortgage-backed and municipal securities. For the year ended December 31, 2013, investment income was $21.6 million, compared with $4.9 million in the prior-year period as we recorded higher investment gains associated with our merchant banking and firm investments. Non-interest expenses from continuing operations were $449.6 million for the year ended December 31, 2013, an increase of 7.1 percent compared to $419.9 million in the prior year, primarily resulting from higher compensation expenses due to an increased revenue base.

For the year ended December 31, 2012, we recorded net income applicable to Piper Jaffray Companies, including continuing and discontinued operations, of $41.3 million. Net revenues from continuing operations for the year ended December 31, 2012 were $489.0 million, a 13.2 percent increase from 2011. In 2012, investment banking revenues were $233.0 million, compared with $202.5 million in 2011, due to higher public finance and advisory services revenues. For the year ended December 31, 2012, institutional brokerage revenues increased 23.1 percent to $166.6 million, compared with $135.4 million in 2011, driven by strong fixed income strategic trading revenues. In 2012, asset management fees were $65.7 million, up modestly compared with 2011. Net interest income in 2012 decreased 17.5 percent to $18.8 million, compared with $22.7 million in 2011. The decrease was primarily the result of a strategic decision to further diversify from overnight funding sources to short term funding sources with extended terms. These short term funding sources with extended terms typically have higher interest costs than overnight financing obtained from repurchase obligations. The change in net interest income is also partly attributable to a decline of our average long inventory balances. For the year ended December 31, 2012, investment income was $4.9 million, compared with $8.2 million in 2011 as we recorded higher investment gains associated with our merchant banking investments in 2011. In 2012, non-interest expenses from continuing operations were $419.9 million, compared with $392.0 million in 2011, which excludes the pre-tax goodwill impairment charge of $120.3 million. This increase was driven by increased variable compensation due to improved operating performance.

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 . . .

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