Jefferies Financial Group Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended May 31, 2022. The quarter’s results are compared with the three months ended May 31, 2021; the year-to-date comparison is with the six months ended May 31, 2021. Jefferies operates investment banking and capital markets, asset management, and legacy Merchant Banking businesses.
Key financial results
| Metric | Three months ended May 31, 2022 | Three months ended May 31, 2021 | Six months ended May 31, 2022 | Six months ended May 31, 2021 |
|---|---|---|---|---|
| Total revenues | $1.618 billion | $2.166 billion | $3.561 billion | $4.870 billion |
| Net revenues | $1.369 billion | $1.951 billion | $3.101 billion | $4.437 billion |
| Income before income taxes | $166.5 million | $474.1 million | $558.9 million | $1.275 billion |
| Net income attributable to common shareholders | $114.0 million | $352.6 million | $441.5 million | $935.0 million |
| Diluted earnings per share | $0.45 | $1.30 | $1.70 | $3.43 |
- Profitability and margins: Net revenues declined about 30% in both the quarter and first half. Compensation and benefits were 47.6% of net revenues in the quarter and 48.3% year to date, versus 48.7% and 52.6%, respectively, in 2021. The effective tax rate was 29.8% for the quarter and 20.4% for the first half; the year-to-date rate benefited from an excess tax benefit on converted restricted stock units.
- Cash flow: First-half operating activities provided $9.4 million, compared with $981.6 million used in the prior-year period. Investing activities used $233.5 million; financing activities used $2.056 billion. Cash, cash equivalents and restricted cash totaled $9.538 billion at May 31, 2022.
- Balance sheet and funding: Total assets were $57.214 billion, down from $60.404 billion at November 30, 2021; total liabilities were $46.702 billion and equity was $10.368 billion. Short-term borrowings were $354.2 million and long-term debt was $8.882 billion. Parent-company liquidity was $1.57 billion; Jefferies Group reported $8.662 billion of cash and other liquidity sources. Management said Group liquidity was sufficient for its modeled stress outflows and long-term capital exceeded cash capital requirements.
- Capital returns: Jefferies repurchased $622.2 million of common shares in the first half, including open-market repurchases and net-share settlements, and paid $142.5 million in dividends. The Board restored the repurchase authorization to $250 million in June 2022.
Material changes and segment performance
- Investment Banking and Capital Markets: Net revenues were $1.098 billion in the quarter and $2.580 billion for the first half, down from $1.599 billion and $3.586 billion. Quarterly investment banking revenue fell to $687.0 million, mainly because underwriting declined 62%; advisory revenue was $371.8 million and remained comparatively resilient. Fixed income revenue fell 37% in the quarter amid lower trading activity, wider spreads, rising rates and mortgage inventory mark-to-market losses. Equities revenue increased slightly, supported by record commissions, electronic trading and prime brokerage.
- Asset Management: Segment net revenues were $31.1 million in the quarter and $91.1 million in the first half, versus $50.7 million and $279.9 million. The first-half decline reflected weaker investment returns and lower performance-related revenue from strategic affiliates. Third-party AUM managed directly by Jefferies was $1.269 billion at May 31, up from $831 million at November 30, 2021, primarily on net inflows.
- Merchant Banking: The segment recorded pre-tax losses of $3.6 million in the quarter and $28.0 million year to date, compared with profits of $54.4 million and $146.7 million. Mark-to-market declines in public-company investments and Vitesse Energy hedging losses weighed on results; Idaho Timber remained profitable. Management noted lumber prices had declined from recent highs.
- Comparability: Prior-year comparisons benefited from exceptionally strong underwriting, capital-markets activity and asset-management returns. Certain Merchant Banking and Asset Management assets were transferred between segments in December 2021; prior-period segment figures were reclassified.
Outlook, commentary and risks
- No numerical earnings or revenue guidance is provided. Management said investment-banking backlog remained strong versus the prior quarter, but execution and timing depend on market conditions and transactions may be delayed, changed or cancelled. Management described equity and debt issuance markets as very challenging amid volatility, inflation concerns and global instability.
- Key exposures include market, credit, liquidity, operational, legal and regulatory risks. The filing highlights rising interest rates, wider credit spreads, geopolitical uncertainty, weaker issuance and trading activity, and potential valuation losses. Jefferies reported two days in the quarter when aggregate net trading losses exceeded its 95% one-day VaR estimate; VaR is not a maximum-loss measure.
- Following Russia’s invasion of Ukraine, some pre-suspension Moscow Exchange trades remained unsettled. The company said it had minimal Russia-related market risk and expected any loss to be immaterial, while continuing to monitor counterparties and settlement developments.
- Legal and regulatory matters were described as ordinary, routine or not significant to consolidated financial position; payments could nevertheless be significant to results in the period incurred. Unrecognized tax benefits, including interest, totaled $455.6 million; tax examinations could affect results when resolved.
- Jefferies reported compliance with relevant credit-facility covenants and substantial excess regulatory capital. A downgrade below investment grade could trigger additional collateral demands; estimated additional collateral under certain Jefferies Group arrangements was $75.7 million. The filing also describes a broad range of trading, financing and commitment exposures.
- Other notable items: $13.5 million of charitable donations followed the Ukrainian Doing Good Global Trading Day. In June 2022, Jefferies made an additional $39.5 million shareholder loan to Linkem. The filing notes continued LIBOR transition work ahead of the cessation of remaining U.S. dollar LIBOR settings after June 30, 2023.
Important facts for investors to verify
- Whether investment-banking backlog converts to revenue as underwriting and issuance conditions evolve.
- The sustainability of advisory, equities and prime-brokerage performance against weaker fixed-income and underwriting results.
- Valuation sensitivity in Level 3 assets, public-company investments, structured notes and other positions using significant or less observable inputs.
- Liquidity, collateral and funding capacity under stress, including potential effects of a credit-rating downgrade and the company’s large secured-financing activity.
- Performance of Vitesse Energy hedges and the effect of falling lumber prices on Idaho Timber; also monitor Linkem funding and its proposed combination with Tiscali.
- Share repurchases, dividends, dilution from outstanding awards and convertible preferred shares, and the use of the renewed $250 million repurchase authorization.