Jefferies Financial Group Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended February 28, 2021; comparisons are with the three months ended February 29, 2020. Jefferies operates investment banking and capital markets, asset management, and merchant banking businesses.
Financial performance
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Total revenues | $2.704 billion | $1.692 billion |
| Net revenues | $2.487 billion | $1.386 billion |
| Income before income taxes | $800.8 million | $157.8 million |
| Net income | $582.5 million | $112.0 million |
| Net income attributable to common shareholders | $582.4 million | $113.0 million |
| Diluted EPS | $2.13 | $0.37 |
| Cash flows from operating activities | $(1.496) billion | $(918.1) million |
| Cash flows from investing activities | $(32.3) million | $(49.3) million |
| Cash flows from financing activities | $1.070 billion | $(316.2) million |
Net revenues increased 79%. Investment Banking and Capital Markets produced $1.960 billion of net revenues and $543.3 million of pretax income, versus $1.149 billion and $250.0 million. Asset Management reported $226.7 million of net revenues and $181.5 million of pretax income, compared with $20.3 million and a $20.9 million pretax loss. Merchant Banking reported $297.5 million of net revenues and $107.6 million of pretax income, versus $204.6 million and a $53.6 million pretax loss.
Compensation and benefits were $1.173 billion, about 47% of net revenues, compared with $670.2 million, about 48%. Non-compensation expenses were $310.0 million, or 15.8% of net revenues, versus $277.9 million, or 24.2%. The income tax provision was $218.2 million, a 27.3% effective rate, versus $45.8 million and 29.0%.
Financial position and liquidity
At February 28, 2021, total assets were $56.869 billion, total liabilities $46.935 billion, and total equity $9.778 billion. Cash and cash equivalents were $8.649 billion; cash, cash equivalents and restricted cash totaled $9.210 billion. Long-term debt was $8.243 billion and short-term borrowings were $882.9 million. These figures exclude the substantial secured financing and securities-financing balances used in the securities business.
Parent-company liquidity was $1.951 billion, against a stated minimum liquidity target of $611.4 million. Jefferies Group reported $8.114 billion of cash and other liquidity sources; management said it had sufficient excess liquidity to meet modeled contingent outflows. Jefferies LLC’s net capital was $2.019 billion, including $1.903 billion of excess net capital. Operating cash outflow reflected working-capital and trading-balance movements; financing cash inflow included increased secured financings and debt issuance.
Material changes and unusual items
- Investment banking net revenues reached a quarterly record of $1.033 billion, including record equity underwriting of $494.8 million. Equity underwriting included $129.2 million from 22 SPAC offerings and related transactions. Advisory revenues declined 9% to $311.4 million.
- Capital markets net revenues reached a record $894.4 million: equities $531.0 million and fixed income $363.4 million. Management cited strong client activity, issuance and market volumes; U.S. rates revenues were lower.
- Asset Management’s $170.8 million investment return and $66.3 million from management/performance fees and strategic affiliates were major contributors to the year-over-year increase. Performance fees are generally recognized in the first fiscal quarter, making results potentially seasonal and variable. Third-party AUM managed directly by Jefferies was $773 million, approximately unchanged from November 30, 2020.
- Merchant Banking’s prior-year comparison included $55.6 million of real-estate impairment and a $33.0 million oil-and-gas impairment. In Q1 2021, Idaho Timber recorded record results amid higher wood demand and pricing; public-company investment marks also contributed to Merchant Banking results. Oil-and-gas results were pressured by $21.9 million of unrealized hedge losses and lower production revenues.
- Compensation included $46.4 million for senior executive stock-option and stock-appreciation-right awards. The company repurchased 5.0 million shares for $127.5 million and paid a $0.20-per-share quarterly dividend, up from $0.15 in the prior-year quarter.
- Operating cash flow was negative despite higher earnings, principally reflecting changes in trading and financing-related balances. Management cautions that these cash flows can fluctuate and recent-period cash flows should not be assumed to recur.
Outlook, risks and contingencies
The filing gives no specific earnings or revenue guidance. Management described a strategy focused on Investment Banking and Capital Markets and Asset Management, while continuing to transform Merchant Banking and return capital to shareholders. Management said it expected to remain in compliance with Jefferies Group revolving-credit covenants, based on current liquidity, funding needs and business expectations.
Key risks include the sensitivity of investment banking and trading results to market, economic and client conditions; market, credit, liquidity, model and operational risks; and valuation uncertainty in Level 3 positions. One trading day’s loss exceeded the one-day 95% VaR in the quarter. The filing also notes COVID-19-related uncertainty, ongoing IBOR transition work, and the need to comply with new swap-dealer capital requirements by October 6, 2021. A downgrade below investment grade could trigger collateral demands; the filing estimates $126.9 million of additional collateral under specified agreements. Legal and regulatory matters are described as ordinary, routine or not significant to consolidated financial position, although payments could materially affect results in a period. The company reported $431.7 million of gross unrecognized tax benefits, including interest; tax examinations could affect results when resolved.
Commitments included $527.0 million of equity commitments, $344.5 million of loan commitments and $224.0 million of underwriting commitments; forward-starting repo and reverse-repo commitments were also substantial. The company guaranteed up to one-half of losses under a $1.5 billion Berkadia commercial-paper support arrangement; $1.47 billion was outstanding. The HomeFed construction loan maturity was extended after quarter-end, from March 1 to June 29, 2021, and its maximum commitment was reduced from $58.9 million to $50.0 million.
Important facts for investors to verify
- How much of the earnings increase reflects sustainable client business versus market-sensitive trading, investment marks and seasonally recognized asset-management performance fees?
- Whether investment banking and capital-markets activity, including SPAC-related revenues, remains strong, and how compensation costs track revenue.
- The liquidity and funding implications of negative operating cash flow, secured-financing growth, collateral requirements and any credit-rating changes.
- The performance and valuation assumptions underlying Merchant Banking investments, Level 3 assets and oil-hedging positions.
- The status and potential financial effects of tax examinations, legal or regulatory proceedings, commitments and guarantees.