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PJC > SEC Filings for PJC > Form 10-Q on 30-Jul-2014All Recent SEC Filings

Show all filings for PIPER JAFFRAY COMPANIES

Form 10-Q for PIPER JAFFRAY COMPANIES


30-Jul-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 strengthened our mergers and acquisitions position in the middle market and added 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 and six months ended June 30, 2014

Net income applicable to Piper Jaffray Companies from continuing operations in the second quarter of 2014 was $18.2 million, or $1.11 per diluted common share, compared with $4.4 million, or $0.25 per diluted common share, for the prior-year period. Net revenues from continuing operations for the three months ended June 30, 2014 were $170.0 million, an increase of 70.4 percent from $99.8 million reported in the year-ago period, due to higher equity financing and advisory services revenues, and higher fixed income institutional brokerage revenues. For the three months ended June 30, 2014, non-compensation expenses from continuing operations increased 16.2 percent to $36.5 million, compared to $31.4 million in the second quarter of 2013. Non-compensation expenses from continuing operations increased in the second quarter of 2014 due to incremental costs associated with the acquisitions of Seattle-Northwest and Edgeview completed in the third quarter of 2013, higher third party marketing fees associated with generating new assets into our asset management business, and higher litigation-related expenses.

For the three months ended June 30, 2014, adjusted net income applicable to Piper Jaffray Companies from continuing operations was $20.5 million(1), or $1.25(1) per diluted common share, compared with $5.6 million(1), or $0.32(1) per diluted common share, for the prior-year period. Adjusted net revenues for the three months ended June 30, 2014 were $166.7 million(1), an increase of 63.4 percent from $102.0 million(1) reported in the year-ago period. For the three months ended June 30, 2014, adjusted non-compensation expenses were $33.0 million(1), up 12.6 percent from $29.3 million(1) for the three months ended June 30, 2013.

Net income applicable to Piper Jaffray Companies from continuing operations in the first half of 2014 was $36.0 million, or $2.21 per diluted common share, compared with $15.0 million, or $0.86 per diluted common share, for the prior-year period. For the twelve months ended June 30, 2014, we generated a rolling 12 month return on average common shareholders' equity of 9.2 percent, compared with 6.0 percent for the twelve months ended June 30, 2013. Net revenues from continuing operations for the six months ended June 30, 2014 were $338.2 million, up 61.6 percent from $209.3 million in the year-ago period. For the six months ended June 30, 2014, non-compensation expenses from continuing operations were $71.5 million, compared with $56.7 million for the six months ended June 30, 2013, due to incremental costs associated with the acquisitions of Seattle-Northwest and Edgeview, higher third party marketing fees associated with our asset management business, and higher legal fees. Additionally, non-compensation expenses from continuing operations were reduced in the first half of 2013 due to the receipt of insurance proceeds for the reimbursement of prior legal settlements.


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For the six months ended June 30, 2014, adjusted net income applicable to Piper Jaffray Companies from continuing operations was $40.5 million(1), or $2.49(1) per diluted common share, compared with $17.4 million(1), or $1.00(1) per diluted common share, for the prior-year period. Adjusted net revenues for the six months ended June 30, 2014 were $328.2 million(1), an increase of 57.2 percent from $208.7 million(1) reported in the year-ago period. For the six months ended June 30, 2014, adjusted non-compensation expenses were $64.2 million(1), up 23.3 percent from $52.0 million(1) for the six months ended June 30, 2013.

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

                                         Three Months Ended             Six Months Ended
                                              June 30,                      June 30,
(Dollars in thousands)                   2014           2013           2014           2013
 Net revenues:
Net revenues - U.S. GAAP basis       $  170,031     $   99,772     $  338,164     $  209,305
Adjustments:
Revenue related to noncontrolling
interests                                (3,333 )        2,240         (9,969 )         (570 )
Adjusted net revenues                $  166,698     $  102,012     $  328,195     $  208,735

Non-compensation expenses:
Non-compensation expenses - U.S.
GAAP basis                           $   36,538     $   31,439     $   71,469     $   56,699
Adjustments:
Non-compensation expenses related to
noncontrolling interests                 (1,178 )         (430 )       (2,676 )       (1,339 )
Amortization of intangible assets
related to acquisitions                  (2,318 )       (1,661 )       (4,636 )       (3,322 )
Adjusted non-compensation expenses   $   33,042     $   29,348     $   64,157     $   52,038

Net income from continuing
operations applicable to Piper
Jaffray Companies:
Net income from continuing
operations applicable to Piper
Jaffray Companies - U.S. GAAP basis  $   18,213     $    4,359     $   35,961     $   15,026
 Adjustments:
Compensation from
acquisition-related agreements              865            196          1,653            392
Amortization of intangible assets
related to acquisitions                   1,416          1,015          2,915          2,030
Adjusted net income from continuing
operations applicable to Piper
Jaffray Companies                    $   20,494     $    5,570     $   40,529     $   17,448

Earnings per diluted common share
from continuing operations:
 Earnings per diluted common share -
U.S. GAAP basis                      $     1.11     $     0.25     $     2.21     $     0.86
 Adjustments:
Compensation from
acquisition-related agreements             0.05           0.01           0.10           0.02
Amortization of intangible assets
related to acquisitions                    0.09           0.06           0.18           0.12
 Adjusted earnings per diluted
common share from continuing
operations                           $     1.25     $     0.32     $     2.49     $     1.00

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.


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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, in 2013, the Securities and Exchange Commission adopted final rules pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act governing municipal advisors. Under these rules, municipal advisors must comply with federal fiduciary standards and other business conduct rules when advising state and local governments or companies regarding the issuance of municipal securities, investment of their proceeds or derivative transactions. 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 the second half of 2014, we expect continuing improvement in U.S. economic growth, modest appreciation in the equity markets and gradually increasing U.S. interest rates. We believe that the fixed income market has 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 variety of geopolitical risks percolate across the globe and an escalation of conflict could create economic uncertainties impacting the U.S. equity and debt markets.
Equity markets finished broadly higher in the first half of 2014, and volatility, as measured by the VIX, reached multi-year lows, which attracted issuers into the market. As a result, equity capital raising was robust in the first half of the year. 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 capital raising. The markets also continue to be very constructive to mergers and acquisitions activity. We believe our advisory services business will continue to be strong into the second half of 2014. The low levels of volatility benefiting equity financings tend to depress equity trading activity, which we do not see abating in the near term.
A rising interest rate environment in the second half of 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 and a volatile trading environment. Expectations of rising interest rates has reduced fixed income trading volumes, which has reduced our trading revenues. We expect muted debt underwriting conditions for the remainder of 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.
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 this Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations" for additional discussion and reconciliations.

Financial Summary for the three months ended June 30, 2014 and June 30, 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
                                             June 30,                             June 30,
                                                              2014
(Dollars in thousands)           2014           2013          v2013          2014           2013
Revenues:
Investment banking           $  103,813     $   53,255         94.9  %       61.1 %          53.4  %
Institutional brokerage          34,528         24,611         40.3          20.3            24.7
Asset management                 22,266         18,427         20.8          13.1            18.5
Interest                         12,448         12,286          1.3           7.3            12.3
Investment income/(loss)          2,921         (2,059 )        N/M           1.7            (2.1 )
Total revenues                  175,976        106,520         65.2         103.5           106.8

Interest expense                  5,945          6,748        (11.9 )         3.5             6.8

Net revenues                    170,031         99,772         70.4         100.0           100.0

Non-interest expenses:
Compensation and benefits       103,076         65,000         58.6          60.6            65.1
Occupancy and equipment           7,061          6,543          7.9           4.2             6.6
Communications                    5,432          5,030          8.0           3.2             5.0
Floor brokerage and
clearance                         1,788          2,247        (20.4 )         1.1             2.3
Marketing and business
development                       6,709          5,957         12.6           3.9             6.0
Outside services                  9,914          8,449         17.3           5.8             8.5
Intangible asset
amortization expense              2,318          1,661         39.6           1.4             1.7
Other operating expenses          3,316          1,552        113.7           2.0             1.6
Total non-interest expenses     139,614         96,439         44.8          82.1            96.7

Income from continuing
operations before income tax
expense                          30,417          3,333        812.6          17.9             3.3

Income tax expense               10,049          1,644        511.3           5.9             1.6

Income from continuing
operations                       20,368          1,689          N/M          12.0             1.7

Discontinued operations:
Loss from discontinued
operations, net of tax                -         (1,871 )        N/M             -            (1.9 )

Net income/(loss)                20,368           (182 )        N/M          12.0            (0.2 )

Net income/(loss) applicable
to noncontrolling interests       2,155         (2,670 )        N/M           1.3            (2.7 )

Net income applicable to
Piper Jaffray Companies      $   18,213     $    2,488        632.0  %       10.7 %           2.5  %

N/M - Not meaningful


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For the three months ended June 30, 2014, we recorded net income applicable to Piper Jaffray Companies of $18.2 million. Net revenues from continuing operations for the three months ended June 30, 2014 were $170.0 million, a 70.4 percent increase compared to $99.8 million in the year-ago period. In the second quarter of 2014, investment banking revenues were $103.8 million, compared with $53.3 million in the prior-year period due to strong equity financing and advisory services revenues resulting from favorable capital markets conditions. For the three months ended June 30, 2014, institutional brokerage revenues increased 40.3 percent to $34.5 million, compared with $24.6 million in the second quarter of 2013. In the prior-year period, we recorded lower fixed income institutional brokerage revenues resulting from the rapid rise in interest rates and widening of credit spreads, which led to market volatility during this time. In the second quarter of 2014, asset management fees increased 20.8 percent to $22.3 million, compared with $18.4 million in the second quarter of 2013, due to higher management fees from increased assets under management, particularly related to our master limited partnership ("MLP") product offering. For the three months ended June 30, 2014, net interest income increased to $6.5 million, compared with $5.5 million in the prior-year period. For the three months ended June 30, 2014, investment income was $2.9 million, compared with a loss of $2.1 million in the prior-year period as we recorded higher investment gains associated with our investment in the municipal bond fund that we manage. Non-interest expenses from continuing operations were $139.6 million for the three months ended June 30, 2014, an increase of 44.8 percent compared to $96.4 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 June 30, 2014, compensation and benefits expenses increased 58.6 percent to $103.1 million from $65.0 million in the corresponding period of 2013 due to improved financial results. Compensation and benefits expenses as a percentage of net revenues was 60.6 percent in the second quarter of 2014, compared with 65.1 percent in the second quarter of 2013. The lower compensation expense ratio was due to an increased revenue base.

Occupancy and Equipment - For the three months ended June 30, 2014, occupancy and equipment expenses increased 7.9 percent to $7.1 million, compared with $6.5 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, and incremental occupancy costs related to transitioning to new office space in San Francisco.

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, 2014, communication expenses increased 8.0 percent to $5.4 million, compared with $5.0 million for the three months ended June 30, 2013, due to higher market data service expenses.

Floor Brokerage and Clearance - For the three months ended June 30, 2014, floor brokerage and clearance expenses were $1.8 million, compared with $2.2 million in the corresponding period of 2013, due to lower trading expenses resulting from reduced trading volumes.

Marketing and Business Development - Marketing and business development expenses include travel and entertainment and promotional and advertising costs. For the three months ended June 30, 2014, marketing and business development expenses increased 12.6 percent to $6.7 million, compared with $6.0 million for the three months ended June 30, 2013, due to higher third party marketing fees associated with our asset management business.

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 17.3 percent to $9.9 million in the second quarter of 2014, compared with $8.4 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 8.0 percent due primarily to higher legal fees and fund expenses.


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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 June 30, 2014, intangible asset amortization expense was $2.3 million, . . .

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