Piper Jaffray Companies Announces 2014 Second Quarter Results

Piper Jaffray Companies (NYSE: PJC) today announced its financial results for the quarter ended June 30, 2014.

Financial Highlights

• Adjusted net income from continuing operations(1) was $20.5 million, or $1.25 per diluted common share(1), in the second quarter of 2014, compared to $5.6 million, or $0.32 per diluted common share, in the second quarter of 2013, and $20.0 million, or $1.24 per diluted common share, in the first quarter of 2014.
• Adjusted net revenues from continuing operations(1) were $166.7 million in the second quarter of 2014, compared to $102.0 million and $161.5 million in the second quarter of 2013 and the first quarter of 2014, respectively.
• Equity financing revenues of $44.1 million in the second quarter of 2014 and $79.4 million in the first half of 2014 were both records. Also, the firm generated record advisory services revenues of $79.4 million in the first half of 2014.
• Adjusted pre-tax operating margin(1) was 19.2% in the second quarter of 2014, compared to 7.8% and 19.3% in the second quarter of 2013 and the first quarter of 2014, respectively.
• Assets under management increased to $12.6 billion at June 30, 2014, compared to $10.2 billion in the year-ago period and $11.5 billion at the end of the first quarter of 2014.
• Rolling 12 month return on average common shareholders' equity increased to 9.2% at June 30, 2014, compared to 6.0% at June 30, 2013. Our rolling 12 month return on average tangible common shareholders' equity(2) improved to 13.9% at June 30, 2014.
• Book value per share increased 9.8% from June 30, 2013 to $52.54 a share at June 30, 2014.

For the second quarter of 2014, on a U.S. GAAP basis, net revenues from continuing operations were $170.0 million, and net income from continuing operations was $18.2 million, or $1.11 per diluted common share. “We are pleased to report very strong results for the second quarter,” said Andrew S. Duff, Chief Executive Officer and Chairman, “Our Asset Management and Investment Banking businesses led the way with strong relative performance in favorable market conditions.”

Second Quarter Results from Continuing Operations – Non-GAAP Basis
Throughout the Adjusted Consolidated Results and Business Segment Results sections of this press release the firm presents 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, and (3) compensation for acquisition-related agreements. Management believes that presenting 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. 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."

Adjusted Consolidated Results
For the second quarter of 2014, adjusted net revenues were $166.7 million, up 63% compared to $102.0 million in the second quarter of 2013 due to higher equity financing and advisory services revenues. Adjusted net revenues increased 3% percent compared to the first quarter of 2014.

For the second quarter of 2014, adjusted compensation and benefits expenses were $101.7 million, up 57% compared to the second quarter of 2013 due to improved financial results. Adjusted compensation and benefits expenses increased 3% compared to the first quarter of 2014.

For the second quarter of 2014, adjusted compensation and benefits expenses were 61.0% of adjusted net revenues, compared to 63.4% and 61.4% for the second quarter of 2013 and the first quarter of 2014, respectively. The adjusted compensation ratio decreased compared to both periods due to an increased revenue base.

Adjusted non-compensation expenses were $33.0 million for the second quarter of 2014, up 13% and 6% compared to the year-ago period and the first quarter of 2014, respectively. Adjusted non-compensation expenses were higher compared to the second quarter of 2013 due to the incremental costs associated with the two acquisitions we closed in the third quarter of the prior year, and increased compared to both periods due to higher litigation-related expenses.

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 operating results of our Hong Kong capital markets business, which we shut down in 2012, and FAMCO, an asset management subsidiary sold in the second quarter of 2013, are presented as discontinued operations for all periods presented.

Capital Markets
For the quarter, Capital Markets generated adjusted pre-tax operating income of $23.1 million, compared to $0.6 million and $24.1 million in the second quarter of 2013 and first quarter of 2014, respectively.

Adjusted net revenues were $144.7 million, up 72% and 2% compared to the year-ago period and the first quarter of 2014, respectively.

• Equity financing revenues of $44.1 million increased 102% and 25% compared to the second quarter of 2013 and the first quarter of 2014, respectively. Revenues were favorable compared to both periods due to more completed transactions and higher revenue per transaction.
• Debt financing revenues were $20.2 million, down 9% compared to the year-ago period due to fewer completed transactions, and up 49% compared to the first quarter of 2014 due to more completed transactions.
• Advisory services revenues were $39.7 million, up 323% compared to the second quarter of 2013 and essentially flat compared to the first quarter of 2014. Revenues increased compared to the year-ago period due to more completed transactions and higher revenue per transaction.
• Equity institutional brokerage revenues of $18.4 million decreased 14% compared to the second quarter of 2013 due to lower client trading volumes. Revenues decreased 24% compared to the first quarter of 2014 due to lower client trading volumes, and the absence of block trades during the quarter.
• Fixed income institutional brokerage revenues were $21.1 million, up 155% compared to the second quarter of 2013 due to trading losses on inventory positions in the year-ago period. In the second quarter of 2013, the fixed income market experienced a rapid increase in interest rates, a widening of credit spreads, and a volatile trading environment. These market dynamics in the year-ago period negatively impacted our inventory values which were not fully mitigated by our hedging strategies. Revenues were down 17% compared to the first quarter of 2014 due to lower trading gains and lower client trading volume.
• Management and performance fees earned from managing our alternative asset management funds were $1.4 million, compared to $0.6 million and $1.7 million in the year-ago period and the sequential quarter, respectively. The increase compared to the second quarter of 2013 was due to higher performance fees.
• Adjusted investment income, which includes gains and losses on our investments in the merchant banking fund and the municipal bond fund that we manage for third-party investors, and other firm investments, was $1.7 million, compared to $2.4 million in the year-ago period and $3.7 million in the first quarter of 2014. The decrease compared to the second quarter of 2013 was due to lower gains on our merchant banking investments, partially offset by higher gains on our investment in the municipal bond fund that we manage for third-party investors. Adjusted investment income decreased compared to the sequential quarter due primarily to lower gains on our merchant banking investments.
• Long-term financing expenses, which primarily represents interest paid on the firm's variable rate senior notes, were $1.7 million, down 9% compared to the second quarter of 2013 and essentially flat with the first quarter of 2014.
• Adjusted operating expenses for the second quarter of 2014 were $121.7 million, up 46% compared to the second quarter of 2013. The increase primarily resulted from higher compensation expenses due to improved operating results and business expansion. Compared to the first quarter of 2014, adjusted operating expenses increased 3%.
• Adjusted segment pre-tax operating margin was 15.9% compared to 0.7% in the year-ago period and 17.0% in the first quarter of 2014. Adjusted pre-tax operating margin improved compared to the second quarter of 2013 due to higher net revenues and decreased compared to the sequential quarter due to higher non-compensation costs.

Asset Management
For the quarter ended June 30, 2014, Asset Management generated adjusted pre-tax operating income of $8.9 million, up 20% and 26% compared to the second quarter of 2013 and the first quarter of 2014, respectively.

Net revenues were $22.0 million, up 22% and 12% compared to the second quarter of 2013 and the first quarter of 2014, respectively. The increase compared to both periods was due to higher management fees from increased assets under management (AUM) driven by market appreciation, and higher investment income.

• Adjusted operating expenses for the current quarter were $13.0 million, up 24% compared to the year-ago period due to higher compensation and non-compensation expenses. Compared to the first quarter of 2014, adjusted operating expenses increased by 3%.
• Adjusted segment pre-tax operating margin was 40.7%, compared to 41.4% in the year-ago period and 36.0% in the first quarter of 2014. Adjusted segment pre-tax operating margin declined relative to the second quarter of 2013 due to higher non-compensation expenses, and improved from the sequential quarter due to a lower compensation ratio driven by higher net revenues.
• AUM was $12.6 billion at the end of the second quarter of 2014, compared to $10.2 billion in the year-ago period and $11.5 billion at the end of the first quarter of 2014. Increases in AUM have been driven primarily by market appreciation.

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 Thur., July 24 at 9 a.m. ET (8 a.m. CT). The earnings release will be available on or after July 24 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 #63714190. 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 July 24 at the same Web address or by calling (855)859-2056 and referencing reservation #63714190.

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, 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 market positioning of and prospects for our public finance business, the environment and prospects for capital markets and corporate advisory transactions (including our performance in specific sectors), anticipated financial results generally (including expectations regarding our non-compensation 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), our strategic priorities (including growth in public finance, asset management, and corporate advisory), 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;
• interest rate volatility, especially if the changes are rapid or severe, could negatively impact our fixed income institutional business;
• 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;
• 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;
• 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, 2013 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, 2013, 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.

© 2014 Piper Jaffray Companies, 800 Nicollet Mall, Suite 1000, Minneapolis, Minnesota 55402-7020

Segment pre-tax operating income and segment pre-tax operation margin exclude the results of discontinued operations.

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."

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."

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.