JEF - Jefferies Announces First Quarter 2022 Financial Results

March, 28 2022 05:42 PM Jefferies Financial Group Inc.

Q1 Financial Highlights

Net income attributable to common shareholders of $327 million, or $1.23 per diluted share
Annualized return on adjusted tangible equity of 16.2% ¹
Total Investment Banking and Capital Markets and Asset Management Net Revenues of $1.54 billion
Quarterly Investment Banking net revenues of $1.00 billion
Combined Capital Markets net revenues of $480 million
Asset Management net revenues (before allocated net interest ² ) of $74 million
Repurchased 10.038 million shares of common stock for $364.2 million, or an average price of $36.28 per share, including 6.848 million shares of common stock in the open market for $250.0 million under our current Board of Directors authorization and 3.190 million shares of common stock for $114.2 million in connection with net-share settlements under our equity compensation plan
In the four year period starting January 2018, Jefferies has repurchased 137.292 million shares of common stock ³ for $3.107 billion, or an average price of $22.63 per share; Jefferies has returned to shareholders $4.316 billion, or 43% of shareholders' equity and 56% of tangible shareholders' equity ⁴ since January 2018
Our Board of Directors has authorized the repurchase in the future of an additional up to $250 million of our common stock

"We are proud of our solid first quarter results which as expected, are down from our industry’s uniquely exceptional first quarter of 2021, but consistent with the new level of operating success Jefferies achieved for the last nine months of 2021. Our strong first quarter results reflect the breadth and depth of our platform, despite the challenging trading environment caused by the anticipated change in Fed policy that existed in December and January and exacerbated by the even more difficult capital markets conditions that began in February with the onset of the invasion of Ukraine. Despite the change in market tone, the performance in our Investment Banking business continues to reflect our increased market share, as continued momentum in our Advisory business led our results, with an increase of 75% over the prior year comparable quarter. Our debt underwriting net revenues were solid, while our equity underwriting results were lower than the same period last year, consistent with a reduction in industry-wide deal activity. The new issue markets are clearly more sensitive to the increase in volatility and while our investment banking backlog ⁵ remains strong, our realization of this backlog is sensitive to market conditions.

"Equities net revenues were impacted by market volatility and global instability. Fixed Income net revenues were lower, primarily due to lower trading volumes in the face of inflation concerns and interest rate uncertainty.

"Asset Management net revenues reflect higher asset management fees, offset by lower investment returns and lower revenues from strategic affiliates as compared to the prior year quarter.

“We have no operations in Russia and our exposure to Russia is otherwise immaterial.

"Our Ukrainian Doing Good Global Trading Day on March 3 ^rd raised more than $14 million, our largest fundraising effort ever. We are humbled by our clients, employees, shareholders and friends who have all come together in this show of support. The funds were distributed to 20 charities that are providing on the ground humanitarian aid and support to help the brave, courageous and inspirational people of Ukraine as they defend their lives, freedom and homes. We hope and pray for their fortitude and success. It should be crystal clear that Jefferies stands with the Ukrainian people."

Richard Handler, CEO, and Brian Friedman, President

Quarterly Cash Dividend

The Jefferies Board of Directors declared a quarterly cash dividend equal to $0.30 per Jefferies common share, payable on May 27, 2022 to record holders of Jefferies common shares on May 16, 2022.

Financial Summary

(Dollars in thousands, except per share amounts)

Three Months Ended February 28,




2022

2021 (6)

% Change
Net revenues:






Investment Banking and Capital Markets

$
1,481,818


$
1,987,496


(25
)%
Asset Management


59,956



229,202


(74
)%
Merchant Banking


189,535



267,004


(29
)%
Corporate


746



590


26
%
Consolidation Adjustments


(140
)


2,650


(105
)%
Net revenues

$
1,731,915


$
2,486,942


(30
)%







Income before income taxes

$
392,332


$
800,785


(51
)%







Net income attributable to common shareholders

$
327,447


$
582,435


(44
)%







Diluted earnings per share

$
1.23


$
2.13


(42
)%







Weighted average diluted shares


266,571



272,881










Annualized return on adjusted tangible equity ¹


16.2
%


33.3
%

Highlights

Three months ended February 28, 2022

Net income attributable to common shareholders of $327 million, or $1.23 per diluted share.
Repurchased 10.038 million shares of common stock for $364.2 million, or an average price of $36.28 per share, including 6.848 million shares of common stock in the open market for $250.0 million under our current Board of Directors authorization and 3.190 million shares of common stock for $114.2 million in connection with net-share settlements under our equity compensation plan.
We had 240.2 million shares outstanding and 267.2 million shares outstanding on a fully diluted basis ⁷ at February 28, 2022. Our book value per share was $43.68 and tangible book value per fully diluted share ⁸ was $33.08 at February 28, 2022.
Our Board of Directors has authorized the repurchase in the future of an additional up to $250 million of our common stock.
Effective tax rate of 16.4%, primarily reflecting excess tax benefits from restricted stock unit conversions.

Investment Banking and Capital Markets

Investment Banking net revenues of $1.00 billion were driven by significantly higher quarterly advisory net revenues and higher results in debt underwriting as compared with the prior year quarter, offset by lower net revenues in equity underwriting.
Combined Capital Markets net revenues of $480 million were lower as compared to prior year quarter. Equities net revenues were significantly impacted by market volatility and global instability. In addition, the first quarter last year benefited from trading opportunities related to Special Purpose Acquisition Companies. Fixed Income results were impacted by lower trading volumes in the face of inflation concerns and interest rate uncertainty.

Asset Management

Asset Management net revenues reflect higher asset management fees, offset by lower investment returns and lower revenues from strategic affiliates as compared to the prior year quarter.

Legacy Merchant Banking

Merchant Banking results reflect strong results at Idaho Timber, offset by unrealized hedging losses at Vitesse and a decline in the value of several of our investments in public companies.

* * * *

Amounts herein pertaining to February 28, 2022 represent a preliminary estimate as of the date of this earnings release and may be revised upon filing our Quarterly Report on Form 10-Q with the Securities and Exchange Commission (“SEC”). More information on our results of operations for the three months ended February 28, 2022 will be provided upon filing our Quarterly Report on Form 10-Q with the SEC, which we expect to file on or about April 8, 2022.

This press release contains certain “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on current views and include statements about our future and statements that are not historical facts. These forward-looking statements are usually preceded by the words “should,” “expect,” “intend,” “may,” “will,” "would," or similar expressions. Forward-looking statements may contain expectations regarding revenues, earnings, operations, and other results, and may include statements of future performance, plans, and objectives. Forward-looking statements may also include statements pertaining to our strategies for future development of our businesses and products. Forward-looking statements represent only our belief regarding future events, many of which by their nature are inherently uncertain. It is possible that the actual results may differ, possibly materially, from the anticipated results indicated in these forward-looking statements. Information regarding important factors, including Risk Factors that could cause actual results to differ, perhaps materially, from those in our forward-looking statements is contained in reports we file with the SEC. You should read and interpret any forward-looking statement together with reports we file with the SEC. We undertake no obligation to update or revise any such forward-looking statement to reflect subsequent circumstances.

Past performance may not be indicative of future results. Different types of investments involve varying degrees of risk. Therefore, it should not be assumed that future performance of any specific investment or investment strategy will be profitable or equal the corresponding indicated performance level(s).

Notes

Return on adjusted tangible equity (a non-GAAP financial measure) is defined as Jefferies' annualized adjusted net income (a non-GAAP financial measure) divided by our beginning of period adjusted tangible shareholders' equity (a non-GAAP financial measure). Refer to schedule on page 9 for reconciliation to U.S. GAAP amounts.
Allocated net interest represents an allocation to Asset Management of certain of our long-term debt interest expense, net of interest income on our Cash and cash equivalents and other sources of liquidity. Allocated net interest has been disaggregated to increase transparency and to make clearer actual Investment return. Refer to Selected Financial and Statistical Information on pages 6 to 7.
The 137.292 million common shares repurchased since January 2018 includes 133.449 million shares of common stock repurchased in the open market for $2.979 billion under our Board of Director authorizations and 3.843 million shares of common stock for $128.6 million repurchased in connection with net-share settlements under our equity compensation plan.
Tangible shareholders' equity (a non-GAAP financial measure), is defined as Jefferies Financial Group shareholders' equity less Intangible assets, net and goodwill. Refer to schedule on page 9 for reconciliation to U.S. GAAP amounts.
Backlog represents an estimate of our net revenues from expected future transactions. As an indicator of net revenues in a given future period, it is subject to limitations. The time frame for the realization of revenues from these expected transactions varies and is influenced by factors we do not control. Transactions not included in the estimate may occur, and expected transactions may also be modified or cancelled.
In the first quarter of 2022, we transferred certain Merchant Banking net assets to our Investment Banking and Capital Markets and Asset Management segments. Prior year amounts have been reclassified to conform to current segment disclosure.
Shares outstanding on a fully diluted basis (a non-GAAP financial measure) is defined as Jefferies common shares outstanding plus restricted stock units, stock options, conversion of redeemable convertible preferred shares and other shares. Refer to schedule on page 10 for reconciliation to U.S. GAAP amounts.
Tangible book value per fully diluted share (a non-GAAP financial measure) is defined as adjusted tangible book value (a non-GAAP financial measure) divided by shares outstanding on a fully diluted basis (a non-GAAP financial measure). Refer to schedule on page 10 for reconciliation to U.S. GAAP amounts.

Summary

(In thousands, except per share amounts) (Unaudited)






Three Months Ended February 28,


2022

2021
Net revenues

$
1,731,915


$
2,486,942

Income before income taxes and loss related to associated companies

$
422,317


$
811,353

Loss related to associated companies


(29,985
)


(10,568
)
Income before income taxes


392,332



800,785

Income tax provision


64,357



218,236

Net income


327,975



582,549

Net loss attributable to the noncontrolling interests


969



743

Net loss attributable to the redeemable noncontrolling interests


573



769

Preferred stock dividends


(2,070
)


(1,626
)
Net income attributable to common shareholders

$
327,447


$
582,435






Basic earnings per common share attributable to Jefferies common shareholders:




Net income

$
1.26


$
2.17






Basic: weighted average shares


257,552



266,386






Diluted earnings per common share attributable to Jefferies common shareholders:




Net income

$
1.23


$
2.13






Diluted: weighted average shares


266,571



272,881

A summary of results for the three months ended February 28, 2022 is as follows (in thousands):



Investment Banking and Capital Markets

Asset Management

Merchant Banking

Corporate

Parent Company Interest

Consolidation Adjustments

Total
Net revenues

$
1,481,818

$
59,956


$
189,535


$
746


$
—


$
(140
)

$
1,731,915

Expenses:














Cost of sales


—


—



95,671



—



—



—



95,671

Compensation and benefits


724,276


19,936



39,323



6,149



—



—



789,684

Non-compensation expenses:














Floor brokerage and clearing fees


72,166


11,795



—



—



—



—



83,961

Selling, general and other expenses


240,936


11,854



26,670



5,937



—



(140
)


285,257

Interest expense


—


—



697



—



8,391



—



9,088

Depreciation and amortization


23,555


362



21,596



424



—



—



45,937

Total non-compensation expenses


336,657


24,011



48,963



6,361



8,391



(140
)


424,243

Total expenses


1,060,933


43,947



183,957



12,510



8,391



(140
)


1,309,598

Income (loss) before income taxes and loss related to associated companies


420,885


16,009



5,578



(11,764
)


(8,391
)


—



422,317

Loss related to associated companies


—


—



(29,985
)


—



—



—



(29,985
)
Income (loss) before income taxes

$
420,885

$
16,009


$
(24,407
)

$
(11,764
)

$
(8,391
)

$
—



392,332

Income tax provision














64,357

Net income













$
327,975

A summary of results for the three months ended February 28, 2021 is as follows (in thousands):



Investment Banking and Capital Markets (1)

Asset Management (1)

Merchant Banking (1)

Corporate

Parent Company Interest

Consolidation Adjustments (1)

Total
Net revenues

$
1,987,496


$
229,202


$
267,004


$
590


$
—


$
2,650


$
2,486,942

Expenses:














Cost of sales


—



—



95,559



—



—



—



95,559

Compensation and benefits


1,109,695



22,785



24,529



15,534



—



—



1,172,543

Non-compensation expenses:














Floor brokerage and clearing fees


66,574



9,842



—



—



—



—



76,416

Selling, general and other expenses


228,733



12,164



26,520



4,669



—



(149
)


271,937

Interest expense


5,553



—



912



—



13,902



—



20,367

Depreciation and amortization


20,710



479



16,714



864



—



—



38,767

Total non-compensation expenses


321,570



22,485



44,146



5,533



13,902



(149
)


407,487

Total expenses


1,431,265



45,270



164,234



21,067



13,902



(149
)


1,675,589

Income (loss) before income taxes and loss related to associated companies


556,231



183,932



102,770



(20,477
)


(13,902
)


2,799



811,353

Loss related to associated companies


—



—



(10,568
)


—



—



—



(10,568
)
Income (loss) before income taxes

$
556,231


$
183,932


$
92,202


$
(20,477
)

$
(13,902
)

$
2,799



800,785

Income tax provision














218,236

Net income













$
582,549

(1) In the first quarter of 2022, we transferred certain Merchant Banking net assets to our Investment Banking and Capital Markets and Asset Management segments. Prior year amounts have been reclassified to conform to current segment disclosure.

Selected Financial and Statistical Information

(Amounts in Thousands, Except Other Data) (Unaudited)


Quarter Ended


February 28, 2022

November 30, 2021 (1)

February 28, 2021 (1)
Investment Banking, Capital Markets and Asset Management Net Revenues:













Advisory

$
543,769


$
587,726


$
311,439








Equity underwriting


156,100



370,636



494,806

Debt underwriting


245,179



222,655



197,367

Total underwriting


401,279



593,291



692,173








Other investment banking (2)


58,134



66,631



83,022








Total investment banking


1,003,182



1,247,648



1,086,634








Equities


277,047



291,032



531,016

Fixed income


202,800



132,771



363,359

Total capital markets


479,847



423,803



894,375








Other (2)


(1,211
)


(23,366
)


6,487








Total Investment Banking and Capital Markets Net Revenues (3)


1,481,818



1,648,085



1,987,496








Asset management fees and revenues (4)


44,502



13,065



66,309

Investment return (5)


29,530



41,658



173,292

Allocated net interest (5)


(14,076
)


(11,914
)


(10,399
)
Total Asset Management Net Revenues


59,956



42,809



229,202








Total Investment Banking, Capital Markets and Asset Management Net Revenues

$
1,541,774


$
1,690,894


$
2,216,698








Investment Banking, Capital Markets and Asset Management Non-compensation Expenses:













Floor brokerage and clearing fees

$
83,961


$
79,652


$
76,416

Underwriting costs


8,128



26,931



36,136

Technology and communications


104,555



101,544



91,939

Occupancy and equipment rental


25,250



25,198



23,783

Business development


24,376



42,386



17,991

Professional services


51,118



54,986



38,636

Depreciation and amortization


23,917



23,149



21,189

Other


39,363



80,519



37,965








Total Investment Banking, Capital Markets and Asset Management Non-compensation Expenses

$
360,668


$
434,365


$
344,055








Investment Banking, Capital Markets and Asset Management Compensation and Benefits Expenses:






Compensation and benefits

$
744,212


$
711,359


$
1,132,480

Compensation and benefits expenses as a percentage of net revenues


48.3
%


42.1
%


51.1
%

(Amounts in Thousands, Except Other Data) (Unaudited)









Quarter Ended


February 28, 2022

November 30, 2021

February 28, 2021
Other Data:






Number of trading days


61



63



60

Number of trading loss days (6)


8



11



9

Average VaR (in millions) (7)

$
12.12


$
10.14


$
16.02

(1)

In the first quarter of 2022, we transferred certain Merchant Banking net assets to our Investment Banking and Capital Markets and Asset Management segments. Previously reported results are presented on a comparable basis.
(2)

In the first quarter of 2022, we also made a change to present our share of the net earnings of Berkadia Commercial Mortgage Holding LLC within Investment banking net revenues, which was previously presented within our Other business category. Previously reported results are presented on a comparable basis.
(3)

Allocated net interest is not separately disaggregated for Investment Banking and Capital Markets. This presentation is aligned to our Investment Banking and Capital Markets internal performance measurement.
(4)

Includes management and performance fees from funds and accounts managed by us as well as our share of fees received by affiliated asset management companies with which we have revenue and profit share arrangements, as well as earnings on our ownership interest in affiliated asset managers.
(5)

Allocated net interest represents an allocation to Asset Management of certain of our long-term debt interest expense, net of interest income on our Cash and cash equivalents and other sources of liquidity. Allocated net interest has been disaggregated to increase transparency and to make clearer actual Investment return. We believe that aggregating Investment return and Allocated net interest would obscure the Investment return by including an amount that is unique to our credit spreads, debt maturity profile, capital structure, liquidity risks and allocation methods.
(6)

Number of trading loss days is calculated based on trading activities in our Investment Banking and Capital Markets and Asset Management business segments.
(7)

VaR estimates the potential loss in value of trading positions in our Investment Banking and Capital Markets and Asset Management business segments 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 7A "Quantitative and Qualitative Disclosures About Market Risk" in our Annual Report on Form 10-K for the year ended November 30, 2021.

Financial Data and Metrics

(Amounts in Millions, Except Other Data) (Unaudited)



Quarter Ended


February 28, 2022

November 30, 2021

February 28, 2021
Financial position (1):






Total assets

$
60,036


$
60,404


$
56,869

Total assets less goodwill and intangible assets for the period

$
58,142


$
58,506


$
54,955

Cash and cash equivalents

$
8,501


$
10,755


$
8,649

Financial instruments owned

$
21,633


$
19,829


$
19,097

Level 3 financial instruments owned (2)

$
640


$
579


$
697

Goodwill and intangible assets

$
1,895


$
1,898


$
1,914

Total equity

$
10,549


$
10,580


$
9,778

Total shareholders' equity

$
10,490


$
10,554


$
9,746

Tangible equity (3)

$
8,596


$
8,656


$
7,832








Other data and financial ratios:






Leverage ratio (1) (4)


5.7



5.7



5.8

Tangible gross leverage ratio (1) (5)


6.8



6.8



7.0








Number of employees, at period end


5,625



5,556



5,009

(1)

Amounts pertaining to February 28, 2022 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 February 28, 2022.
(2)

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.
(3)

Tangible equity (a non-GAAP financial measure) represents total Jefferies shareholders' equity less goodwill and identifiable intangible assets. We believe that tangible equity is meaningful for valuation purposes, as financial companies are often measured as a multiple of tangible equity, making these ratios meaningful for investors.
(4)

Leverage ratio equals total assets divided by total equity.
(5)

Tangible gross leverage ratio (a non-GAAP financial measure) equals total assets less goodwill and identifiable intangible assets divided by tangible equity. The tangible gross leverage ratio is used by rating agencies in assessing our leverage ratio.

Non-GAAP Reconciliations

The following tables reconcile our non-GAAP measures to their respective U.S. GAAP measures. Management believes such non-GAAP measures are useful to investors as they allow them to view our results through the eyes of management, while facilitating a comparison across historical periods. These measures should not be considered a substitute for, or superior to, measures prepared in accordance with U.S. GAAP.

Return on Adjusted Tangible Equity Reconciliation

The table below reconciles our Net income attributable to common shareholders to adjusted net income and our Shareholders' equity to adjusted tangible shareholders' equity (in thousands):




Three Months Ended February 28, 2022

Three Months Ended February 28, 2021







Net income attributable to common shareholders (GAAP)

$
327,447


$
582,435


Intangible amortization and impairment expense, net of tax


2,949



2,604


Adjusted net income (non-GAAP)

$
330,396


$
585,039


Annualized adjusted net income (non-GAAP)

$
1,321,584


$
2,340,156










November 30, 2021

November 30, 2020







Shareholders' equity (GAAP)

$
10,553,755


$
9,403,893


Less: Intangible assets, net and goodwill


(1,897,500
)


(1,913,467
)

Less: Deferred tax asset


(327,547
)


(393,687
)

Less: Weighted average quarter-to-date impact of cash dividends and share repurchases


(154,005
)


(68,714
)

Adjusted tangible shareholders' equity (non-GAAP)

$
8,174,703


$
7,028,025








Return on adjusted tangible equity


16.2
%


33.3
%

Jefferies Shareholders' Equity GAAP Reconciliation

The table below reconciles our shareholders' equity to tangible shareholders' equity (in thousands):




December 31, 2017





Shareholders' equity (GAAP)

$
10,105,957


Intangible assets, net and goodwill


(2,463,180
)

Tangible shareholders' equity (non-GAAP)

$
7,642,777

Jefferies Book Value and Shares Outstanding GAAP Reconciliation

The table below reconciles our book value (shareholders' equity) to adjusted tangible book value and our common shares outstanding to fully diluted shares outstanding (in thousands, except per share amounts):




February 28, 2022





Book value (GAAP)

$
10,490,300


Redeemable convertible preferred shares convertible to common shares (1)


125,000


Stock options (2)


120,141


Intangible assets, net and goodwill


(1,894,721
)

Adjusted tangible book value (non-GAAP)

$
8,840,720






Common shares outstanding (GAAP)


240,169


Restricted stock units ("RSUs")


16,466


Redeemable convertible preferred shares converted to common shares (1)


4,441


Stock options (2)


5,063


Other


1,088


Fully diluted shares outstanding (non-GAAP) (3)


267,227






Book value per share outstanding

$
43.68


Tangible book value per fully diluted share outstanding

$
33.08

(1)

Redeemable convertible preferred shares added to book value and fully diluted shares assume that the redeemable convertible preferred shares are converted to common shares.
(2)

Stock options added to book value are equal to the total number of stock options outstanding as of February 28, 2022 of 5,063,000 multiplied by the weighted average exercise price of $23.73 on February 28, 2022. Stock options added to fully diluted shares are equal to the total stock options outstanding on February 28, 2022.
(3)

Fully diluted shares outstanding include vested and unvested RSUs as well as the target number of RSUs issuable under the senior executive compensation plans. Fully diluted shares outstanding also include all stock options and the additional common shares if our redeemable convertible preferred shares were converted to common shares.

View source version on businesswire.com: https://www.businesswire.com/news/home/20220328005793/en/

Jonathan Freedman 212.778.8913

Company Name:	Jefferies Financial Group Inc.
Stock Symbol:	JEF
Market:	NYSE
Website:	jefferies.com

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