Business context and reporting period
Jefferies Financial Group Inc. (NYSE: JEF) filed its Form 10-K for the fiscal year ended November 30, 2021. The company’s principal businesses are investment banking and capital markets, asset management, and a legacy Merchant Banking portfolio that it is winding down. Jefferies Group is its largest subsidiary. Fiscal 2021 results are annual, not standalone fourth-quarter results.
Financial performance and position
| Metric | FY2021 | FY2020 |
|---|---|---|
| Net revenues | $8.185 billion | $6.011 billion |
| Income before taxes | $2.254 billion | $1.067 billion |
| Net income attributable to common shareholders | $1.667 billion | $769.6 million |
| Diluted earnings per share | $6.13 | $2.65 |
| Operating cash flow | $1.573 billion | $2.076 billion |
| Total assets at year-end | $60.404 billion | $53.118 billion |
| Long-term debt at year-end | $9.126 billion | $8.352 billion |
| Shareholders’ equity at year-end | $10.554 billion | $9.404 billion |
| Book value per common share | $43.33 | $37.65 |
Net revenues increased 36%; pre-tax income more than doubled. Investment Banking and Capital Markets generated $6.797 billion of net revenue and $2.097 billion of pre-tax income. Compensation and benefits were $3.551 billion, or 48.9% of net revenue, down from 54.8% in 2020. The company reported an income tax provision of $576.7 million and a 25.6% effective tax rate, versus 28.0% in 2020.
Cash, cash equivalents and restricted cash totaled $11.828 billion at year-end. Parent-company liquidity was $2.00 billion, including $1.56 billion in U.S. government money funds. Jefferies Group reported $10.746 billion of cash and other liquidity sources. Jefferies Group’s long-term capital of $14.38 billion exceeded its cash capital requirements. These measures are not interchangeable: substantial cash and assets support regulated, secured-financing and customer activities.
Material changes versus the prior comparable period
- Investment Banking and Capital Markets revenue rose 36% to $6.797 billion. Investment banking reached a record $4.423 billion, including record advisory revenue of $1.874 billion and underwriting revenue of $2.492 billion. Equities revenue set a record at $1.301 billion; fixed income revenue fell 28.5% to $959.1 million from a record prior year.
- Asset Management net revenue rose to a record $336.7 million from $235.3 million, helped by increased affiliate-related fees and investment returns. Third-party assets under management were $831 million, up from $774 million.
- Merchant Banking reported $114.4 million pre-tax income, compared with a $24.6 million loss. Idaho Timber posted record results; real estate revenue and realized and unrealized investment gains also contributed.
- Operating cash flow declined by $502.9 million year over year. Investing cash outflow was $400.6 million; financing provided $994.3 million, including debt issuance and secured financing, partly offset by debt repayments, share repurchases and dividends.
- Shareholders’ equity rose to $10.554 billion and book value per share to $43.33. The company repurchased 8.54 million shares for $266.8 million at an average $31.25 per share and paid $0.90 per share in dividends during FY2021.
Outlook, commentary, risks and unusual items
Management said the investment banking backlog at November 30, 2021 was robust and consistent with year-earlier levels, while cautioning that expected transactions may be delayed, modified or cancelled. Strategy remains focused on growing investment banking, capital markets and Leucadia Asset Management, returning excess capital, and selling, distributing or transferring remaining Merchant Banking assets over the next few years. No quantified earnings or revenue guidance is provided.
- In January 2022, the board raised the quarterly dividend 20% to $0.30 per share and restored the share repurchase authorization to $250 million. Management also noted that future in-kind distributions or special dividends may be considered if conditions permit.
- The company announced a strategic alliance with SMBC Group in July 2021, including cooperation in leveraged finance, cross-border M&A and healthcare, and an unsecured $350 million revolving facility for Jefferies Group. SMBC also provided Jefferies Finance with a $1.65 billion revolving facility and a $250 million subordinated loan.
- Jefferies Group repurchased $750 million of 5.125% notes due 2023 and Jefferies Financial Group repurchased $308.3 million of its 5.50% notes due 2023. Jefferies Group issued $1.0 billion of 2.625% notes due 2031. Early redemptions generated disclosed costs, including $38.2 million of Jefferies Group costs and a $26.0 million loss on the parent-company note repurchase.
- Fiscal 2021 included $186.8 million of compensation expense from amendments accelerating amortization of prior-year cash awards, a $39.0 million prime-brokerage bad-debt expense, and $56.0 million of one-time Jefferies Finance refinancing charges.
- Principal risks include trading and investment losses, counterparty and funding risk, liquidity and regulatory-capital constraints, credit-rating downgrades, cybersecurity and operational failures, litigation and regulatory change, and exposure to economic, pandemic and market conditions. The company disclosed a $72.2 million estimate of additional collateral that could be called under specified arrangements if Jefferies Group’s rating fell below investment grade; derivative-related disclosure also describes broader contingent collateral outflows under specified contract triggers.
- Legacy-portfolio risks include oil-price and development exposure, real-estate values, and Linkem’s 5G investment and anticipated operating losses during expansion. A proposed Linkem-Tiscali combination was announced after year-end and remained subject to completion. The company also agreed to reimburse Berkshire Hathaway for half of losses under a surety policy supporting Berkadia commercial paper; $1.47 billion was outstanding at year-end.
Key facts for investors to verify
- Review the audited statements and segment disclosures, particularly record investment-banking results, the fixed-income decline, and the contribution of investment returns and Merchant Banking gains.
- Assess the quality and repeatability of earnings, including variable compensation, award-amendment charges, prime-brokerage bad debt, refinancing costs and fair-value gains.
- Reconcile consolidated cash and liquidity with parent-company liquidity, regulated-subsidiary capital restrictions, repo funding and contractual debt maturities.
- Evaluate the sustainability of shareholder distributions against future cash needs, the 2023 debt maturities and the planned liquidation or transfer of legacy investments.
- Monitor transaction-backlog conversion, SMBC alliance execution, Linkem’s 5G rollout and proposed transaction, oil-and-gas hedging, and Berkadia’s commercial-paper exposure.
- Consider valuation uncertainty: the auditor identified certain Level 2 and Level 3 financial-asset and liability valuations as a critical audit matter. The auditor issued unqualified opinions on the financial statements and internal controls.