Jefferies Financial Group Inc. — FY2022 Form 10-K
Reporting period: Fiscal year ended November 30, 2022; comparisons are with fiscal 2021 unless noted. This is an annual filing, not a standalone fourth-quarter report. Jefferies is a global investment banking and securities firm with Investment Banking and Capital Markets and Asset Management segments.
Financial performance
| Metric | FY2022 | FY2021 | Change |
|---|---|---|---|
| Net revenues | $5.98 billion | $8.01 billion | Down 25.4% |
| Earnings before tax | $1.06 billion | $2.25 billion | Down 53.2% |
| Net earnings attributable to Jefferies | $777.2 million | $1.67 billion | Down 53.4% |
| Diluted earnings per share | $3.06 | $6.13 | Down 50.1% |
| Effective tax rate | 25.9% | 25.6% | Up 0.3 percentage points |
Pre-tax operating margin was 17.7%, down from 28.1%. Non-interest expenses fell 14.5% to $4.92 billion, led by lower compensation expense, which declined 27.2% to $2.59 billion. Compensation was 43.3% of net revenues, compared with 44.4%.
- Investment banking: Revenue was $2.90 billion, down 37.7%. Advisory revenue remained strong at $1.78 billion, down 5.1%; underwriting revenue fell 58.7% to $1.03 billion.
- Equities: Revenue was $1.06 billion, down 18.5%, reflecting weaker new issuance and SPAC activity, partly offset by market-share gains and strong electronic trading and prime services.
- Fixed income: Revenue was $765.6 million, down 20.2%, amid lower activity, volatility and liquidity in several markets, and mortgage-inventory mark-to-market losses.
- Asset Management: Revenue was $1.26 billion, up 15.1%, mainly reflecting legacy investment sales and merchant-banking results; fees and revenues declined 26.2% to $89.1 million and investment return fell 39.8% to $156.6 million.
Balance sheet, liquidity and capital
- Total assets were $51.06 billion, down 9.0%; total equity was $10.30 billion. Leverage was 5.0 times total equity and tangible gross leverage was 5.9 times, both lower than in 2021.
- Cash and cash equivalents were $9.70 billion. The company reported $11.64 billion of cash and other identified liquidity sources, equal to 22.8% of total assets. Management said liquidity was sufficient to meet modeled contingent outflows under stress.
- Long-term debt was $8.77 billion, down from $9.13 billion; short-term borrowings were $528.4 million. Total long-term capital was $17.49 billion. The company retained investment-grade ratings: Moody’s Baa2, S&P BBB and Fitch BBB.
- Operating cash flow was $1.80 billion, versus $1.58 billion in FY2021. Cash, cash equivalents and restricted cash ended the year at $10.71 billion, down from $11.83 billion.
- Jefferies returned $1.14 billion to shareholders through $280.1 million in dividends and $859.6 million in share repurchases. The quarterly dividend was $0.30 per share.
Material changes, outlook and notable items
- Results declined from FY2021’s record revenue and earnings, principally as industry-wide underwriting activity contracted. Advisory remained resilient; most other major businesses reported lower revenue.
- On November 1, 2022, Jefferies Group LLC merged into Jefferies Financial Group Inc., simplifying the corporate structure and transferring Jefferies Group’s debt obligations to the parent. Segment reporting was reorganized into two segments, with prior periods recast for comparison.
- Management reported the three-month investment-banking backlog at November 30 was consistent with August 31, but stressed that execution depends on market conditions and transactions may be delayed, changed or cancelled. The filing provides no broad numerical earnings or revenue guidance.
- Legacy portfolio sales included Idaho Timber, producing a $138.7 million pre-tax gain, and Oak Hill, producing a $175.1 million gain. A completed multifamily property sale also contributed revenue. Jefferies distributed its Vitesse Energy ownership to shareholders on January 13, 2023.
- Other notable items included an $80 million combined SEC/CFTC regulatory settlement, a $25.3 million impairment of the FXCM investment, and technical covenant violations on $112.9 million of auto-loan-secured facilities that the company said were being resolved with lenders.
- After year-end, Jefferies expected to pay $1.50 billion in cash for FY2022 compensation awards. It also disclosed a $1.5 billion Berkadia commercial-paper support arrangement, under which Jefferies agreed to reimburse Berkshire Hathaway for half of covered losses.
- Principal risks include market and counterparty losses, liquidity and funding stress, credit-rating downgrades, regulation and litigation, cybersecurity and operational failures, employee retention, and uncertainty from interest rates, inflation, geopolitical events and the LIBOR transition. The company is also winding down a significant portion of its legacy investment portfolio.
Investor facts to verify
- Whether the investment-banking backlog converts to completed transactions and revenue, given uncertain market conditions.
- The durability of advisory, equities and fixed-income revenue, and whether expense reductions can offset weaker activity without impairing growth.
- Progress and final resolution of the $112.9 million auto-loan facility covenant issues.
- Potential exposure under Berkadia’s commercial-paper support agreement and other commitments and guarantees.
- Realizability of gains and carrying values in legacy investments, including the effect of sales, impairments and the Vitesse distribution.
- Liquidity and capital availability at the parent, considering regulatory restrictions on subsidiary distributions and scheduled debt and compensation payments.
Audit and reporting: Deloitte issued an unqualified opinion on the financial statements and internal controls. The company changed secondary-loan trading accounting from trade-date to settlement-date treatment; it reported no impact on net earnings or total equity. Deloitte identified valuation of instruments using significant unobservable inputs or complex models as a critical audit matter.