Business context and reporting period
Jefferies Financial Group Inc. is a diversified financial services company focused on investment banking, capital markets and asset management, alongside a portfolio of direct investments. Its fiscal year ended November 30, 2019. Comparisons with 2018 require care: the 2018 period covered eleven months for most of the company but twelve months for Jefferies Group, and the business mix changed through acquisitions, sales and transfers.
Key financial results
| Metric | FY2019 | Comparable filing figure |
|---|---|---|
| Net revenues | $3.893 billion | $3.764 billion for the eleven months ended November 30, 2018 |
| Income before taxes, continuing operations | $478.6 million | $296.1 million |
| Income tax benefit | $484.0 million | $19.0 million tax provision |
| Income from continuing operations | $962.6 million | $277.1 million |
| Net income attributable to common shareholders | $959.6 million | $1.022 billion |
| Diluted earnings per share | $3.03 | $2.90 |
| Cash from operating activities | $(827.8) million | $691.1 million |
| Cash from investing activities | $1.707 billion | $142.4 million |
| Cash from financing activities | $1.590 billion | $(575.8) million |
| Total assets / shareholders’ equity | $49.46 billion / $9.58 billion | $47.13 billion / $10.06 billion |
| Long-term debt / short-term borrowings | $8.34 billion / $548.5 million | $7.62 billion / $387.5 million |
| Book value per common share | $32.85 | $32.72 |
Net income was materially affected by a $544.6 million tax benefit from realizing previously lodged tax effects when the available-for-sale portfolio was sold. The filing says this realization did not change total equity. Cash and cash equivalents were $7.68 billion at year-end; cash, cash equivalents and restricted cash totaled $8.48 billion. Parent-company liquidity was $2.22 billion, versus a stated minimum liquidity reserve of $620.6 million.
Material changes versus the prior period
- Jefferies Group net revenues were $3.11 billion, down from $3.18 billion. Equities rose to $774.0 million from $665.6 million and fixed income to $681.4 million from $559.7 million; investment banking revenues fell 20.5% to $1.52 billion, chiefly on lower underwriting activity.
- Merchant Banking results included significant portfolio gains and losses. The company sold its remaining National Beef interest for $970.0 million in cash and recognized a $205.0 million pretax gain; it also acquired the remainder of HomeFed and recorded a $72.1 million revaluation gain.
- The company distributed its Spectrum Brands shares to shareholders in October 2019, recorded at $451.1 million. It repurchased 25.9 million Jefferies shares for $506.2 million, averaging $19.52 per share.
- The We Company investment was marked down by $182.3 million during 2019. The company ended the year with no National Beef equity interest.
Outlook, management commentary, risks and unusual items
Management describes a strategy of expanding core financial-services businesses, simplifying the structure and transforming Merchant Banking through sales, restructuring or transfers. The filing provides no quantified earnings or revenue guidance. Management expected federal cash taxes in the upcoming year after using approximately $1.0 billion of net operating losses in 2019, leaving about $111 million at year-end. In January 2020, the board raised the quarterly cash dividend 20% to $0.15 per share.
Key risks include market-sensitive trading and investment results, funding and liquidity conditions, credit and counterparty losses, regulatory and capital requirements, cybersecurity and operational disruption, and valuation uncertainty in illiquid investments. The filing also highlights LIBOR transition and Brexit-related uncertainty. Jefferies Group reported sufficient excess liquidity for its modeled maximum liquidity outflow; Jefferies LLC reported $1.645 billion of net capital and $1.528 billion of excess net capital.
Contractual obligations totaled $13.11 billion. Commitments and guarantees totaled $27.12 billion, substantially related to the investment-banking segment and including derivative notionals; these figures should not be treated as expected cash losses. Separately, Jefferies agreed to reimburse Berkshire Hathaway for half of losses under a $1.5 billion surety policy supporting Berkadia commercial paper; $1.47 billion was outstanding. Management stated that current litigation was not expected to materially affect consolidated financial position or liquidity, while noting payments could be significant to a period’s results. The financial-statement auditor issued an unqualified opinion, and management and the auditor concluded internal control over financial reporting was effective.
Most important facts for investors to verify
- Normalize earnings for the $544.6 million nonrecurring tax benefit and other investment-related gains and markdowns; compare periods with the fiscal-year and portfolio changes in mind.
- Review the causes and sustainability of negative operating cash flow, including the effects of securities financing and trading-balance movements.
- Assess debt maturities, funding needs, parent-company liquidity and restrictions on subsidiaries’ ability to distribute cash.
- Track investment valuations and exposures, particularly The We Company, oil and gas, real estate, Linkem, FXCM and Berkadia’s commercial-paper reimbursement arrangement.
- Confirm subsequent-year cash taxes, dividends, share repurchases and progress on the Merchant Banking transformation.