Jefferies Financial Group Inc. — Form 10-Q Summary
Reporting period: Quarter ended August 31, 2019; nine months ended August 31, 2019. The company changed its fiscal year-end to November 30 in 2018. The prior-year comparisons end September 30 and Jefferies Group results in those periods use a one-month reporting lag; interpret comparisons with this timing difference in mind. Figures below are in U.S. dollars.
Financial performance and position
| Metric | Third quarter 2019 | Prior-year comparison | Nine months 2019 | Prior-year comparison |
|---|---|---|---|---|
| Total revenues | $1.223 billion | $1.459 billion | $3.929 billion | $3.864 billion |
| Net revenues | $856.8 million | $1.151 billion | $2.787 billion | $2.957 billion |
| Income from continuing operations before tax | $13.3 million | $272.7 million | $246.1 million | $348.0 million |
| Income from continuing operations | $49.4 million | $182.3 million | $768.7 million | $296.4 million |
| Net income attributable to common shareholders | $48.5 million | $192.6 million | $764.1 million | $1.043 billion |
| Diluted EPS | $0.15 | $0.55 | $2.41 | $2.91 |
- Quarterly net revenues fell about 26%; principal transactions shifted to a $20.9 million loss from $116.2 million of revenue. Investment banking revenue declined to $410.8 million from $460.0 million. Higher equity and fixed-income trading revenue and advisory fees partly offset those declines.
- Nine-month net revenues declined about 6%. Investment banking revenue was $1.126 billion versus $1.400 billion; interest income increased to $1.243 billion from $939.3 million.
- Quarterly expenses rose to $915.8 million from $897.0 million. Compensation was 53.0% of net revenues, compared with 55.0% a year earlier. Nine-month compensation was 53.3% of net revenues, versus 54.8%.
- Jefferies Group reported pretax income of $83.1 million for the quarter and $300.8 million for the nine months. Merchant Banking reported a quarterly pretax loss of $42.9 million and nine-month pretax income of $28.4 million.
- At August 31, total assets were $49.263 billion, liabilities $39.063 billion, and total equity $10.048 billion. Cash and cash equivalents were $6.011 billion; cash, cash equivalents and restricted cash totaled $6.682 billion.
- Short-term borrowings were $518.9 million and long-term debt $7.969 billion. Parent-company debt was about $991 million. Jefferies LLC reported net capital of $1.474 billion and excess net capital of $1.357 billion.
- For the nine months, operating activities used $1.251 billion of cash, investing activities provided $1.103 billion, and financing activities provided $835.5 million. Cash, cash equivalents and restricted cash increased by $669.1 million.
Material changes and unusual items
- Nine-month continuing-operations income includes a nonrecurring $544.6 million tax benefit realized after selling the remaining available-for-sale securities portfolio. This affected reported tax expense and earnings, but did not increase total equity.
- HomeFed was consolidated from July 1, 2019, after Jefferies acquired the remaining shares in a stock-for-stock merger. Jefferies recorded a preliminary $72.1 million pretax gain from remeasuring its existing interest; purchase accounting remains preliminary.
- The We Company investment was marked down by $146.0 million in the quarter and contributed to Merchant Banking’s loss. Its reported fair value was $123.2 million at August 31, versus $254.4 million at November 30, 2018.
- In September, the board approved a pro rata distribution of Jefferies’ 7,514,477 Spectrum Brands shares to shareholders, effective October 11. A $451.1 million dividend payable was recorded on the September 16 declaration date.
- Jefferies repurchased 17.7 million common shares for $352.1 million during the nine months and paid $113.0 million in common dividends. Share count at August 31 was about 299.9 million.
- JETX Energy recorded $15.1 million of lease-abandonment charges. The filing also reports substantial Level 3 valuation losses: net losses on Level 3 assets were $123.3 million for the nine months.
Outlook, liquidity, and risks
- The filing provides no specific earnings or revenue guidance. Management emphasizes that Jefferies Group results are not necessarily predictable or recurring and depend on global markets, economic conditions, trading positions, and client activity.
- Management reported parent-company actual liquidity of $1.416 billion against a $571.8 million minimum reserve target. Jefferies Group reported sufficient excess liquidity to meet modeled contingent outflows and $12.2 billion of long-term capital exceeding cash capital requirements.
- Standard & Poor’s affirmed the BBB− long-term rating and revised its outlook to positive; Moody’s rated the company Baa3/Stable and Fitch BBB/Stable. Management noted that a downgrade below investment grade could trigger additional collateral demands; estimated potential collateral calls under specified arrangements were about $96.5 million.
- Risk factors include market, credit, liquidity, funding, operational, legal and regulatory risks; fair-value uncertainty in investments and other Level 3 assets; and exposures to derivatives and securities financing. The filing reports $1.472 billion of auto-loan receivables at Foursight? The stated balance is $720.8 million; about 31% was subprime at August 31.
- Legal and regulatory proceedings are described as ordinary, routine, or not significant to consolidated financial position. The company says payments could nevertheless be significant to results in the period incurred. It reports compliance with applicable debt covenants and effective disclosure controls.
Important facts for investors to verify
- How much of nine-month earnings and EPS reflects the $544.6 million one-time tax benefit, and what are normalized earnings and tax rates?
- What drove the quarter’s principal-transactions loss and Merchant Banking results, and how might the We Company valuation change further?
- What are the final HomeFed purchase-price allocations, including acquired debt, goodwill, and future operating contribution?
- What are the completed terms and shareholder impact of the Spectrum Brands share distribution, including treatment of the recorded dividend payable?
- How should investors assess liquidity and funding risk given negative operating cash flow, secured-financing activity, debt maturities, and potential collateral calls?
- How do trading, underwriting and advisory trends compare after accounting for the fiscal-year change and one-month reporting-lag differences?