Jefferies Financial Group Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended February 28, 2022. Jefferies operates investment banking and capital markets, asset management, and a legacy Merchant Banking portfolio that it intends to continue realizing, transferring, or otherwise winding down.
Key financial metrics
Amounts are in U.S. dollars; figures are rounded. Income statement comparisons are with the three months ended February 28, 2021.
| Metric | Q1 2022 | Prior period / comparison |
|---|---|---|
| Total revenues | $1.943 billion | $2.704 billion; down 28.1% |
| Net revenues | $1.732 billion | $2.487 billion; down 30.4% |
| Income before tax | $392.3 million | $800.8 million; down 51.0% |
| Net income | $328.0 million | $582.5 million; down 43.7% |
| Net income attributable to common shareholders | $327.4 million | $582.4 million |
| Diluted EPS | $1.23 | $2.13 |
| Operating cash flow | $(1.215) billion | $(1.496) billion |
| Cash, cash equivalents and restricted cash at period end | $9.424 billion | $9.210 billion at prior-year quarter end |
| Total assets / total equity | $60.036 billion / $10.549 billion | $60.404 billion / $10.580 billion at November 30, 2021 |
| Short-term borrowings / long-term debt | $467.9 million / $8.896 billion | $221.9 million / $9.126 billion at November 30, 2021 |
| Income tax provision / effective rate | $64.4 million / 16.4% | $218.2 million / 27.3% |
Net income as a percentage of net revenues was approximately 18.9%, versus 23.4% in the prior-year quarter. The lower current-period tax rate included an excess tax benefit related to conversion of restricted stock units.
Material changes and segment performance
- Investment Banking and Capital Markets: Net revenues were $1.482 billion, down from $1.987 billion; pretax income was $420.9 million, versus $556.2 million. Advisory revenue increased 74.6% to $543.8 million, while underwriting fell 42.0% to $401.3 million, principally due to lower equity issuance. Capital Markets revenue declined to $479.8 million from $894.4 million, reflecting lower equities and fixed-income activity.
- Asset Management: Net revenues were $60.0 million versus $229.2 million, and pretax income was $16.0 million versus $183.9 million. Investment return fell to $29.5 million from $173.3 million, amid difficult conditions for long/short equity, multi-strategy and energy strategies. Third-party AUM managed directly by Jefferies increased to $992 million from $831 million at November 30, 2021, largely on net inflows.
- Merchant Banking: Net revenues were $189.5 million versus $267.0 million; the segment recorded a pretax loss of $24.4 million, compared with income of $92.2 million. Mark-to-market declines in public-company investments and losses related to associated companies were significant factors. Idaho Timber remained profitable; oil and gas revenue benefited from higher prices, partly offset by hedge losses.
- Costs and margins: Consolidated compensation and benefits expense decreased to $789.7 million from $1.173 billion, partly reflecting lower revenue-linked compensation. Investment Banking and Capital Markets compensation was 48.9% of segment net revenues, versus 55.8%. Consolidated non-compensation expenses increased to $424.2 million from $407.5 million.
Cash, debt and capital returns
- Cash and cash equivalents on the balance sheet were $8.501 billion, down from $10.755 billion at November 30, 2021; the cash-flow measure of cash, cash equivalents and restricted cash was $9.424 billion at quarter end.
- Net cash used in investing activities was $105.1 million. Net cash used in financing activities was $1.083 billion, including $737.6 million of debt repayments, $934.0 million of net repayments in other secured financings, $338.1 million of treasury-share purchases and $72.3 million of dividends; debt issuance partly offset outflows.
- Parent-company liquidity was $1.83 billion. Management reported Jefferies Group liquidity sources of $8.54 billion, including cash and other sources, and stated that modeled stress liquidity needs were covered. Jefferies Group’s $14.93 billion of long-term capital exceeded its modeled cash-capital requirements.
- Common dividends were $0.30 per share. The company repurchased 10.04 million shares for $364.2 million during the quarter, including $250.0 million under its authorized program. The authorization was fully used at February 28; the board restored it to $250 million in March 2022.
Outlook, risks and unusual items
- The filing gives no numerical earnings or revenue guidance. Management said investment-banking backlog remained strong, but new-issue markets were sluggish and conversion of backlog depended on market conditions; prospective transactions may be delayed, changed or cancelled.
- Management cited inflation, interest-rate uncertainty, widening credit spreads, reduced investor demand for securitized products and lower issuance activity as factors affecting markets. Russia’s invasion of Ukraine added volatility. Jefferies reported no operations in Russia and minimal related securities market risk, but trades executed before the Moscow Exchange suspension remained unsettled; management said any reasonably estimable loss was not material, while noting the ultimate outcome was uncertain.
- Oil and gas hedging affected results: about 58% of Q1 oil production was hedged at a weighted average of approximately $59 per barrel; expected hedged production was about 46% for the remainder of 2022 at approximately $61 per barrel, and 27% for 2023 at approximately $77 per barrel. Hedge timing and production revenue may not align by quarter.
- Jefferies Group had $3.55 billion of other secured financings and $8.90 billion of consolidated long-term debt. Management reported compliance with relevant credit-facility covenants. A downgrade below investment grade could trigger collateral requirements; the filing estimates $446 million of potential collateral return or posting under specified derivative features and separately estimates $122.2 million of additional collateral calls under other arrangements.
- Commitments included $9.62 billion of forward-starting reverse repos and $6.22 billion of forward-starting repos, primarily settling within three business days, plus $335.3 million of loan commitments and $164.2 million of equity commitments. Jefferies also agreed to reimburse Berkshire Hathaway for up to half of losses under a $1.5 billion surety policy supporting Berkadia-affiliate commercial paper; $1.47 billion was outstanding.
- Legal and regulatory matters were described as ordinary-course or not significant to consolidated financial position. Management cautioned that settlements, fines or other outcomes could affect results in the period incurred. Disclosure controls were assessed as effective, with no material change in internal control reported for the quarter.
Important facts for investors to verify
- Whether investment-banking backlog converts to revenue and how market conditions affect advisory, underwriting and capital-markets activity.
- How much the decline in asset-management investment returns and Merchant Banking mark-to-market losses persists, and the performance of associated-company investments.
- Liquidity availability under stress, including secured-funding access, collateral calls, commitments and the distinction between unrestricted cash and restricted cash.
- Exposure and potential settlement losses on Russia-related unsettled trades, and any subsequent developments in geopolitical or market conditions.
- The effect of share repurchases, dividends and potentially dilutive awards on capital, share count and per-share results.
- Developments in tax examinations and the $446.9 million of gross unrecognized tax benefits, including interest.