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Jefferies Reports Third Quarter 2014 Financial Results

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Jefferies Group LLC today announced financial results for its fiscal third quarter 2014.

Highlights for the three months ended August 31, 2014:

  • Total Net revenues of $843 million
  • Pre-tax earnings of $136 million
  • Net earnings of $84 million
  • Record Investment Banking net revenues of $468 million
  • Equities net revenues of $172 million
  • Fixed Income net revenues of $195 million
  • Total Sales and Trading net revenues of $367 million

Highlights for the nine months ended August 31, 2014:

  • Record Total Net revenues of $2,465 million
  • Record Pre-tax earnings of $417 million
  • Record Net earnings of $257 million
  • Record Investment Banking net revenues of $1,213 million
  • Equities net revenues of $538 million
  • Fixed Income net revenues of $699 million
  • Total Sales and Trading net revenues of $1,237 million

Richard B. Handler, Chairman and Chief Executive Officer, and Brian P. Friedman, Chairman of the Executive Committee, commented: “These results represent the best third quarter and the best first nine-months Jefferies has achieved in our over 50-year history. Our third quarter performance was driven by $468 million in Investment Banking net revenues. These record investment banking results reflect solid contributions from equity and debt capital markets, strong performance in our merger and acquisition advisory business, and broad participation across our industry groups and geographies. Our sales and trading business results were also solid for the quarter and are $367 million. We continue to expand our client reach and believe we are gaining market share across the board as we leverage our unique position as the largest non-bank, full-service global investment banking firm based in the U.S. The overall environment is reasonable, and our competitive position has never been stronger.”

The attached financial tables should be read in connection with our Quarterly Report on Form 10-Q for the quarter ended May 31, 2014 and our Annual Report on Form 10-K for the year ended November 30, 2013. On September 2, 2014, we issued a press release announcing preliminary financial results for the fiscal third quarter of 2014, which were also filed with a Current Report on Form 8-K. Actual results as reported herein differ from those preliminary results as a result of our routine financial reporting close process, which has now been finalized. Differences in the actual results for the fiscal third quarter of 2014 reported herein from the preliminary results are attributed to revenue allocations to business divisions, conclusions on revenue arrangements, fair value estimates and adjustments to expense accruals.

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, as well as wealth management, in the Americas, Europe and Asia. Jefferies Group LLC is a wholly-owned subsidiary of Leucadia National Corporation (NYSE:LUK) , a diversified holding company.

JEFFERIES GROUP LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Amounts in Thousands)
(Unaudited)
Successor Predecessor
Quarter Ended Quarter Ended Nine Months Ended Six Months Ended Quarter Ended
August 31, 2014 August 31, 2013 August 31, 2014 August 31, 2013 February 28, 2013
Revenues:
Commissions $ 159,085 $ 153,402 $ 488,526 $ 316,161 $ 146,240
Principal transactions 144,354 (24,910) 566,133 109,661 300,278
Investment banking 467,793 309,339 1,213,262 586,473 288,278

Asset management fees and investment

income from managed funds 8,463 13,549 15,319 24,076 10,883
Interest income 249,251 230,672 782,059 489,337 249,277
Other revenues 26,489 28,630 57,962 54,875 27,004
Total revenues 1,055,435 710,682 3,123,261 1,580,583 1,021,960
Interest expense 212,126 178,987 657,932 390,450 203,416
Net revenues 843,309 531,695 2,465,329 1,190,133 818,544

Interest on mandatorily redeemable preferred interests of

consolidated subsidiaries 3,368 10,961

Net revenues, less interest on mandatorily redeemable preferred

interests of consolidated subsidiaries

843,309 531,695 2,465,329 1,186,765 807,583
Non-interest expenses:
Compensation and benefits 477,268 293,771 1,390,043 667,651 474,217
Non-compensation expenses:
Floor brokerage and clearing fees 55,967 49,166 159,500 98,068 46,155
Technology and communications 67,286 62,266 201,849 126,105 59,878
Occupancy and equipment rental 28,477 26,205 81,652 58,430 24,309
Business development 27,800 17,624 79,193 40,356 24,927
Professional services 31,231 25,269 81,395 54,788 24,135
Other 19,645 34,012 54,656 52,732 14,475
Total non-compensation expenses 230,406 214,542 658,245 430,479 193,879
Total non-interest expenses 707,674 508,313 2,048,288 1,098,130 668,096
Earnings before income taxes 135,635 23,382 417,041 88,635 139,487
Income tax expense 51,762 8,493 155,962 33,500 48,645
Net earnings 83,873 14,889 261,079 55,135 90,842

Net earnings attributable to noncontrolling interests

312 3,149 3,760 3,887 10,704

Net earnings attributable to Jefferies Group LLC/common
stockholders

$ 83,561 $ 11,740 $ 257,319 $ 51,248 $ 80,138
Pretax operating margin 16.1% 4.4% 16.9% 7.5% 17.3%
Effective tax rate 38.2% 36.3% 37.4% 37.8% 34.9%
JEFFERIES GROUP LLC AND SUBSIDIARIES
SELECTED STATISTICAL INFORMATION
(Amounts in Thousands, Except Other Data)
(Unaudited)
Successor Predecessor
Quarter Ended Quarter Ended Nine Months Ended Six Months Ended Quarter Ended
August 31, 2014 August 31, 2013 August 31, 2014 August 31, 2013 February 28, 2013

Revenues by Source

Equities $ 171,708 $ 151,038 $ 537,769 $ 292,628 $ 167,354
Fixed income 195,345 47,769 698,979 276,956 352,029
Total 367,053 198,807 1,236,748 569,584 519,383
Equity 93,309 56,482 271,773 110,046 61,380
Debt 175,597 120,187 495,635 253,901 140,672
Capital markets 268,906 176,669 767,408 363,947 202,052
Advisory 198,887 142,670 445,854 232,526 86,226
Investment banking 467,793 319,339 1,213,262 596,473 288,278

Asset management fees and investment income (loss)

from managed funds:
Asset management fees 7,379 9,578 21,752 20,910 11,083
Investment income (loss) from managed funds 1,084 3,971 (6,433

)

3,166 (200 )
Total 8,463 13,549 15,319 24,076 10,883
Net revenues 843,309 531,695 2,465,329 1,190,133 818,544

Interest on mandatorily redeemable preferred interests of consolidated subsidiaries

3,368 10,961

Net revenues, less mandatorily redeemable preferred interests of consolidated subsidiaries

$ 843,309 $

531,695

$ 2,465,329 $ 1,186,765 $ 807,583

Other Data

Number of trading days 64 64 188 128 60
Average firmwide VaR (in millions) (A) $ 13.50 $ 11.02 $ 14.88 $ 9.89 $ 9.27
Average firmwide VaR excluding Knight Capital (in millions) (A) $ 8.25 $ 7.24 $ 9.80 $ 6.51 $ 5.99

Average firmwide VaR excluding Knight Capital and Harbinger Group

Inc. (in millions) (A)

$ 8.25 $ 7.24 $ 8.48 $ 6.51 $ 5.99
(A) 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 calculation 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, 2013.
JEFFERIES GROUP LLC AND SUBSIDIARIES
FINANCIAL HIGHLIGHTS
(Amounts in Millions, Except Where Noted)
(Unaudited)
Successor
Quarter Ended Quarter Ended Quarter Ended
August 31, 2014 May 31, 2014 August 31, 2013

Financial position:

Total assets (1) $ 44,764 $ 43,610 $ 38,830
Average total assets for the period (1) $ 51,369 $ 50,379 $ 45,824
Average total assets less goodwill and intangible assets for the period (1) $ 49,387 $ 48,394 $ 43,840
Cash and cash equivalents (1) $ 4,035 $ 3,958 $ 4,119
Cash and cash equivalents and other sources of liquidity (1) (2) $ 5,913 $ 5,824 $ 5,574
Cash and cash equivalents and other sources of liquidity – % total assets (1) (2) 13.2 % 13.4 % 14.4 %

Cash and cash equivalents and other sources of liquidity – % total assets less goodwill and intangible assets (1)(2)

13.8 % 14.0 % 15.1 %
Financial instruments owned (1) $ 18,420 $ 17,144 $ 13,698
Goodwill and intangible assets (1) $ 1,978 $ 1,984 $ 1,988
Total equity (including noncontrolling interests) $ 5,602 $ 5,527 $ 5,241
Total member’s / common stockholders’ equity $ 5,571 $ 5,496 $ 5,164
Tangible member’s / common stockholders’ equity (3) $ 3,593 $ 3,512 $ 3,176

Level 3 financial instruments:

Level 3 financial instruments owned (1) (4) $ 499 $ 490 $ 444
Level 3 financial instruments owned with economic exposure (1) (5) $ 480 $ 490 $ 441
Level 3 financial instruments owned – % total assets (1) 1.1 % 1.1 % 1.1 %
Level 3 financial instruments owned – % total financial instruments owned (1) 2.7 % 2.9 % 3.2 %
Level 3 financial instruments owned with economic exposure – % total financial instruments owned (1) 2.6 % 2.9 % 3.2 %

Level 3 financial instruments owned with economic exposure – % tangible member’s / common stockholders’ equity (1)

13.4 % 14.0 % 13.9 %

Other data and financial ratios:

Total capital (1) (6) $ 11,970 $ 11,941 $ 11,034
Leverage ratio (1) (7) 8.0 7.9 7.4
Adjusted leverage ratio (1) (8) 10.5 10.0 9.3
Tangible gross leverage ratio (1) (9) 11.9 11.9 11.6
Leverage ratio – excluding impacts of the Leucadia transaction (1) (10) 10.1 10.0 9.4
Number of trading days 64 63 64
Average firmwide VaR (11) $ 13.50 $ 14.94 $ 11.02
Average firmwide VaR excluding Knight Capital (11) $ 8.25 $ 8.63 $ 7.24
Average firmwide VaR excluding Knight Capital and Harbinger Group Inc. (11) $ 8.25 $ 7.97 $ 7.24
Number of employees, at period end 3,885 3,785 3,805
JEFFERIES GROUP LLC AND SUBSIDIARIES
FINANCIAL HIGHLIGHTS – FOOTNOTES
(1) Amounts pertaining to August 31, 2014 represent 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 three months ended August 31, 2014.
(2) As of August 31, 2014, 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 $1,530 million, in aggregate, and $348 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. The corresponding amounts included in other sources of liquidity as of May 31, 2014 were $1,202 million and $664 million, and as of August 31, 2013, were $1,145 million and $310 million, respectively.
(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)

Level 3 financial instruments owned with economic exposure represent Level 3 financial instruments owned adjusted for Level 3 financial instruments that are financed by nonrecourse secured financing or attributable to third party or employee noncontrolling interests in certain consolidated entities.

(6) As of August 31, 2014, May 31, 2014 and August 31, 2013, total capital includes our long-term debt of $6,368 million, $6,414 million and $5,793 million, respectively, 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.
(7) Leverage ratio equals total assets divided by total equity.
(8) 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, 2014, May 31, 2014 and August 31, 2013 adjusted assets were $38,100 million, $35,577 million and $30,112 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.
(9) 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.
(10) Leverage ratio – excluding impacts of the Leucadia transaction (a non-GAAP financial measure) is calculated as follows:
August 31, May 31, August 31,
$ millions 2014 2014 2013
Total assets $ 44,764 $ 43,610 $ 38,830
Goodwill and acquisition accounting fair value adjustments on the transaction with Leucadia (1,957 ) (1,957 ) (1,957 )
Net amortization to date on asset related purchase accounting adjustments 42 37 18
Total assets excluding transaction impacts $ 42,849 $ 41,690 $ 36,891
Total equity $ 5,602 $ 5,527 $ 5,241
Equity arising from transaction consideration (1,426 ) (1,426 ) (1,426 )
Preferred stock assumed by Leucadia 125 125 125
Net amortization to date of purchase accounting adjustments, net of tax (58 ) (48 ) (17 )
Total equity excluding transaction impacts $ 4,243 $ 4,178 $ 3,923
Leverage ratio – excluding impacts of the Leucadia transaction 10.1 10.0 9.4
(11) 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 calculation 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, 2013.

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