RJF

Business Context and Reporting Period

Company: Raymond James Financial, Inc. (RJF)
Filing Type: Form 10-K (Annual Report)
Period Ended: September 28, 2001
Headquarters: St. Petersburg, Florida

Raymond James Financial, Inc. is a holding company engaged in securities brokerage, investment banking, asset management, and banking services. Its principal subsidiaries include Raymond James & Associates, Inc. (RJA), Raymond James Financial Services, Inc. (RJFS), and Raymond James Ltd. (RJ Ltd.), acquired on January 1, 2001. The company operates through five segments: retail distribution, institutional distribution, investment banking, asset management, and other (including banking and trust services).

Key Financial Metrics

Revenue Composition (Fiscal 2001): Securities commissions and fees accounted for 60.0% of total revenues. Interest income represented 20.1%, and investment banking fees represented 5.9%. Fee-based revenues (investment advisory, interest, asset-based fees) comprised approximately 48% of total revenues.

Material Changes vs. Prior Period

• Revenue Decline: Total revenues decreased 2% to $1.66 billion. Excluding the $65.5 million contribution from the RJ Ltd. acquisition, revenues declined 6% due to poor equity market conditions and reduced transaction volumes.
• Net Income Decrease: Net income fell 23% to $96.4 million. On an operating basis (excluding legal reserve adjustments), results were down 36% from the prior year.
• Acquisition Impact: The acquisition of Goepel McDermid Inc. (renamed RJ Ltd.) on January 1, 2001, added $65.5 million in revenues and $64.4 million in expenses. The purchase price was $78 million (cash and stock).
• Legal Settlement: The company paid $27.5 million in June 2001 to settle the Corporex judgment. This resulted in a $16 million reversal of legal reserves in 2001, partially offsetting the decline in operating income.
• Interest Income: Interest revenue declined 3% to $334.4 million due to lower margin balances as equity values dropped and clients became more conservative. Net interest income declined 9%.
• Assets Under Management (AUM): Total financial AUM decreased 10% to $15.9 billion, primarily due to declines in equity asset values, despite positive net sales in certain segments.

Guidance, Outlook, Risks, and Unusual Items

Management Commentary: Management noted that fiscal 2001 was plagued by poor equity markets, leading to a decline in transaction volume. The company continues to focus on non-transaction dependent fee revenues. Expenses increased 3% on an operating basis, driven by personnel additions in operations and capital markets to support previous volume growth, though headcount was reduced in the last two quarters of 2001.

Unusual Items:

• Corporex Litigation: A $40.7 million judgment was entered in 2000. A $20 million charge was taken in 2000 to increase legal reserves. In 2001, the company paid $27.5 million to settle the case and reversed $16 million of the previously established reserve.
• Accounting Standards: The company plans to adopt SFAS 142 (Goodwill and Other Intangible Assets) effective September 29, 2001. This will require testing goodwill for impairment rather than amortization. The impact on financial statements is not yet estimable.

Risks and Contingencies:

• Market Risk: Exposure to fluctuations in interest rates, credit ratings, and equity prices. The company manages this through position limits and hedging (e.g., interest rate swaps).
• Credit Risk: Exposure to client margin accounts and counterparty defaults. The company monitors collateral daily and maintains strict credit limits.
• Legal/Regulatory: Subject to extensive regulation by the SEC, NYSE, and other bodies. The company is a defendant in various lawsuits incidental to its business, though management believes outcomes will not be materially adverse.
• Forward-Looking Statements: Results may differ due to transaction volume, market volatility, interest rate fluctuations, regulatory changes, and general economic conditions.

Investor Verification Checklist

• Corporex Settlement Impact: Verify the net effect of the $27.5 million cash outflow versus the $16 million reserve reversal on the 2001 bottom line.
• Fee-Based Revenue Trend: Confirm the sustainability of the 48% fee-based revenue mix as a buffer against market volatility.
• Goodwill Impairment: Monitor the impact of the upcoming adoption of SFAS 142 on the $62 million of unamortized goodwill.
• Margin Balances: Assess the correlation between equity market performance and the company's interest income, given the 18% decline in average margin balances.
• Acquisition Integration: Review the performance of RJ Ltd. (formerly Goepel McDermid) to ensure it meets revenue and profitability expectations.