Jefferies Reports Fiscal Third-Quarter 2013 Financial Results

Business Wire

NEW YORK--(BUSINESS WIRE)--

Jefferies Group LLC today announced financial results for its fiscal third quarter 2013.

Highlights for the three months ended August 31, 2013:

  • Net revenues of $517 million
  • Net earnings of $12 million
  • Investment banking net revenues of $319 million
  • Equities net revenues of $151 million
  • Fixed Income net revenues of $33 million

“With the significant change in expectations regarding interest rates, we experienced a very challenging summer in our fixed income businesses due to the rising rate environment, spread widening, redemptions experienced by our client base which heavily muted trading, and related mark-to-market write downs within our inventory (with no single meaningful item). At the same time, we recorded strong results in our investment banking activities and continued improvement in equities. Finally, our European business had a strong third-quarter, with meaningful benefit from our corporate broking effort, Jefferies Hoare Govett. Our investment in Knight Capital was marked down by $16 million in the third-quarter, reflecting the decline in the Knight stock price. The impact of this mark-down is recorded in our Equities net revenues line item,” commented Richard B. Handler, Chairman and Chief Executive Officer of Jefferies.

“Fixed income markets were most unsettled in June, while July and August were more balanced, but witnessed subdued summer activity levels. Since Labor Day, client flows have been stronger and fixed income performance has markedly improved to more normal levels. Momentum in Investment Banking appears to be building for our fourth-quarter and into 2014, as our backlog is strong and improving,” added Mr. Handler.

Our revenues, expenses and net earnings for the third-quarter of 2013 are impacted by the following items:

  • Revenues include an additional $27 million of positive net interest income due to the amortization of premiums arising from the one-time fair value adjustment of our long-term debt to fair value as of the date of our merger with Leucadia and the concurrent assumption of our mandatorily redeemable convertible preferred stock by Leucadia.
  • Professional fees include an additional $3.6 million of merger related and other legal fees.
  • Other expenses include the following items aggregating $17 million: $8 million of incremental amortization expense associated with intangible assets and internally developed software recognized upon the merger with Leucadia and approximately $9 million in litigation settlement costs. Our litigation settlement costs include a final judgment awarded on our last outstanding auction-rate securities matter.

Without these costs, our non-compensation costs would be $180 million.

Excluding the above revenue items, our compensation ratio would have been 59.5%, consistent with recent periods. Our total headcount at August 31, 2013 was 3,805, an increase of 20 employees compared to May 31, 2013.

Peregrine C. Broadbent, Chief Financial Officer of Jefferies commented: “As the table below shows, our balance sheet, capital, liquidity and risk metrics continue to demonstrate our continued conservative management philosophy and remain virtually unchanged from prior quarters. At period end, our gross leverage ratio, excluding the impact of the Leucadia purchase accounting, was 9.41 times equity and Level 3 assets were $500 million and remain at about 3% of inventory."

 
August 31, 2013
 
May 31, 2013
  • Total assets, excluding goodwill and intangibles1
$ 36.8 billion $ 37.0 billion
  • Tangible member's/common shareholders' equity1
$ 3.18 billion $ 3.17 billion
  • Liquidity buffer1
$ 5.6 billion $ 5.2 billion
  • Level 3 assets
$ 500 million $ 502 million
  • Average VaR2

$ 11.02 million

$ 8.77 million
  • Average VaR excluding Knight Capital holdings2
$ 7.24 million $ 5.77 million
 

The financial tables attached should be read in connection with our Quarterly Report on Form 10-Q for the quarter ended May 31, 2013 and our Annual Report on Form 10-K for the year ended November 30, 2012.

Jefferies, the global investment banking firm focused on serving clients for over 50 years, is a leader in providing insight, expertise and execution to investors, companies and governments. The firm provides a full range of investment banking, sales, trading, research and strategy across the spectrum of equities, fixed income, foreign exchange, futures and commodities, and also select asset and wealth management strategies, in the Americas, Europe and Asia. Jefferies Group LLC is a wholly-owned subsidiary of Leucadia National Corporation (LUK), a diversified holding company.

1 This represents a non-GAAP measure. Refer to the Financial Highlights table on page 5 and related footnotes.
2 This measure is reflected on a period basis.

 
JEFFERIES GROUP LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Amounts in Thousands)
(Unaudited)
       
Successor Predecessor
Quarter Ended Quarter Ended Quarter Ended
August 31, 2013 May 31, 2013 (A) August 31, 2012
 
Revenues:
Commissions $ 138,736 $ 146,848 $ 119,200
Principal transactions (24,910) 134,571 297,037
Investment banking 309,339 277,134 260,163
Asset management fees and

investment income from managed funds

13,549 10,527 3,116

Interest income

230,672 258,665 242,625
Other revenues   28,630   26,245   22,911
Total revenues 696,016 853,990 945,052
Interest expense   178,987   211,463   206,114
Net revenues 517,029 642,527 738,938
Interest on mandatorily redeemable preferred interests of

consolidated subsidiaries

-   3,368   8,304
Net revenues, less interest on mandatorily redeemable preferred

interests of consolidated subsidiaries

517,029   639,159   730,634
 
Non-interest expenses:
Compensation and benefits 293,771 373,880 440,391
 
Non-compensation expenses:
Floor brokerage and clearing fees 34,500 32,991 30,280
Technology and communications 62,266 63,839 58,681
Occupancy and equipment rental 26,205 32,225 24,077
Business development 17,624 22,732 27,736
Professional services 25,269 29,519 14,667
Other   34,012   18,720   12,433
Total non-compensation expenses   199,876   200,026   167,874
Total non-interest expenses   493,647   573,906   608,265
Earnings before income taxes 23,382 65,253 122,369
Income tax expense   8,493   25,007   44,048
Net earnings 14,889 40,246 78,321
Net earnings attributable to noncontrolling interests (B)   3,149   738   8,150
Net earnings attributable to Jefferies Group LLC/ common shareholders $ 11,740 $ 39,508 $ 70,171
 
Compensation and benefits / Net revenues 56.8% 58.2% 59.6%
 
Effective tax rate 36.3% 38.3% 36.0%
 

(A) Our consolidated net income for the three months ended May 31, 2013 reflects a reduction of $2.5 million, after tax, to correct the valuation of the conversion option in our convertible senior debentures. We evaluated the effects of this correction and concluded that it is not material to the previously issued Quarterly Report on Form 10-Q for the three month period ended May 31, 2013. Nevertheless, we have revised our consolidated net income for the three month period ended May 31, 2013 to reflect this correction and appropriately reflected a reduction of $3.9 million in Principal transaction revenues.

(B) For the quarter ended August 31, 2013, net earnings attributable to third party interests and a Leucadia interest in certain asset management entities and investment vehicles managed by us.

JEFFERIES GROUP LLC AND SUBSIDIARIES
SELECTED STATISTICAL INFORMATION
(Amounts in Thousands, Except Other Data)
(Unaudited)
     
Quarter Ended
Successor   Predecessor
Aug 31, May 31, Aug 31,
  2013  

2013 (A)

 

  2012  

Revenues by Source

Equities $ 151,037 $ 141,590 $ 209,980
Fixed income   33,103   213,276     265,679  
Total 184,140 354,866 475,659
 
 
Equity 56,482 53,564 39,068
Debt   120,187   133,714     87,894  
Capital markets 176,669 187,278 126,962
Advisory   142,670   89,856     133,201  
Investment banking 319,339 277,134 260,163
 
Asset management fees and investment gain (loss)

from managed funds:

Asset management fees 9,579 11,332 8,583
Investment gain (loss) from managed funds   3,971   (805 )   (5,467 )
Total   13,550   10,527     3,116  
Net revenues   517,029   642,527     738,938  
Interest on mandatorily redeemable preferred interests of consolidated subsidiaries   -   3,368     8,304  
Net revenues, less mandatorily redeemable preferred interests of consolidated subsidiaries $ 517,029 $ 639,159   $ 730,634  
 

Other Data

Number of trading days 64 64 65
 
Average firmwide VaR (in millions) (B) $ 11.02 $ 8.77 $ 10.53
Average firmwide VaR excluding Knight Capital (in millions) (B) $ 7.24 $ 5.77 $ 8.35
 

(A) Our consolidated net income for the three months ended May 31, 2013 reflects a reduction of $2.5 million, after tax, to correct the valuation of the conversion option in our convertible senior debentures. We evaluated the effects of this correction and concluded that it is not material to the previously issued Quarterly Report on Form 10-Q for the three month period ended May 31, 2013. Nevertheless, we have revised our consolidated net income for the three month period ended May 31, 2013 to reflect this correction and appropriately reflected a reduction of $3.9 million in Principal transaction revenues.

(B) VaR estimates the potential loss in value of our trading positions due to adverse market movements over a one-day time horizon with a 95% confidence level. For a further discussion of the calcuation of VaR, see "Value at risk" in Part II, Item 7 "Management's Discussion and Analysis" in our Annual Report on Form 10-K for the year ended November 30, 2012.

JEFFERIES GROUP LLC AND SUBSIDIARIES
FINANCIAL HIGHLIGHTS
(Amounts in Millions, Except Where Noted)
(Unaudited)
     
Quarter Ended
Successor Predecessor
Aug 31, May 31, Aug 31,
  2013    

2013 (A)

 

  2012  
 

Results:

Net earnings attributable to Jefferies Group LLC / common shareholders (in thousands) $ 11,740 $ 39,508 $ 70,171
Pretax operating margin 4.5 % 10.2 % 16.7 %
Effective tax rate 36.3 % 38.3 % 36.0 %

 

Financial position:

Total assets (1) $ 38,830 $ 38,938 $ 34,407
Average total assets for quarter (1) $ 45,824 $ 47,150 $ 42,594
Average total assets less goodwill and intangible assets for quarter (1) $ 43,840 $ 45,157 $ 42,207
 
Cash and cash equivalents (1) $ 4,119 $ 3,403 $ 2,845
Cash and cash equivalents and other sources of liquidity (1) (2) $ 5,574 $ 5,187 $ 4,229
Cash and cash equivalents and other sources of liquidity - % total assets (1) (2) 14.4 % 13.3 % 12.3 %
Cash and cash equivalents and other sources of liquidity - % total assets less goodwill and intangible assets (1) (2) 15.1 % 14.0 % 12.4 %
 
Financial instruments owned (1) $ 13,698 $ 15,270 $ 13,917
Goodwill and intangible assets (1) $ 1,988 $ 1,982 $ 381
 
Total equity (including noncontrolling interests) $ 5,241 $ 5,183 $ 3,707
Total member's / common stockholders' equity $ 5,164 $ 5,147 $ 3,369
Tangible member's / common stockholders' equity (3) $ 3,176 $ 3,165 $ 2,988
 

Level 3 financial instruments:

Level 3 financial instruments owned (1) (4) $ 444 $ 447 $ 487
Level 3 financial instruments owned - % total assets (1) 1.1 % 1.1 % 1.4 %
Level 3 financial instruments owned - % total financial instruments owned (1) 3.2 % 2.9 % 3.5 %
Level 3 financial instruments owned - % tangible member's / common stockholders' equity (1) 14.0 % 14.1 % 16.3 %
 

Other data and financial ratios:

Total capital (1) (5) $ 11,034 $ 11,271 $ 8,622
Leverage ratio (1) (6) 7.4 7.5 9.3
Adjusted leverage ratio (1) (7) 9.3 9.9 8.8
Tangible gross leverage ratio (1) (8) 11.6 11.7 11.4
Leverage ratio - excluding merger impacts (1) (9) 9.4 9.5 N/A
 
Number of trading days 64 64 65
 
Average firmwide VaR (10) $ 11.02 $ 8.77 $ 10.53
Average firmwide VaR excluding Knight Capital (10) $ 7.24 $ 5.77 $ 8.35
 
Number of employees, at quarter end 3,805 3,785 3,814
 
Compensation and benefits / Net revenues 56.8 % 58.2 % 59.6 %
 

(A) Our consolidated net income for the three months ended May 31, 2013 reflects a reduction of $2.5 million, after tax, to correct the valuation of the conversion option in our convertible senior debentures. Our Statement of Financial Condition reflects adjustments of $10.2 million to increase total assets and $12.7 million to increase total liabilities as of May 31, 2013, after considering tax effects, for the effect of the option valuation both in connection with the acquisition accounting for our merger with Leucadia on March 1, 2013 and the adjustment to the valuation of the conversion option at May 31, 2013. We evaluated the effects of this correction and concluded that it is not material to the previously issued Quarterly Report on Form 10-Q for the three month period ended May 31, 2013. Nevertheless, we have revised our consolidated net income for the three month period ended May 31, 2013 to correct for the effect of this item and appropriately reflected a reduction of $3.9 million in Principal transaction revenues and revised our balance sheet to appropriately reflect an increase of $5.3 million in Goodwill, an increase of $5.0 million in Other assets for the impact on income taxes and an increase of $12.7 million in Long-term debt.

  Footnotes
 
(1) This amount represents a preliminary estimate as of the date of this earnings release and may be revised in our Quarterly Report on Form 10-Q for the period ended August 31, 2013.
 
(2) As of August 31, 2013, other sources of liquidity include high quality sovereign government securities and reverse repurchase agreements collateralized by U.S. government securities and other high quality sovereign government securities of $1,145 million, in aggregate, and $310 million, being the total of the estimated amount of additional secured financing that could be reasonably expected to be obtained from our financial instruments that are currently not pledged at reasonable financing haircuts and additional funds available under the committed senior secured revolving credit facility available for working capital needs of Jefferies Bache.
 
(3) Tangible member's / common stockholders’ equity (a non-GAAP financial measure) represents total member's / common stockholders’ equity less goodwill and identifiable intangible assets. We believe that tangible member's / common stockholders' equity is meaningful for valuation purposes, as financial companies are often measured as a multiple of tangible member's / common stockholders' equity, making these ratios meaningful for investors.
 
(4) Level 3 financial instruments represent those financial instruments classified as such under Accounting Standards Codification 820, accounted for at fair value and included within Financial instruments owned.
 
(5) As of August 31 and May 31, 2013, total capital includes our long-term debt of $5,793 million and $6,088 million, respectively, and total equity. As of August 31, 2012 total capital includes our long-term debt, mandatorily redeemable convertible preferred stock, mandatorily redeemable preferred interest of consolidated subsidiaries, in aggregate $4,916 million, and total equity. Long-term debt included in total capital is reduced by amounts outstanding under the revolving credit facility and the amount of debt maturing in less than one year, where applicable.
 
(6) Leverage ratio equals total assets divided by total equity.
 
(7) Adjusted leverage ratio (a non-GAAP financial measure) equals adjusted assets divided by tangible total equity, being total equity less goodwill and identifiable intangible assets. Adjusted assets (a non-GAAP financial measure) equals total assets less securities borrowed, securities purchased under agreements to resell, cash and securities segregated, goodwill and identifiable intangibles plus financial instruments sold, not yet purchased (net of derivative liabilities). As of August 31, 2013, May 31, 2013 and August 31, 2012 adjusted assets were $30,139 million, $31,648 million and $29,232 million, respectively. We believe that adjusted assets is a meaningful measure as it excludes certain assets that are considered of lower risk as they are generally self-financed by customer liabilities through our securities lending activities.
 
(8) Tangible gross leverage ratio (a non-GAAP financial measure) equals total assets less goodwill and identifiable intangible assets divided by tangible member's / common stockholders' equity. The tangible gross leverage ratio is used by Rating Agencies in assessing our leverage ratio.
 
(9) Leverage ratio - excluding merger impacts (a non-GAAP financial measure) is calculated as follows:
                August 31,   May 31,
$ millions   2013   2013
Total assets $ 38,830 $ 38,938
Goodwill and acquisition accounting fair value adjustments on the merger with Leucadia (1,953 ) (1,953 )
Net amortization to date on asset related purchase accounting adjustments   18     9  
Total assets excluding the impact of the merger $ 36,895   $ 36,994  
 
Total equity $ 5,241 $ 5,183
Equity arising from merger consideration (1,422 ) (1,422 )
Preferred stock assumed by Leucadia 125 125
Net amortization to date of purchase accounting adjustments, net of tax   (17 )   (8 )
Total equity excluding the impact of the merger $ 3,927   $ 3,878  
 
Leverage ratio - excluding merger impacts   9.4     9.5  
 
(10)   VaR estimates the potential loss in value of our trading positions due to adverse market movements over a one-day time horizon with a 95% confidence level. For a further discussion of the calcuation of VaR, see "Value at risk" in Part II, Item 7 "Management's Discussion and Analysis" in our Annual Report on Form 10-K for the year ended November 30, 2012.
 

Contact:
Jefferies Group LLC
Peregrine C. Broadbent, 212-284-2338
Chief Financial Officer
View Comments