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| PJC > SEC Filings for PJC > Form 10-Q on 6-Nov-2009 | All Recent SEC Filings |
6-Nov-2009
Quarterly Report
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, 2008 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, 2008, as updated in our subsequent reports filed
with the SEC. These reports are available at our web site at
www.piperjaffray.com and at the SEC web site at www.sec.gov. Forward-looking
statements speak only as of the date they are made, and we undertake no
obligation to update them in light of new information or future events.
Executive Overview
Our business principally consists of providing investment banking,
institutional brokerage, asset management and related financial services to
middle-market companies, private equity groups, public entities, non-profit
entities and institutional investors in the United States, Europe and Asia. We
generate revenues primarily through the receipt of advisory and financing fees
earned on investment banking activities, commissions and sales credits earned on
equity and fixed income institutional sales and trading activities, net interest
earned on securities inventories, profits and losses from trading activities
related to these securities inventories and asset management fees.
The securities 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.
During the third quarter of 2009, all of our businesses contributed to our
solid performance. The positive fixed income institutional brokerage results we
experienced in the first half of 2009 continued into the third quarter driven by
incremental trading revenues and solid client activity, although below the
robust levels of the second quarter. Additionally, we had a reasonably good
equity financing quarter and we were able to complete several equity financing
transactions across our focus sectors. Equity financing conditions have improved
from the beginning of the year, but activity in this area remains well below
historical levels.
RESULTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009
For the three months ended September 30, 2009, we recorded net income of
$9.3 million from continuing operations, or $0.47 per diluted share, compared
with a net loss from continuing operations of $27.5 million for the
corresponding period in the prior year. Net revenues for the third quarter of
2009 were $119.7 million, an increase of 62.8 percent from $73.5 million
reported in the year-ago period that was driven by a substantial increase in
fixed income institutional brokerage revenues. The third quarter of 2008
included a $21.7 million loss in fixed income institutional brokerage revenues
related to our now discontinued tender option bond program.
For the nine months ended September 30, 2009, net income from continuing
operations was $18.1 million, or $0.93 per diluted share, compared with a net
loss from continuing operations of $30.4 million, or $1.92 per diluted share,
for the prior-year period. Net revenues for the nine months of 2009 increased
25.8 percent from the prior-year period to $335.8 million, driven by higher
fixed income institutional brokerage revenues.
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 also may 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 impacts one or more sectors
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 light of recent conditions
in the global financial markets and the global economy, regulators have
increased their focus on the regulation of the financial services industry.
Changes in the regulatory environment in which we operate could have an adverse
effect on our business.
OUTLOOK FOR THE REMAINDER OF 2009
Equity financing conditions have improved from the beginning of the year;
however, activity in this area remains well below historical levels. In the
first nine months of 2009, we completed several equity financing and advisory
transactions across all our focus sectors. If markets remain conducive to equity
financing, as we experienced in the second and third quarters, we believe equity
financing activity in our focus sectors will continue. Our public finance
business performed well in the second and third quarters and we anticipate this
business may improve further if the non-investment grade portion of the
tax-exempt markets begins to function. We believe advisory activity will be
challenged through the remainder of the year, as buyers remain cautious. We
believe the very favorable fixed income institutional brokerage results we
experienced in the first nine months of 2009 will decline as trading spreads
compress and customer activity slows.
For the nine months ended September 30, 2009, non-compensation expenses were
$96.8 million, down 20 percent compared to the first nine months of 2008. This
decline was a result of a decrease in restructuring-related expenses as well as
cost reduction actions taken in 2008 and continued expense discipline. All
non-compensation expense categories reflected a decline compared with the
year-ago period. We anticipate that our non-compensation expense run-rate will
be in the range of approximately $32 million to $33 million in the fourth
quarter of 2009.
Results of Operations
FINANCIAL SUMMARY FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2009 AND SEPTEMBER
30, 2008
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 Net
For the Three Months Ended Revenues
September 30, For the Three Months Ended
2009 September 30,
(Dollars in thousands) 2009 2008 v2008 2009 2008
Revenues:
Investment banking $ 48,115 $ 48,313 (0.4 ) % 40.2 % 65.7 %
Institutional brokerage 59,576 12,834 364.2 49.8 17.5
Interest 10,398 10,509 (1.1 ) 8.7 14.3
Asset management 3,568 4,314 (17.3 ) 3.0 5.9
Other income 3,340 697 379.2 2.8 0.9
Total revenues 124,997 76,667 63.0 104.5 104.3
Interest expense 5,328 3,148 69.3 4.5 4.3
Net revenues 119,669 73,519 62.8 100.0 100.0
Non-interest expenses:
Compensation and benefits 71,802 80,421 (10.7 ) 60.0 109.4
Occupancy and equipment 7,703 8,092 (4.8 ) 6.4 11.0
Communications 5,474 6,597 (17.0 ) 4.6 9.0
Floor brokerage and clearance 2,974 3,342 (11.0 ) 2.5 4.5
Marketing and business
development 5,498 6,099 (9.9 ) 4.6 8.3
Outside services 6,234 9,270 (32.8 ) 5.2 12.6
Restructuring-related expenses - 4,570 (100.0 ) - 6.2
Other operating expenses 4,402 1,830 140.5 3.7 2.5
Total non-interest expenses 104,087 120,221 (13.4 ) % 87.0 163.5
Income/(loss) before income tax
expense/(benefit) 15,582 (46,702 ) N/M 13.0 (63.5)
Income tax expense/(benefit) 6,316 (19,166 ) N/M 5.3 (26.0)
Net income/(loss) from continuing
operations 9,266 (27,536 ) N/M 7.7 (37.5)
Discontinued operations:
Loss from discontinued
operations, net of tax - (653 ) N/M - (0.8)
Net income/(loss) $ 9,266 $ (28,189 ) N/M 7.7 % (38.3) %
Net income applicable to common
shareholders $ 7,576 N/A N/M 6.3 % N/A
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N/M - Not meaningful
N/A - Not applicable as no allocation of income was made due to loss position
Effective January 1, 2009, the FASB in ASC 260, "Earnings per Share,"
clarified that unvested stock-based payment awards that contain nonforfeitable
rights to dividends or dividend equivalents (whether paid or unpaid) are
participating securities and should be included in the earnings per share
calculation under the two-class method. Our consolidated results of operations
for the three months ended September 30, 2009 and September 30, 2008 include the
effect of ASC 260. For further discussion of our earnings per share, see Note
16, "Earnings Per Share," in our unaudited consolidated financial statements.
For the three months ended September 30, 2009, we recorded net income of
$9.3 million with net revenues of $119.7 million. Revenues increased
62.8 percent from the year-ago period. For the third quarter of 2009, investment
banking revenues were essentially flat at $48.1 million, compared with revenue
of $48.3 million in the prior-year period as lower advisory service revenues
were offset by increases in equity and debt financing activity. Institutional
brokerage revenues in the third quarter of 2009 increased significantly to
$59.6 million, compared with $12.8 million in the corresponding period in the
prior year as a result of higher fixed income sales and trading revenues. In the
third quarter of 2008, we recorded a $21.7 million loss related to our now
discontinued tender option bond program. In the third quarter of 2009, net
interest income decreased to $5.1 million, compared with $7.4 million in the
third quarter of 2008. Asset management fees for the three months ended
September 30, 2009, were $3.6 million, compared with $4.3 million in the
prior-year period, driven by lower assets under management resulting from
declining asset valuations. Other income increased to $3.3 million in the third
quarter of 2009 from $0.1 million in the prior-year period due to gains recorded
on our principal investments. Non-interest expenses decreased to $104.1 million
for the three months ended September 30, 2009, from $120.2 million in the
corresponding period in the prior year, primarily as a result of decreased
compensation and benefits expenses and restructuring costs recorded in the
year-ago period.
NON-INTEREST EXPENSES
Compensation and Benefits - Compensation and benefits expenses, which are the
largest component of our expenses, include salaries, bonuses, benefits,
stock-based compensation, employment taxes and other employee costs. A portion
of compensation expense is comprised of variable incentive arrangements,
including discretionary bonuses, 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 bonus payments, which generally occur in
February, have a greater impact on our cash position and liquidity than is
reflected in our statements of operations.
For the three months ended September 30, 2009, compensation and benefits
expenses decreased 10.7 percent to $71.8 million from $80.4 million in the third
quarter of 2008. This decrease was due to a more variable compensation model in
2009 as well as cost savings associated with restructuring-related activities
that occurred in 2008 and the first half of 2009. Compensation and benefits
expenses as a percentage of net revenues were 60.0 percent for the third quarter
of 2009, compared with 109.4 percent for the third quarter of 2008. The elevated
compensation and benefits ratio in the third quarter of 2008 was attributable to
losses incurred on our now discontinued tender option bond program.
Occupancy and Equipment - Occupancy and equipment expenses in the third
quarter of 2009 were $7.7 million, compared with $8.1 million for the
corresponding period in 2008. The decrease was attributable to prior investments
in technology and equipment becoming fully depreciated and a decrease in base
rent as a result of cost saving initiatives in 2008.
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,
2009, communications expenses were $5.5 million, compared with $6.6 million for
the prior-year period. The decrease was attributable to reduced data
communication expenses as a result of cost saving initiatives in 2008 and early
2009.
Floor Brokerage and Clearance - Floor brokerage and clearance expenses were
$3.0 million for the three months ended September 30, 2009, compared with
$3.3 million for the three months ended September 30, 2008.
Marketing and Business Development - Marketing and business development
expenses include travel and entertainment and promotional and advertising costs.
In the third quarter of 2009, marketing and business development expenses
decreased 9.9 percent to $5.5 million, compared with $6.1 million in the third
quarter of 2008. This decrease was due to cost saving actions taken in late 2008
as well as a decline in travel expenses.
Outside Services - Outside services expenses include securities processing
expenses, outsourced technology functions, outside legal fees and other
professional fees. Outside services expenses decreased 32.8 percent to
$6.2 million in the third quarter of 2009, compared with $9.3 million for the
prior-year period, due to reductions in legal fees and consulting costs.
Additionally, in 2009 we changed vendors for some of our outsourced technology
functions, which resulted in a decline in expenses associated with those
functions.
Restructuring-Related Expense - During the third quarter of 2008, we
implemented certain expense reduction measures, which resulted in a pre-tax
restructuring charge of $4.6 million, consisting of $2.2 million in severance
benefits and $2.4 million for the reduction of office space.
Other Operating Expenses - Other operating expenses include insurance costs,
license and registration fees, expenses related to our charitable giving
program, amortization of intangible assets and litigation-related expenses,
which consist of the amounts we reserve and/or pay out related to legal and
regulatory matters. In the third quarter of 2009, other operating expenses
increased to $4.4 million, compared with $1.8 million in the third quarter of
2008, primarily due to increased litigation-related expenses. In the third
quarter of 2008, we had a favorable resolution of a trading-related litigation
matter which decreased litigation-related expenses.
Income Taxes - For the three months ended September 30, 2009, our provision
for income taxes was $6.3 million, equating to an effective tax rate of
40.5 percent. For the three months ended September 30, 2008, income taxes from
continuing operations was a benefit of $19.2 million, equating to an effective
tax rate of 41.0 percent.
NET REVENUES FROM OPERATIONS (DETAIL)
For the Three Months Ended
September 30,
2009
2009 2008 v2008
(Dollars in thousands)
Net revenues:
Investment banking
Financing
Equities $ 17,769 $ 11,397 55.9 %
Debt 20,493 17,771 15.3
Advisory services 10,138 21,358 (52.5)
Total investment banking 48,400 50,526 (4.2)
Institutional brokerage
Equities 31,438 35,302 (10.9)
Fixed income 32,101 (17,280 ) N/M
Total institutional brokerage 63,539 18,022 252.6
Asset management 3,568 4,314 (17.3)
Other income 4,162 657 533.5
Total net revenues $ 119,669 $ 73,519 62.8 %
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N/M - Not meaningful
Investment banking revenues comprise all the revenues generated through
financing and advisory services activities including derivative activities that
relate to debt financing. To assess the profitability of investment banking, we
aggregate investment banking fees with the net interest income or expense
associated with these activities.
Investment banking revenues decreased 4.2 percent to $48.4 million in the
third quarter of 2009, compared with $50.5 million in the corresponding period
in 2008. For the three months ended September 30, 2009, equity financing
revenues increased to $17.8 million, compared with $11.4 million in the
prior-year period due to increased activity. Equity capital markets activity was
depressed in the third quarter of 2008 due to difficult market conditions, which
continued through the first quarter of 2009. Although the third quarter of 2009
was an improvement from 2008, equity financing revenues remain below our
historical quarterly average. In the third quarter of 2009, we completed 24
equity financings raising $4.5 billion in capital for our clients. In the third
quarter of 2008, we completed 13 equity financings raising $2.4 billion in
capital for our clients. Debt financing revenues in the third quarter of 2009
increased 15.3 percent to $20.5 million due to higher public finance
underwriting revenues attributable to an increased number of transactions
completed. For the third quarter of 2009, we underwrote 150 public finance
issues with a par value of $2.4 billion, compared with 93 public finance issues
with a par value of $2.0 billion for the prior-year period. For the three months
ended September 30, 2009, advisory services revenues decreased 52.5 percent to
$10.1 million, compared with $21.4 million in the prior year period. The
decrease was a result of a decline in both the number of completed transactions
and average revenue per transaction. We completed 6 advisory transactions with
an aggregate transaction value of $0.5 billion during the third quarter of 2009,
compared with 13 advisory transactions with an aggregate transaction value of
$7.3 billion in the third quarter of 2008.
Institutional brokerage revenues comprise all the revenues generated through
trading activities, which consist primarily of facilitating customer trades. To
assess the profitability of institutional brokerage activities, we aggregate
institutional brokerage revenues with the net interest income or expense
associated with financing, economically hedging and holding long or short
inventory positions. Our results may vary from quarter to quarter as a result of
changes in trading margins, trading gains and losses, net interest spreads,
trading volumes and the timing of transactions based on market opportunities.
For the three months ended September 30, 2009, institutional brokerage
revenues increased significantly to $63.5 million, compared with $18.0 million
in the prior-year period, as strong fixed income brokerage revenues more than
offset the decline in equity sales and trading revenues. Equity institutional
brokerage revenues decreased 10.9 percent to $31.4 million in the third quarter
of 2009, compared with $35.3 million in the prior-year period due to lower U.S.
high touch equities sales and trading revenues resulting from a decline in
trading volume. Fixed income institutional brokerage revenues were $32.1 million
in the third quarter of 2009, compared with a loss of $17.3 million in the
prior-year period. In the third quarter of 2009, all fixed income products
produced strong revenues as the client flow business was solid across both tax
exempt and taxable products. In the third quarter of 2008, the loss was
primarily driven by a $21.7 million loss related to our now discontinued tender
option bond program.
For the three months ended September 30, 2009, asset management fees
decreased to $3.6 million, compared with $4.3 million in the prior-year period,
due to a decline in assets under management resulting from a decline in asset
valuations. As of September 30, 2009, we had $6.7 billion in assets under
management compared with $8.1 billion at September 30, 2008.
Other income/loss includes gains and losses from our investments in private
equity and venture capital funds, other firm investments and income associated
with the forfeiture of equity awards. In the third quarter of 2009, we recorded
income of $4.2 million, compared with $0.7 million of income in the prior year
period as we recorded higher income associated with the valuation of our
principal investments.
DISCONTINUED OPERATIONS
Discontinued operations include the resolution of certain legal matters and
revisions to restructuring estimates related to our Private Client Services
("PCS") business, which we sold to UBS on August 11, 2006.
In the third quarter of 2008, discontinued operations recorded a net loss of
$0.7 million, related to changes in estimates on office space leased.
FINANCIAL SUMMARY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND SEPTEMBER 30,
2008
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 Net
For the Nine Months Ended Revenues
September 30, For the Nine Months Ended
2009 September 30,
(Dollars in thousands) 2009 2008 v2008 2009 2008
Revenues:
Investment banking $ 134,615 $ 135,762 (0.8 ) % 40.1 % 50.8 %
Institutional brokerage 175,455 93,842 87.0 52.3 35.1
Interest 26,659 38,782 (31.3 ) 7.9 14.5
Asset management 9,817 12,984 (24.4 ) 2.9 4.9
Other income/(loss) (1,209 ) 1,469 N/M (0.4 ) 0.6
Total revenues 345,337 282,839 22.1 102.8 105.9
Interest expense 9,496 15,852 (40.1 ) 2.8 5.9
Net revenues 335,841 266,987 25.8 100.0 100.0
Non-interest expenses:
Compensation and benefits 201,503 200,785 0.4 60.0 75.2
Occupancy and equipment 21,901 24,335 (10.0 ) 6.5 9.1
Communications 17,003 19,205 (11.5 ) 5.0 7.2
Floor brokerage and clearance 9,088 9,895 (8.2 ) 2.7 3.7
Marketing and business
development 13,362 19,576 (31.7 ) 4.0 7.3
Outside services 21,168 29,220 (27.6 ) 6.3 10.9
. . .
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