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PJC > SEC Filings for PJC > Form 10-Q on 1-May-2014All Recent SEC Filings

Show all filings for PIPER JAFFRAY COMPANIES

Form 10-Q for PIPER JAFFRAY COMPANIES


1-May-2014

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, 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, and (3) compensation from acquisition-related agreements. 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 and investing activities, which focus on proprietary investments in municipal bonds, mortgage-backed securities, equity securities, and merchant banking activities that 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 unaudited consolidated financial statements.


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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 investments in 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 include the operating results of our Hong Kong capital markets business, which ceased operations in 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.

Results for the three months ended March 31, 2014

Net income applicable to Piper Jaffray Companies from continuing operations in the first quarter of 2014 was $17.7 million, or $1.10 per diluted common share, compared with $10.7 million, or $0.60 per diluted common share, for the prior-year period. At March 31, 2014, we generated a rolling 12 month return on average common shareholders' equity of 7.2 percent, compared with 6.7 percent at March 31, 2013. Net revenues from continuing operations for the three months ended March 31, 2014 were $168.1 million, up 53.5 percent from $109.5 million in the year-ago period due to higher equity financing and advisory services revenues. For the three months ended March 31, 2014, non-compensation expenses from continuing operations were $34.9 million, compared with $25.3 million for the three months ended March 31, 2013. Non-compensation expenses from continuing operations were reduced in the first quarter of 2013 due to the receipt of insurance proceeds for the reimbursement of prior legal settlements. Additionally, the first quarter of 2014 includes incremental costs associated with the acquisitions of Seattle-Northwest and Edgeview completed in the third quarter of 2013.

For the three months ended March 31, 2014, adjusted net income applicable to Piper Jaffray Companies from continuing operations was $20.0 million(1), or $1.24(1) per diluted common share, compared with $11.9 million(1), or $0.67(1) per diluted common share, for the prior-year period. Adjusted net revenues for the three months ended March 31, 2014 were $161.5 million(1), an increase of 51.3 percent from $106.7 million(1) reported in the year-ago period. For the three months ended March 31, 2014, adjusted non-compensation expenses were $31.1 million(1), up 37.1 percent from $22.7 million(1) for the three months ended March 31, 2013.

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

                                                             Three Months Ended March 31,
(Dollars in thousands)                                         2014                 2013
 Net revenues:
Net revenues - U.S. GAAP basis                           $      168,133       $      109,533
Adjustments:
Revenue related to noncontrolling interests                      (6,636 )             (2,810 )
Adjusted net revenues                                    $      161,497       $      106,723

Non-compensation expenses:
Non-compensation expenses - U.S. GAAP basis              $       34,931       $       25,260
Adjustments:
Non-compensation expenses related to noncontrolling
interests                                                        (1,498 )               (909 )
Amortization of intangible assets related to
acquisitions                                                     (2,318 )             (1,661 )
Adjusted non-compensation expenses                       $       31,115       $       22,690

Net income from continuing operations applicable to
Piper Jaffray Companies:
Net income from continuing operations applicable to
Piper Jaffray Companies - U.S. GAAP basis                $       17,748       $       10,667
 Adjustments:
Compensation from acquisition-related agreements                    788                  196
Amortization of intangible assets related to
acquisitions                                                      1,499                1,015
Adjusted net income from continuing operations
applicable to Piper Jaffray Companies                    $       20,035       $       11,878

Earnings per diluted common share from continuing
operations:
 U.S. GAAP basis                                         $         1.10       $         0.60
 Adjustments:
Compensation from acquisition-related agreements                   0.05                 0.01
Amortization of intangible assets related to
acquisitions                                                       0.09                 0.06
 Non-U.S. GAAP basis, as adjusted                        $         1.24       $         0.67


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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) and credit spreads, the level and shape of various yield curves, the volume and value of trading in securities, and the demand for asset management services.

Factors that differentiate our business within the financial services industry may also affect our financial results. For example, our capital markets 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 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 fixed income market has largely factored in the Federal Reserve's intention to continue tapering bond purchases under its quantitative easing program, and interest rates generally will move in response to the rate of economic growth and inflation expectations going forward, but will be sensitive to the Federal Reserve's short-term interest rate policies and guidance.

A rising interest rate environment in 2014 may result in varied financial results across our debt financing and fixed income institutional brokerage businesses. The sharp increase in interest rates in mid-2013 resulted in a substantial decline in debt refinancing activity, which has negatively impacted our debt financing revenues. We expect less favorable debt 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. The strength of our broader product offerings and investments in our public finance business over the past few years will benefit us during these challenging conditions. We will continue to manage our inventories and hedging strategies to mitigate market volatility and our exposure to rising interest rates.

Equity markets finished the quarter slightly ahead of their record levels at the end of 2013, and attracted both issuers and investors into the market. As a result, equity capital raising remained strong and trading volumes increased from 2013 levels. 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.

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

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.

Financial Summary for the three months ended March 31, 2014 and March 31, 2013

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
                                        Three Months Ended                   Three Months Ended
                                             March 31,                            March 31,
                                                              2014
(Dollars in thousands)           2014           2013          v2013          2014           2013
Revenues:
Investment banking           $   88,474     $   40,821        116.7  %       52.6 %          37.3  %
Institutional brokerage          44,034         40,147          9.7          26.2            36.7
Asset management                 20,959         18,456         13.6          12.5            16.8
Interest                         13,659         10,823         26.2           8.1             9.9
Investment income                 6,768          5,065         33.6           4.0             4.6
Total revenues                  173,894        115,312         50.8         103.4           105.3

Interest expense                  5,761          5,779         (0.3 )         3.4             5.3

Net revenues                    168,133        109,533         53.5         100.0           100.0

Non-interest expenses:
Compensation and benefits       100,489         66,105         52.0          59.8            60.4
Occupancy and equipment           6,778          5,817         16.5           4.0             5.3
Communications                    5,955          5,232         13.8           3.5             4.8
Floor brokerage and
clearance                         1,834          2,150        (14.7 )         1.1             2.0
Marketing and business
development                       5,526          4,980         11.0           3.3             4.5
Outside services                  9,493          7,214         31.6           5.6             6.6
Intangible asset
amortization expense              2,318          1,661         39.6           1.4             1.5
Other operating expenses          3,027         (1,794 )        N/M           1.8            (1.6 )
Total non-interest expenses     135,420         91,365         48.2          80.5            83.4

Income from continuing
operations before income tax
expense                          32,713         18,168         80.1          19.5            16.6

Income tax expense                9,827          5,600         75.5           5.8             5.1

Income from continuing
operations                       22,886         12,568         82.1          13.6            11.5

Discontinued operations:
Loss from discontinued
operations, net of tax                -           (521 )        N/M             -            (0.5 )

Net income                       22,886         12,047         90.0          13.6            11.0

Net income applicable to
noncontrolling interests          5,138          1,901        170.3           3.1             1.7

Net income applicable to
Piper Jaffray Companies      $   17,748     $   10,146         74.9  %       10.6 %           9.3  %

N/M - Not meaningful


Table of Contents

For the three months ended March 31, 2014, we recorded net income applicable to Piper Jaffray Companies of $17.7 million. Net revenues from continuing operations for the three months ended March 31, 2014 were $168.1 million, a 53.5 percent increase compared to $109.5 million in the year-ago period. In the first quarter of 2014, investment banking revenues were $88.5 million, compared with $40.8 million in the prior-year period due to strong equity financing and advisory services revenues resulting from favorable equity capital markets conditions. For the three months ended March 31, 2014, institutional brokerage revenues increased 9.7 percent to $44.0 million, compared with $40.1 million in the first quarter of 2013, due to higher equity institutional brokerage revenues. In the first quarter of 2014, asset management fees increased 13.6 percent to $21.0 million, compared with $18.5 million in the first quarter of 2013, due to higher management fees from increased assets under management, particularly related to our master limited partnership ("MLP") product offering. In the first three months of 2014, net interest income increased 56.6 percent to $7.9 million, compared with $5.0 million in prior-year period. 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 three months ended March 31, 2014, investment income was $6.8 million, compared with $5.1 million in the prior-year period as we recorded higher investment gains associated with our investment in the municipal bond funds that we manage. Non-interest expenses from continuing operations were $135.4 million for the three months ended March 31, 2014, an increase of 48.2 percent compared to $91.4 million in the prior year, primarily resulting from higher compensation expenses due to a significantly increased revenue base.

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, 2014, compensation and benefits expenses increased 52.0 percent to $100.5 million from $66.1 million in 2013 due to improved financial results. Compensation and benefits expenses as a percentage of net revenues was 59.8 percent in the first quarter of 2014 and 60.4 percent in the first quarter of 2013.

Occupancy and Equipment - For the three months ended March 31, 2014, occupancy and equipment expenses increased 16.5 percent to $6.8 million, compared with $5.8 million in the corresponding period of 2013. The increase was primarily the result of incremental occupancy expenses from our acquisitions of Seattle-Northwest and Edgeview completed during the third quarter of 2013.

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, 2014, communication expenses increased 13.8 percent to $6.0 million, compared with $5.2 million for the three months ended March 31, 2013. The increase resulted from higher market data service expenses due to increased headcount driven by our acquisitions and investments in personnel made during 2013.

Floor Brokerage and Clearance - For the three months ended March 31, 2014, floor brokerage and clearance expenses were $1.8 million, compared with $2.2 million million in the corresponding period of 2013.

Marketing and Business Development - Marketing and business development expenses include travel and entertainment and promotional and advertising costs. For the three months ended March 31, 2014, marketing and business development expenses increased 11.0 percent to $5.5 million, compared with $5.0 million for the first quarter of 2013, due to higher travel expenses resulting from increased equity underwriting and advisory activities.

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 31.6 percent to $9.5 million in the first quarter of 2014, compared with $7.2 million in the corresponding period of 2013. Excluding the portion of expenses from non-controlled equity interests in our consolidated alternative asset management funds, outside services expenses increased 26.5 percent due primarily to increased third party marketing and finders fees associated with the funds in our asset management business, along with higher legal fees.


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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 March 31, 2014, intangible asset amortization expense was $2.3 million, compared with $1.7 million in the three months ended March 31, 2013. The increase was attributable to incremental 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 $3.0 million in the first quarter of 2014, compared with income of $1.8 million in the first quarter of 2013. In the first quarter of 2013 we received insurance proceeds for the reimbursement of prior legal settlements.

Income Taxes - For the three months ended March 31, 2014, our provision for income taxes was $9.8 million equating to an effective tax rate, excluding noncontrolling interests, of 35.6 percent, compared with $5.6 million in the prior-year period equating to an effective tax rate, excluding noncontrolling interests, of 34.4 percent.

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 our 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.

Throughout this section, we have presented segment results on both a U.S. GAAP and non-GAAP basis. Management believes that presenting adjusted segment pre-tax operating income and adjusted segment pre-tax operating margin in conjunction with the U.S. GAAP measures provides a more meaningful basis for comparison of its operating results and underlying trends between periods.

Adjusted segment pre-tax operating income and adjusted segment pre-tax operating margin exclude (1) revenues and expenses related to noncontrolling interests,
(2) amortization of intangible assets related to acquisitions, and (3) compensation from acquisition-related agreements. For U.S. GAAP purposes, these items are included in each of their respective line items on the consolidated statements of operations.


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