Piper Jaffray Companies Announces 2016 Second Quarter Results

Piper Jaffray Companies Announces 2016 Second Quarter Results

Piper Jaffray Companies (NYSE: PJC) today announced its financial results for the quarter ended June 30, 2016.

“Execution on our growth strategies highlighted by strong performance in areas of targeted investment, particularly Public Finance and Fixed Income, delivered improved results on a more balanced business mix for the quarter,” said Andrew S. Duff, Chairman and CEO of Piper Jaffray. “A detailed review of our cost base, which has expanded due to growth investments, is underway in order to drive higher returns for our shareholders.”

Financial Highlights

• Strong results in our fixed income-related businesses, driven by our investments in these businesses coupled with accommodative markets, produced a year-over-year increase in revenues. Debt and equity financing combined to more than offset a decline in advisory services to drive the sequential increase in revenue.
• Pre-tax operating margin improved relative to the sequential quarter due to higher net revenues, as well as moderating expense levels.
• Our rolling 12 month return on average common shareholders' equity was 2.8% at June 30, 2016. Our adjusted return on average common shareholders' equity⁽²⁾ was 6.7% at June 30, 2016.
• Our U.S. GAAP results were adversely impacted by acquisition-related compensation expenses and restructuring and integration costs, which are excluded from our non-GAAP results.

Business Segment Results

The firm has two reportable business segments: Capital Markets and Asset Management. Consolidated net revenues and expenses are fully allocated to these two segments. The variance explanations for net revenues are consistent with those on both a U.S. GAAP and non-GAAP basis.

U.S. GAAP Results and Commentary

Capital Markets

The following table summarizes our Capital Markets business segment results on a U.S. GAAP basis for the periods presented:

• Equity financing revenues of $16.8 million decreased 51% compared to the year-ago period and increased 156% compared to the sequential quarter. The equity capital raising markets, which peaked a year ago, have gradually improved from the trough we experienced in the first quarter.
• Debt financing revenues were $33.3 million, up 21% and 109% compared to the second quarter of 2015 and the first quarter of 2016, respectively, due to increased market share from our investments in the business, coupled with robust market conditions.
• Advisory services revenues were $48.1 million, up 9% compared to the second quarter of 2015 due to our expansion into energy and financial institutions sectors over the past year. Revenues were down 41% compared to a strong first quarter of 2016.
• Equity institutional brokerage revenues of $22.6 million increased 11% and 15% compared to the year-ago period and the first quarter of 2016, respectively, due to our expansion into the energy sector through our acquisition of Simmons & Company International ("Simmons").
• Fixed income institutional brokerage revenues were $29.0 million, up 41% and 70% compared to the second quarter of 2015 and first quarter of 2016, respectively. Increased customer flow activity and a strong performance by the municipals asset class drove the increase in revenues.
• Investment income, which includes realized and unrealized gains and losses on investments (including amounts attributable to noncontrolling interests) in our merchant banking fund, and firm investments, were $7.5 million for the quarter, compared to $0.2 million and $2.1 million in the year-ago period and the sequential quarter, respectively. In the second quarter of 2016, we recorded higher gains on the merchant banking portfolio.
• Operating expenses for the second quarter of 2016 were $152.0 million, up 23% compared to the second quarter of 2015 due to higher compensation expenses from higher acquisition-related costs and increased revenues. Higher non-compensation expenses as a result of business expansion, as well as restructuring and integration costs principally related to our acquisition of Simmons, also drove the increase from the year-ago period. Operating expenses were up 10% compared to the first quarter of 2016 due to higher compensation expenses from higher acquisition-related costs and increased revenues.
• Segment pre-tax operating margin was 3.0% compared to 15.4% in the year-ago period and 2.0% in the first quarter of 2016. Pre-tax operating margin was lower compared to the second quarter of 2015 as compensation and non-compensation expenses increased relative to revenues, primarily due to an increase in acquisition-related expenses.

Asset Management

The following table summarizes our Asset Management business segment results on a U.S. GAAP basis for the periods presented:

• Management and performance fees of $12.8 million decreased 31% compared to the year-ago period due to lower management fees from both our value equity and MLP product offerings. The decrease was driven by lower assets under management (AUM) resulting from market depreciation, and net client outflows from our value equity products.
• Investment income/(loss) on firm capital invested in our strategies was income of $0.9 million for the current quarter, compared with losses of $0.7 million and $1.0 million in the second quarter of 2015 and the first quarter of 2016, respectively.
• Operating expenses for the current quarter were $11.9 million, down 18% compared to the year-ago period due to lower compensation expenses from a decline in net revenues. Operating expenses were up 6% compared to the first quarter of 2016 due to higher non-compensation expenses.
• Segment pre-tax operating margin was 13.1% in the second quarter of 2016, compared to 18.9% in the year-ago period and 5.4% in the sequential quarter. Segment pre-tax operating margin was lower compared to the second quarter of 2015 primarily due to a decline in management fees, and higher compared to the first quarter of 2016 due to investment income on firm capital invested in our strategies.
• AUM was $8.1 billion at the end of the second quarter of 2016, compared to $11.4 billion in the year-ago period and $7.5 billion at the end of the first quarter of 2016. The increase in AUM in the second quarter of 2016 was due to net market appreciation from our MLP product offerings, which were partially offset by net client outflows in our value equity product offerings.

Non-GAAP Results and Commentary

Throughout this section of this press release we present financial measures that are not prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP"). The 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 for acquisition-related agreements and (4) restructuring and acquisition integration costs. Management believes that presenting results and measures on this adjusted basis alongside U.S. GAAP measures provides the most meaningful basis for comparison of its operating results across periods. For a detailed explanation of the adjustments made to the corresponding U.S. GAAP measures, see "Reconciliation of U.S. GAAP to Selected Summary Financial Information."

Capital Markets

The following table summarizes our Capital Markets business segment results on a non-GAAP basis for the periods presented:

• The variance explanations for net revenues on a non-GAAP basis are consistent with those on a U.S. GAAP basis.
• Adjusted operating expenses for the second quarter of 2016 were $135.1 million, up 11% compared to the second quarter of 2015 due to higher compensation and non-compensation expenses as a result of expansion into the energy and financial institutions sectors. Adjusted operating expenses were up 7% compared to the first quarter of 2016 due to higher compensation expenses from increased revenues, as well as higher non-compensation expenses primarily due to a full quarter of expenses related to the Simmons acquisition.
• Adjusted segment pre-tax operating margin was 12.0% compared to 16.7% in the year-ago period and 10.0% in the first quarter of 2016. Adjusted pre-tax operating margin was lower compared to the second quarter of 2015 as compensation and non-compensation expenses increased relative to revenues due to funding related to our growth initiatives, and higher compared to the sequential quarter primarily due to increased net revenues.

Asset Management

The following table summarizes our Asset Management business segment results on a non-GAAP basis for the periods presented:

* Management believes that presenting adjusted segment pre-tax operating margin excluding investment income/(loss) provides the most meaningful basis for comparison of the operating results for the Asset Management segment across periods.

• The variance explanations for net revenues, operating expenses and margin on a non-GAAP basis are consistent with those on a U.S. GAAP basis. The difference between our U.S. GAAP and non-GAAP operating expenses is due to intangible asset amortization expense. See also discussion above on AUM.

Other Matters

In the second quarter of 2016, we incurred $3.4 million of restructuring and integration charges. These charges principally resulted from costs to vacate redundant leased office space, contract termination fees and transaction costs related to our acquisition of Simmons.

During the second quarter of 2016, we repurchased $42.7 million, or 1,063,000 shares of our common stock, at an average price of $40.15 per share.

Additional Shareholder Information

Conference Call

Andrew S. Duff, chairman and chief executive officer, and Debbra L. Schoneman, chief financial officer, will hold a conference call to review the financial results on Thur., Jul. 28 at 9 a.m. ET (8 a.m. CT). The earnings release will be available on or after Jul. 28 at the firm's Web site at www.piperjaffray.com. The call can be accessed via webcast or by dialing (888)810-0209 or (706)902-1361 (international) and referencing reservation #43558164. Callers should dial in at least 15 minutes prior to the call time. A replay of the conference call will be available beginning at approximately 12 p.m. ET Jul. 28 at the same Web address or by calling (855)859-2056 and referencing reservation #43558164.

About Piper Jaffray

Piper Jaffray is an investment bank and asset management firm serving clients in the U.S. and internationally. Proven advisory teams combine deep industry, product and sector expertise with ready access to capital. Founded in 1895, the firm is headquartered in Minneapolis and has offices across the United States and in London, Aberdeen, Hong Kong and Zurich. www.piperjaffray.com

Cautionary Note Regarding Forward-Looking Statements

This press release and the conference call to discuss the contents of this press release contain forward-looking statements. Statements that are not historical or current facts, including statements about beliefs and expectations, are forward-looking statements and are subject to significant risks and uncertainties that are difficult to predict. These forward-looking statements cover, among other things, statements made about general economic and market conditions (including the outlook for equity markets and the interest rate environment), the environment and prospects for corporate advisory, capital markets and public finance transactions (including our performance in specific sectors and the outlook for future quarters), anticipated financial results generally (including expectations regarding our noncompensation expenses, compensation and benefits expense, compensation ratio, revenue levels, operating margins, earnings per share, effective tax rate, and return on equity), current deal pipelines (or backlogs), financial results for our asset management segment (including our performance in specific sectors, e.g. energy-based MLPs), the liquidity of fixed income markets and impact on our related inventory, our strategic priorities (including growth in public finance, asset management, and corporate advisory), the expected benefits of our expansion into the financial institutions and energy sectors, including the expected benefits of the integration of Simmons and Company International, River Branch Holdings LLC, and BMO Capital Markets GKST Inc. or other similar matters.

Forward-looking statements involve inherent risks and uncertainties, both known and unknown, and important factors could cause actual results to differ materially from those anticipated or discussed in the forward-looking statements. These risks, uncertainties and important factors include, but are not limited to, the following:

• market and economic conditions or developments may be unfavorable, including in specific sectors in which we operate, and these conditions or developments, such as market fluctuations or volatility, may adversely affect our business, revenue levels and profitability;
• net revenues from equity and debt financings and corporate advisory engagements may vary materially depending on the number, size, and timing of completed transactions, and completed transactions do not generally provide for subsequent engagements;
• the volume of anticipated investment banking transactions as reflected in our deal pipelines (and the net revenues we earn from such transactions) may differ from expected results if there is a decline in macroeconomic conditions or the financial markets, or if the terms of any transactions are modified;
• asset management revenue may vary based on product trends favoring passive investment products, and investment performance and market factors, with market factors impacting certain sectors that are more heavily weighted to our business, e.g. energy-based MLP funds;
• interest rate volatility, especially if the changes are rapid or severe, could negatively impact our fixed income institutional business and the negative impact could be exaggerated by reduced liquidity in the fixed income markets;
• strategic trading activities comprise a meaningful portion of our fixed income institutional brokerage revenue, and results from these activities may be volatile and vary significantly, including the possibility of incurring losses, on a quarterly and annual basis;
• we may not be able to effectively integrate any business or groups of employees we acquire or hire, and the expected benefits (e.g. cost and revenue synergies) of any acquisitions or strategic hires, including that of Simmons and Company International, River Branch Holdings LLC and BMO Capital Markets GKST Inc., may take longer than anticipated to achieve and may not be achieved in their entirety or at all;
• our stock price may fluctuate as a result of several factors, including but not limited to, changes in our revenues and operating results.

A further listing and description of these and other risks, uncertainties and important factors can be found in the sections titled “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2015 and “Management's Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2015, and updated in our subsequent reports filed with the SEC (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 readers are cautioned not to place undue reliance on them. We undertake no obligation to update them in light of new information or future events.

© 2016 Piper Jaffray Companies, 800 Nicollet Mall, Suite 1000, Minneapolis, Minnesota 55402-7020

N/M — Not meaningful

This presentation includes non-GAAP measures. The non-GAAP measures are not meant to be considered in isolation or as a substitute for the corresponding U.S. GAAP measures, and should be read only in conjunction with our consolidated financial statements prepared in accordance with U.S. GAAP. For a detailed explanation of the adjustments made to the corresponding U.S. GAAP measures, see "Reconciliation of U.S. GAAP to Selected Summary Financial Information."

N/M — Not meaningful

This presentation includes non-GAAP measures. The non-GAAP measures are not meant to be considered in isolation or as a substitute for the corresponding U.S. GAAP measures, and should be read only in conjunction with our consolidated financial statements prepared in accordance with U.S. GAAP. For a detailed explanation of the adjustments made to the corresponding U.S. GAAP measures, see "Reconciliation of U.S. GAAP to Selected Summary Financial Information."

* Management believes that presenting adjusted segment pre-tax operating margin excluding investment income/(loss) provides the most meaningful basis for comparison of the operating results for the Asset Management segment across periods.

N/M — Not meaningful

This presentation includes non-GAAP measures. The non-GAAP measures are not meant to be considered in isolation or as a substitute for the corresponding U.S. GAAP measures, and should be read only in conjunction with our consolidated financial statements prepared in accordance with U.S. GAAP.