Jefferies Financial Group Inc. — Q3 2023 Form 10-Q
Reporting period: Fiscal quarter and nine months ended August 31, 2023. Jefferies is a global investment banking and securities firm with Investment Banking and Capital Markets and Asset Management segments. Comparisons are with the periods ended August 31, 2022, except balance-sheet comparisons, which are with November 30, 2022. Figures below are in U.S. dollars.
Key financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenues | $2.041bn | $1.832bn | $5.473bn | $5.341bn |
| Interest expense | $858.8m | $322.3m | $1.969bn | $800.6m |
| Net revenues | $1.182bn | $1.510bn | $3.503bn | $4.541bn |
| Earnings before income taxes | $91.1m | $301.9m | $267.0m | $860.7m |
| Net earnings | $53.9m | $195.9m | $192.0m | $640.8m |
| Net earnings attributable to common shareholders | $51.4m | $195.5m | $197.4m | $636.9m |
| Diluted earnings per share | $0.22 | $0.78 | $0.82 | $2.48 |
| Effective tax rate | 40.8% | 35.1% | 28.1% | 25.6% |
For the quarter, net revenues fell 21.7% and common-shareholder earnings fell 73.7%. For the nine months, net revenues declined 22.8% and common-shareholder earnings declined 69.0%. Higher interest revenue was accompanied by a similarly substantial increase in interest expense.
Segments and material period changes
- Investment Banking and Capital Markets: Q3 net revenues were $1.168bn, up 4.7%; nine-month net revenues were $3.446bn, down 6.6%. Q3 advisory revenue fell 30.4% to $335.3m, while underwriting rose 16.2% to $264.9m. Equities were down 2.8% for the quarter and up 5.9% year to date. Fixed income rose 39.3% for the quarter and 57.8% year to date.
- Asset Management: Q3 net revenues were $10.1m, compared with $398.3m; nine-month net revenues were $47.7m, compared with $854.4m. Better investment returns were more than offset by lower merchant-banking activity following the Idaho Timber sale and Vitesse Energy spin-off, and by investment losses and write-downs. The company reported $31.7m of Q3 investment return versus a $35.5m loss a year earlier.
- Management attributed much of the year-over-year earnings decline to the reduction in merchant-banking revenues, including businesses no longer owned, and to lower investment-banking activity. Prior-year Q3 non-interest expenses also included an $80m combined SEC/CFTC settlement.
- Compensation and benefits were $644.1m in Q3, up 15.1%, and $1.923bn year to date, roughly flat. Compensation was 54.5% of net revenues in Q3 and 54.9% year to date; management noted that prior periods included a greater proportion of merchant-banking revenues, which carry lower compensation rates.
Cash flow, balance sheet, debt and liquidity
- At August 31, total assets were $56.045bn, up 9.8% from November 30, 2022; total liabilities were $46.279bn and total equity was $9.765bn. Cash and cash equivalents were $8.817bn, down from $9.703bn.
- For the nine months, operating cash flow was negative $1.890bn, compared with positive $1.409bn in 2022. Investing cash flow was negative $256.0m and financing cash flow was positive $1.018bn. Cash, cash equivalents and restricted cash declined by $1.128bn to $9.579bn. Operating cash flow reflected, among other items, changes in trading inventory and secured financing balances.
- Long-term debt was $9.462bn, up from $8.774bn; short-term borrowings were $924.9m, up from $528.4m. The increase in long-term debt primarily reflected the issuance of $990.6m net proceeds from 5.875% senior notes due 2028, partly offset by a $350m credit-facility paydown. The filing reports covenant compliance at quarter-end.
- Management’s cash-and-other-liquidity-source measure was $10.838bn, or 19.3% of total assets, versus $11.641bn at November 30. It reported sufficient excess liquidity to meet modeled contingent outflows under its stress scenario. Total long-term capital was $17.094bn; leverage was 5.7x and tangible gross leverage was 6.9x.
- During the nine months, the company returned $911.7m to shareholders, primarily through $208.6m of cash dividends, $165.3m of share repurchases and the $527.0m Vitesse Energy distribution. It declared a further $0.30-per-share dividend after quarter-end, payable November 28, 2023.
Outlook, risks and unusual items
- Management said investment-banking backlog had strengthened from the prior quarter and noted recent signs of increased underwriting and M&A activity. It cautioned that timing and execution are uncertain and dependent on market conditions. The filing provides no quantified earnings or revenue guidance.
- On September 14, 2023, after quarter-end, Jefferies completed foreclosure on collateral consisting of a 50.1% interest in FXCM, resulting in 100% ownership and consolidation in subsequent periods. Purchase-price allocation was still being measured at filing time; the company expects to remeasure its existing 49.9% interest at fair value.
- Golden Queen investment impairment charges were $27.8m in Q3 and $57.2m for the nine months; its investment carrying value was $8.8m at August 31. OpNet generated $157.1m of equity-method losses for the nine months, and Jefferies agreed to provide financial support to OpNet through June 2024 if needed.
- Other key exposures include market, credit, liquidity, operational, legal and regulatory risks; valuation uncertainty for Level 3 assets; and sensitivity of investment-banking and asset-management results to economic and market conditions. The company noted that it holds cash at financial institutions in amounts that may exceed FDIC insurance limits, while stating it had no exposure to SVB, Signature Bank or First Republic.
- Gross unrecognized tax benefits were $350.4m, with $135.3m of accrued interest. Tax examinations could affect results in the period resolved. Jefferies said it did not believe ongoing legal and regulatory matters would materially adversely affect its consolidated financial statements based on currently available information.
Investor verification points
- Confirm how the post-quarter FXCM acquisition, fair-value remeasurement and purchase accounting affect subsequent reported results and capital.
- Track investment-banking activity and backlog conversion, particularly M&A advisory and debt underwriting, against management’s qualified improvement commentary.
- Assess whether Asset Management results and legacy investment marks improve, including OpNet funding needs and Golden Queen recoverability.
- Monitor liquidity, operating cash flows, secured financing levels, debt maturities and compliance with financing covenants and regulatory capital requirements.
- Review the drivers of elevated compensation as a share of net revenues, tax-rate variability and any developments in tax examinations or legal and regulatory matters.