Jefferies Financial Group Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended May 31, 2023. Jefferies is a global investment banking and securities firm with Investment Banking and Capital Markets and Asset Management segments. The filing is unaudited.
Key financial results
| Metric | Three months ended May 31, 2023 | Year-over-year change | Six months ended May 31, 2023 | Year-over-year change |
|---|---|---|---|---|
| Total revenues | $1.65 billion | Up 3.4% | $3.43 billion | Down 2.2% |
| Net revenues | $1.04 billion | Down 22.5% | $2.32 billion | Down 23.4% |
| Earnings before income taxes | $17.9 million | Down 89.2% | $175.9 million | Down 68.5% |
| Net earnings attributable to Jefferies | $12.4 million | Down 89.1% | $146.0 million | Down 66.9% |
| Diluted earnings per share | $0.05 | Prior year $0.45 | $0.60 | Prior year $1.70 |
Higher interest revenue was substantially offset by higher interest expense; consequently, total revenue increased in the quarter while net revenue declined. Quarterly pretax income was 1.7% of net revenues, versus 12.4% a year earlier. Six-month pretax margin was 7.6%, versus 18.4%.
Segments and material period changes
- Investment Banking and Capital Markets: Quarterly net revenues were $1.05 billion, down 4.8%; six-month net revenues were $2.26 billion, down 12.0%. Advisory revenue fell 31.6% in the quarter and 39.8% for six months amid subdued M&A activity. Quarterly underwriting rose 3.9%, as stronger equity underwriting partly offset weaker debt underwriting; six-month underwriting declined 29.6%.
- Equities and fixed income: Quarterly equities net revenues increased 11.2% to $283.3 million, and fixed income increased 60.6% to $259.4 million. Six-month gains were 11.3% and 62.0%, respectively, reflecting stronger trading results across several businesses.
- Asset Management: Quarterly net revenues were negative $22.4 million, compared with positive $234.0 million a year earlier; six-month net revenues fell 87.9% to $55.9 million. Lower legacy merchant-banking contributions after the Idaho Timber sale and Vitesse Energy spin-off, together with OpNet losses, outweighed improved investment returns and fees.
- Management reported aggregate assets under management of $29.7 billion at May 31, up from $29.1 billion at November 30, 2022. This measure includes affiliated managers and company investments.
Cash flow, balance sheet, debt and liquidity
- Operating cash flow was negative $1.40 billion for the six months, compared with positive $8.8 million in the prior-year period. Investing cash outflow was $117.3 million; financing cash outflow was $224.5 million. Cash, cash equivalents and restricted cash ended at $8.97 billion, down from $10.71 billion at November 30, 2022.
- Total assets were $53.74 billion and total liabilities $43.97 billion at May 31. Total equity was $9.77 billion; common shareholders’ equity was $9.70 billion.
- Long-term debt was $8.79 billion and short-term borrowings $846.9 million. Total long-term capital was $16.84 billion; the long-term debt-to-equity-capital ratio was 0.72:1. Total-assets-to-equity leverage was 5.5x and tangible gross leverage was 6.6x.
- Cash and cash equivalents plus other identified liquidity sources totaled $10.05 billion, or 18.7% of total assets. Management stated that long-term capital exceeded cash capital requirements and that available excess liquidity covered modeled contingent outflows under its stress scenario.
- Broker-dealer regulatory capital remained above minimums: Jefferies LLC excess net capital was $819.5 million. The filing reports compliance with applicable regulatory capital requirements.
Outlook, management commentary and key risks
- No numerical earnings or revenue guidance is provided. Management said the investment-banking backlog strengthened modestly from the prior quarter, but execution is uncertain and dependent on market conditions; it noted signs of a potential pickup in equity underwriting.
- Management cited uncertain economic and market conditions, subdued M&A and leveraged-finance activity, inflation, elevated interest rates and volatility as factors affecting results. Results are described as inherently unpredictable and dependent on market conditions and positions.
- OpNet generated equity-method losses of $83.0 million in the quarter and $121.8 million for six months; Jefferies reported a $71.6 million quarterly and $79.9 million six-month impact in its merchant-banking discussion. The company has agreed to provide additional support to OpNet if needed through June 2024 and made a further $15.6 million shareholder loan after quarter-end.
- Golden Queen investment impairments totaled $29.4 million for six months, including a further $7.3 million in the quarter, following lower projected mine cash flows. The filing also reports $113.5 million of six-month net losses on equity securities without readily determinable fair values, including $79.9 million of impairments.
- Jefferies disclosed an involuntary bankruptcy petition against FXCM’s 50% shareholder. Jefferies intends to enforce rights under its secured loan and related agreements and believes this could result in it owning all of FXCM; the outcome is uncertain.
- At May 31, commitments totaled $12.92 billion, including $5.29 billion of forward-starting reverse repos and $4.03 billion of forward-starting repos, both generally settling within three business days. A technical covenant violation on a $20.1 million automobile-loan facility was subsequently amended, and the company reported compliance afterward.
- The company noted that it holds cash at financial institutions in amounts that may exceed FDIC insurance limits, despite reporting no exposure to the three U.S. banks that failed in 2023. Other risks include market, liquidity, counterparty, credit, legal and regulatory risks. Tax examinations may affect results when resolved; management did not expect them to materially affect the consolidated financial position.
- Shareholder distributions included $138.7 million of cash dividends, $165.0 million of share repurchases and the $527.0 million Vitesse Energy distribution during the six months. A $0.30-per-share dividend was declared for payment in August 2023.
Important facts for investors to verify
- Whether the investment-banking backlog converts to completed transactions and revenue, given management’s execution caveat.
- OpNet’s operating and funding needs, the extent of further support or loans, and whether its losses continue.
- The outcome and timing of Jefferies’ FXCM enforcement efforts and the related bankruptcy proceedings.
- Drivers of negative operating cash flow and the durability of liquidity under market stress, including funding and collateral needs.
- Potential effects of market conditions, fair-value estimates, credit losses and tax examinations on future earnings.
- Post-quarter-end share-class and SMBC exchange transactions, including the effect of the preferred shares and non-voting common shares on ownership and per-share interests.