RJF

Business Context and Reporting Period

Company: Raymond James Financial, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three months ended December 27, 2002
Business Overview: The Company operates through retail investment services, capital markets, asset management, and banking (RJBank) segments. It provides securities brokerage, investment banking, asset management, and banking services primarily in the U.S., Canada, and Europe.

Key Financial Metrics

Cash Flow Summary (Three Months Ended Dec 27, 2002):
- Net cash used in operating activities: $(124,194)
- Net cash provided by investing activities: $32,654
- Net cash provided by financing activities: $18,023

Material Changes vs. Prior Period

• Revenue Decline: Total revenues decreased 5% to $344.6 million, driven by poor equity markets depressing retail commissions and lower interest rates.
• Profitability Drop: Net income fell 20% to $14.4 million, marking the Company's lowest earnings in five quarters.
• Segment Performance:
  • Retail Investment Services: Revenues down 4% ($8.5 million); pre-tax profits down $9.6 million due to a $10 million net addition to legal reserves.
  • Capital Markets: Revenues down 12% ($9.2 million) due to less profitable fixed income trading and lower equity capital markets fees.
  • Asset Management: Revenues down 5% due to lower assets under management (AUM), though AUM increased 6% during the quarter due to positive net sales and market appreciation.
  • RJBank: Revenues down 9%, but pre-tax income increased 63% due to vibrant residential loan production.
• Expense Trends: Compensation expenses declined 5% overall, though communication and information processing expenses rose 10% due to losses from a software joint venture (CSS).

Guidance, Outlook, Risks, and Unusual Items

• Stock-Based Compensation: The Company adopted the fair value recognition provisions of FAS 123 effective September 28, 2002. Management estimates the impact on fiscal 2003 earnings per share will approximate $0.10, higher than the previously reported $0.06 estimate.
• Legal Contingencies:
  • Premiere 72 Program: A series of lawsuits and arbitrations were filed regarding an alleged mortgage lending program. While the total amount funded by participants may exceed $150 million, the Company believes it has meritorious defenses and cannot currently estimate its exposure.
  • Reserves: A $10 million net addition to legal reserves was recorded in the Retail segment, significantly impacting pre-tax income.
• Capital Resources: The Company has a $100 million line of credit and uncommitted lines aggregating $380 million for its broker-dealer subsidiary. Net capital requirements are well above regulatory minimums.
• Market Risk: The Company utilizes interest rate swaps to manage interest rate risk on variable-rate debt and fixed income inventories. Management believes exposure to interest rate risk is not material.

Investor Verification Checklist

• Legal Exposure: Verify the status and potential financial impact of the "Premiere 72" mortgage program litigation, as the Company currently cannot estimate the exposure.
• Stock Compensation Impact: Confirm the actual impact of the new FAS 123 accounting standard on fiscal 2003 earnings, noting the revised estimate of $0.10 per share.
• Asset Quality: Monitor the $1.5 billion in client receivables (predominantly margin loans) for potential credit deterioration given the poor equity market conditions.
• Joint Venture Losses: Review the financial performance of the CSS software joint venture, which contributed to increased operating expenses.
• Capital Adequacy: Confirm continued compliance with net capital rules for broker-dealer subsidiaries, particularly given the decline in trading profits.