Jefferies Financial Group Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended February 28, 2023. Jefferies is a global investment banking and securities firm with Investment Banking and Capital Markets and Asset Management reportable segments. Amounts below are U.S. dollars.
Financial results and position
| Metric | Q1 2023 | Prior-year quarter / comparison |
|---|---|---|
| Total revenues | $1.781 billion | $1.913 billion, down 6.9% |
| Net revenues | $1.283 billion | $1.693 billion, down 24.2% |
| Earnings before income taxes | $158.0 million | $392.3 million, down 59.7% |
| Net earnings attributable to Jefferies | $133.6 million | $327.4 million, down 59.2% |
| Basic / diluted EPS | $0.56 / $0.54 | $1.26 / $1.23 |
| Operating cash flow | $(1.819) billion | $(1.215) billion |
Net revenues are total revenues less interest expense. Interest expense rose to $497.1 million from $220.0 million, contributing to the larger decline in net revenues. Pretax earnings were about 12.3% of net revenues; compensation and benefits were 54.8% of net revenues, versus 46.7% a year earlier. The effective tax rate was 18.2%, compared with 16.4%.
At February 28, total assets were $52.03 billion, total liabilities $42.22 billion and total equity $9.81 billion. Cash and cash equivalents were $7.51 billion; cash, cash equivalents and restricted cash totaled $8.57 billion. Management’s defined cash and other liquidity sources totaled $9.72 billion, or 18.7% of assets. Long-term debt was $8.63 billion and short-term borrowings $477.8 million. Reported leverage was 5.3x; tangible gross leverage was 6.4x. Long-term capital was $16.87 billion.
Material changes and business performance
- Investment banking: Net revenues fell 42.2% to $567.9 million. Advisory revenues declined 45.3% and underwriting revenues 48.8%, reflecting lower deal activity and issuance.
- Capital markets: Equities net revenues rose 11.4% to $308.7 million; fixed income rose 63.1% to $330.7 million, with management citing strong credit trading results.
- Asset Management: Net revenues fell 65.5% to $78.3 million, largely reflecting the prior-year contribution from Idaho Timber, sold in 2022. Investment return increased to $31.0 million from $8.9 million. Aggregate assets under management across Jefferies and affiliates were approximately $30.8 billion, up from $29.1 billion at November 30, 2022.
- Non-interest expenses declined 13.5% to $1.125 billion, mainly from lower compensation and the absence of Idaho Timber cost of sales. Compensation fell 11.1%; technology, business development and professional services expenses increased.
- Operating cash flow was negative, principally amid changes in trading and financing balances, including higher securities borrowed and financial instruments owned. Cash and cash equivalents declined from $9.70 billion at November 30, 2022.
Outlook, risks and unusual items
- No quantified earnings or revenue guidance is provided. Management said investment banking backlog was consistent with November 30, 2022 levels, but transaction execution and revenue realization depend on market conditions; expected transactions may be delayed, changed or canceled.
- Management cited inflation, rising interest rates, market volatility and weaker deal activity as relevant conditions. Results are inherently variable and sensitive to financial markets, economic conditions and the firm’s positions.
- Jefferies distributed its ownership of Vitesse Energy to shareholders on January 13, 2023, recording a $527.0 million distribution of capital. The quarter also included Vitesse Energy’s acquisition of Vitesse Oil for $30.6 million in shares. The distribution reduced reported equity and affected period comparisons.
- The $125.0 million mandatorily redeemable convertible preferred shares converted into approximately 4.65 million common shares during the quarter. A $22.1 million impairment was recorded on the Golden Queen equity-method investment.
- One automobile-loan-secured credit facility had technical covenant violations being addressed with lenders; it had no outstanding balance at quarter-end. Jefferies reported compliance with other cited credit-facility covenants. Management stated it had sufficient excess liquidity for its modeled stress outflows.
- After quarter-end, the filing discusses the March 2023 failures of Silicon Valley Bank and Signature Bank. Jefferies reported no exposure to either, but cautioned that it holds cash at financial institutions in amounts that may exceed FDIC insurance limits.
- Legal and regulatory matters arise in the ordinary course; management did not believe any matter would materially adversely affect the consolidated financial statements based on information then available. Tax examinations could affect results in the period resolved.
Important facts for investors to verify
- Whether investment banking activity and the stated backlog convert into fees, given management’s market-dependent execution caveat.
- How elevated interest expense, compensation as a share of net revenues and trading-related balance-sheet movements affect profitability and cash generation.
- Liquidity and funding capacity under stress, including cash held above insured limits, secured-funding reliance and the effects of any ratings downgrade.
- Progress resolving the technical covenant issue, refinancing needs and debt maturities, including the $385.5 million 5.5% notes due October 2023.
- Performance and funding needs of significant affiliates and investments, including OpNet, FXCM and Golden Queen, and the impact of fair-value estimates and impairments.