Jefferies Financial Group Inc. — 2020 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended November 30, 2020, not a standalone calendar-year fourth quarter. Jefferies operates investment banking and capital markets, asset management, and direct-investing businesses. Management’s strategy is to expand its core financial-services businesses, transform and simplify Merchant Banking, and return capital to shareholders. Segment reporting changed in 2020; prior periods were recast where indicated.
Key financial results
| Metric | FY2020 | FY2019 | Change / context |
|---|---|---|---|
| Net revenues | $6.011 billion | $3.893 billion | Up 54.4% |
| Income before tax | $1.067 billion | $478.6 million | Up 123%; margin on net revenues was about 17.8% versus 12.3% |
| Income from continuing operations | $768.4 million | $962.6 million | Down 20.2%, largely reflecting the absence of a large prior-year tax benefit |
| Net income attributable to common shareholders | $769.6 million | $959.6 million | Down 19.8% |
| Diluted earnings per share | $2.65 | $3.03 | Down 12.5%; share repurchases reduced weighted-average shares |
| Operating cash flow | $2.076 billion | $(827.8) million | Improved; Jefferies Group provided $1.871 billion in 2020 |
| Investing cash flow | $(186.2) million | $1.707 billion | 2020 included substantial investments and loans, partly offset by distributions and repayments |
| Financing cash flow | $(723.5) million | $1.590 billion | 2020 reflected buybacks and dividends, alongside debt issuance and repayment |
- Revenue and segment performance: Investment Banking and Capital Markets reported $4.989 billion of net revenues and $1.120 billion of pretax income, versus $3.036 billion and $347.1 million, respectively, in 2019. Investment banking revenue reached a record $2.398 billion; advisory was $1.054 billion and underwriting was $1.448 billion. Capital Markets revenue was a record $2.470 billion, including record equities revenue of $1.129 billion and fixed-income revenue of $1.341 billion.
- Asset Management: Net revenues were $235.3 million versus $84.9 million, mainly due to higher investment returns. Platform-wide net asset value or equivalent AUM was $26.8 billion, compared with $20.7 billion. Separately, third-party AUM managed by wholly owned managers fell to $774 million from $1.216 billion, reflecting quantPORT wind-down, redemptions and market depreciation.
- Merchant Banking: Pretax loss was $24.6 million, compared with pretax income of $289.5 million in 2019. The prior year included a $205.0 million National Beef sale gain and a $72.1 million HomeFed revaluation gain. In 2020, Idaho Timber delivered record results, while oil-and-gas and real-estate impairments weighed on results.
- Expenses and margins: Total expenses rose to $4.868 billion from $3.617 billion. Compensation was $2.941 billion, or 54.8% of net revenues; excluding a $179.6 million charge from accelerating amortization of certain prior cash awards, compensation was 51.2% of net revenues. Non-compensation expenses were 22.7% of net revenues versus 34.5% in 2019, reflecting operating leverage.
- Balance sheet and debt: Total assets were $53.118 billion versus $49.460 billion; shareholders’ equity was $9.404 billion versus $9.580 billion. Long-term debt was $8.352 billion, broadly flat year over year, and short-term borrowings were $764.7 million. Parent-company debt was approximately $1.0 billion, including $750 million due in 2023 and $250 million due in 2043.
- Liquidity: Consolidated cash and cash equivalents were $9.055 billion, up from $7.679 billion. Parent-company liquidity was $1.885 billion, against a stated minimum liquidity reserve of $619.4 million. Jefferies Group reported $8.605 billion of cash and other liquidity sources and said it had sufficient excess liquidity for modeled contingent outflows. These figures should be considered alongside the firm’s secured-funding model, regulatory restrictions and balance-sheet commitments.
- Capital returns: Jefferies repurchased 42.1 million common shares for $812.7 million, averaging $19.29 per share, and paid $0.60 per share in regular dividends. The board raised the quarterly dividend to $0.20 in January 2021. The company said it had returned almost $3.4 billion through repurchases and dividends over the prior three fiscal years.
Material changes and unusual items
- COVID-19 initially disrupted markets and businesses in March 2020; subsequent market recovery, volatility, client activity and capital-markets issuance supported record Jefferies Group results. Management reported that remote work was implemented without significant disruption to business or control processes.
- The 2019 comparison is affected by a nonrecurring $544.6 million tax benefit from realizing previously lodged tax benefits after selling the available-for-sale portfolio. The 2020 effective tax rate was 28.0%; the 2019 tax benefit produced a reported tax benefit overall.
- FY2020 included non-cash charges of $44.2 million for WeWork, $73.9 million related to HomeFed real estate investments, $13.2 million for Vitesse Energy Finance’s DJ Basin assets, and $34.6 million for JETX Energy assets. It also included a $61.5 million gain on short-term hedges.
- Jefferies Group recorded $179.6 million of compensation expense after changing service provisions on certain previously granted cash awards. Non-compensation expenses included $34.0 million donated to Australian wildfire relief charities and $8.6 million in other charitable donations.
- Debt actions included repaying 2.375% Euro Medium Term Notes at maturity, retiring 6.875% senior notes early, and issuing additional 5.125% notes due 2023 and $500 million of 2.75% notes due 2032. Ratings were Baa3/BBB/BBB with stable outlooks at filing, following S&P’s revision from negative to stable.
Outlook, risks and contingencies
- Management gave no specific quantitative earnings or revenue guidance. It expects continued development of Investment Banking and Capital Markets and Asset Management, further Merchant Banking transformation and possible additional transactions. It also cautioned that business mix, investment distributions and reported cash flows can vary substantially and may not recur.
- Principal risks include market and trading losses, counterparty defaults, funding and liquidity stress, credit-rating downgrades, regulatory capital constraints, operational and cyber incidents, litigation, employee retention, and changing regulation. The filing identifies COVID-19, oil-price volatility, LIBOR transition, Brexit-related operating costs and market uncertainty as relevant exposures.
- Merchant Banking exposure includes Linkem, oil and gas, HomeFed and other real-estate investments, FXCM and Idaho Timber. Linkem’s 5G expansion is expected to incur operating losses over the next couple of years; oil and gas values remain sensitive to prices and production decisions.
- Jefferies agreed to reimburse Berkshire Hathaway for half of losses under a $1.5 billion surety policy supporting Berkadia affiliate commercial paper; $1.47 billion was outstanding at year-end. The filing also reports $31.994 billion of commitments and guarantees, including forward-starting repos and reverse repos, derivatives, equity and loan commitments. These amounts are not equivalent to expected cash losses.
- Management said current legal and regulatory matters were not expected to have a significant adverse effect on consolidated financial position or liquidity, while noting any resolution could materially affect results in a particular period. The filing also reports $401.4 million of liabilities for unrecognized tax benefits and $46.4 million of pension obligations.
Most important facts for investors to verify
- How much of 2020’s revenue and pretax improvement reflects recurring client business versus unusually strong market activity, volatility and trading conditions.
- The sustainability of earnings after adjusting for the 2019 $544.6 million tax benefit, 2020 award-amortization charge and Merchant Banking impairments or hedge gains.
- Liquidity available at the parent versus regulated subsidiaries, debt maturities and refinancing needs, and the potential consequences of a ratings downgrade.
- Valuations, future funding needs and exit timing for Merchant Banking holdings—especially oil and gas, real estate, WeWork and Linkem—and the extent of further impairment risk.
- The potential cash exposure under Berkadia’s commercial-paper reimbursement arrangement and other commitments, guarantees and litigation contingencies.