Jefferies Reports Second Quarter 2012 Financial Results

NEW YORK & LONDON--()--Jefferies Group, Inc. (NYSE: JEF) today announced financial results for its fiscal second quarter and first half ended May 31, 2012.

Highlights for the three months ended May 31, 2012, versus the three months ended May 31, 2011:

  • Net revenues of $711 million, versus $727 million
  • Net earnings to common shareholders of $63 million ($72 million on a non-GAAP basis after excluding certain items[1]), versus $81 million
  • Net earnings per common share of $0.28 ($0.31 on a non-GAAP basis after excluding certain items1), versus $0.36
  • Investment Banking net revenues of $297 million, versus $328 million
  • Fixed Income net revenues of $293 million, versus $223 million

Highlights for the six months ended May 31, 2012 versus the six months ended May 31, 2011:

  • Net revenues of $1,491 million, versus $1,486 million
  • Net earnings to common shareholders of $141 million ($148 million on a non-GAAP basis after excluding certain items1), versus $168 million
  • Net earnings per common share of $0.61 ($0.64 on a non-GAAP basis after excluding certain items1), versus $0.78
  • Investment Banking net revenues of $583 million, versus $567 million
  • Fixed Income net revenues of $632 million, versus $541 million

"Our results reflect our continued strength in investment banking and the durability of our sales and trading platform despite the challenging market environment that again evolved during the quarter,” commented Richard B. Handler, Chairman and Chief Executive Officer of Jefferies. “We believe Jefferies is unique today in our intense focus on offering an integrated, global capital markets platform to our clients and an entrepreneurial culture to our employee-partners."

A conference call with management discussion of these financial results will be held today, Tuesday, June 19, 2012, at 9:00 AM Eastern. Investors and securities industry professionals may access the management discussion by calling 877-710-9938 or 702-928-7183. A one-week replay of the call will also be available at 855-859-2056 or 404-537-3406 (conference ID # 84086805). A live audio webcast and delayed replay can also be accessed at Jefferies.com.

Jefferies Group, Inc. (NYSE: JEF), the global investment banking firm focused on serving clients for 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.

[1] Adjustments to net earnings to common shareholders and net earnings per common share for certain non-GAAP items include amortization of intangibles, and compensation awards and impairment charges on intangibles related to our Bache and Hoare Govett acquisitions and interest expense incurred as a result of debt extinguishment accounting from prior quarters, all on an after-tax basis.

-- financial tables follow --

JEFFERIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Amounts in Thousands, Except Per Share Amounts)
(Unaudited)
 
            Three Months Ended             Six Months Ended

May 31,
2012

           

May 31,
2011

May 31,
2012

           

May 31,
2011

Revenues:
Commissions $ 121,796 $ 129,291 $ 239,295 $ 249,212
Principal transactions 215,962 175,316 496,797 465,468
Investment banking 296,963 328,421 582,758 567,480

Asset management fees and
investment income from managed funds

1,898 10,547 7,532 34,415
Interest 271,602 304,425 546,310 577,641
Other   37,851   22,117   80,191   42,578
Total revenues 946,072 970,117 1,952,883 1,936,794
Interest expense   235,041   242,952   461,886   451,246
Net revenues 711,031 727,165 1,490,997 1,485,548

Interest on mandatorily redeemable referred interest of
consolidated subsidiaries

  4,456   4,415   26,300   20,854

Net revenues, less mandatorily redeemable preferred
interest

  706,575   722,750   1,464,697   1,464,694
 
Non-interest expenses:
Compensation and benefits 423,541 431,936 870,003 874,828
Floor brokerage and clearing fees 32,921 31,384 60,759 59,517
Technology and communications 60,329 49,850 121,779 93,525
Occupancy and equipment rental 24,940 20,437 47,505 38,416
Business development 22,379 22,457 44,626 42,395
Professional services 17,296 16,099 30,989 29,375
Other   18,587   20,103   33,585   33,223
Total non-interest expenses   599,993   592,266   1,209,246   1,171,279
Earnings before income taxes 106,582 130,484 255,451 293,415
Income tax expense   38,203   45,784   90,355   106,670
Net earnings 68,379 84,700 165,096 186,745
Net earnings to noncontrolling interests   4,881   4,084   24,462   18,788
Net earnings to common shareholders $ 63,498 $ 80,616 $ 140,634 $ 167,957
Earnings per common share:
Basic $ 0.28 $ 0.36 $ 0.61 $ 0.78
Diluted $ 0.28 $ 0.36 $ 0.61 $ 0.78
 
Weighted average common shares:
Basic 216,597 210,751 217,384 205,054
Diluted 220,711 214,870 221,497 209,172
 
Effective tax rate 35.8% 35.1% 35.4% 36.4%
 

 
JEFFERIES GROUP, INC. AND SUBSIDIARIES
SELECTED STATISTICAL INFORMATION
(Amounts in Thousands, Except Per Share Amounts)
(Unaudited)
                                   
Quarter Ended

May 31,
2012

February 29,
2012

May 31,
2011

Statement of Earnings

Net revenues, less mandatorily redeemable referred
interest

$ 706,575 $ 758,122 $ 722,750
 
Non-interest expenses:
Compensation and benefits 423,541 446,462 431,936
Non-compensation expenses   176,452   162,791   160,330
Earnings before income taxes 106,582 148,869 130,484
Income tax expense   38,203   52,152   45,784
Net earnings 68,379 96,717 84,700
Net earnings to noncontrolling interests   4,881   19,581   4,084
Net earnings to common shareholders $ 63,498 $ 77,136 $ 80,616
Diluted earnings per common share $ 0.28 $ 0.33 $ 0.36
 

Financial Ratios

Pretax operating margin 15% 20% 18%
Compensation and benefits / Net revenues 60% 57% 59%
Effective tax rate 35.8% 35.0% 35.1%
 

 
JEFFERIES GROUP, INC. AND SUBSIDIARIES
SELECTED STATISTICAL INFORMATION
(Amounts in Thousands, Except Per Share Amounts)
(Unaudited)
                                   
Quarter Ended

May 31,
2012

February 29,
2012

May 31,
2011

Revenues by Source

Equities $ 119,570 $ 136,215 $ 165,076
Fixed Income 292,600 339,147 223,121
Other   -   13,175   -
Total 412,170 488,537 388,197
 
 
Equity 55,623 46,187 52,039
Debt   132,429   89,695   131,806
Capital markets 188,052 135,882 183,845
Advisory   108,911   149,913   144,576
Investment banking 296,963 285,795 328,421
 

Asset management fees and investment income / (loss)
from managed funds:

Asset management fees 7,979 11,888 5,019

Investment (loss) / income from managed funds

  (6,081)   (6,254)   5,528
Total   1,898   5,634   10,547
Net revenues   711,031   779,966   727,165

Interest on mandatorily redeemable preferred interest of
consolidated subsidiaries

  4,456   21,844   4,415

Net revenues, less mandatorily redeemable
preferred interest

$ 706,575 $ 758,122 $ 722,750
 

Other Data

Number of trading days 64 61 64
Full time employees (end of quarter) 3,809 3,851 3,222
Common shares outstanding 203,989 205,819 202,154
Weighted average common shares:
Basic 216,597 218,049 210,751
Diluted 220,711 222,162 214,870
 

 
JEFFERIES GROUP, INC. AND SUBSIDIARIES
COMMON SHARES OUTSTANDING AND COMMON SHARES FOR BASIC AND DILUTED EPS CALCULATIONS
(Amounts in Thousands)
(Unaudited)
     
 
May 31, 2012
 
Common shares outstanding 203,989
Outstanding restricted stock units 22,470
Adjusted shares outstanding 226,459
 

Note - All share information below for EPS purposes is based upon weighted-average balances for the applicable period.

 

Quarter Ended
May 31, 2012

Six Months Ended
May 31, 2012

 
Shares outstanding (weighted average) (1) 205,318 203,513
Unearned restricted stock (2) (8,633) (8,921)
Earned restricted stock units (3) 17,990 18,428
Other issuable shares (4) 1,922 4,364
Common Shares for Basic EPS 216,597 217,384
 
Stock options (5) 4 3

Mandatorily redeemable convertible preferred stock

(6) 4,110 4,110
Convertible debt (7) - -
Common Shares for Diluted EPS 220,711 221,497
 
 
(1)     Shares outstanding represents shares issued less shares repurchased in treasury stock. Shares issued includes public and private offerings, earned and unearned restricted stock, distributions related to restricted stock units, deferred compensation plans, and employee stock purchase plan and stock option exercises. Shares issued does not include undistributed earned and unearned restricted stock units.
 
(2) As certain restricted stock is contingent upon a future service condition, unearned shares are removed from shares outstanding in the calculation of basic EPS as Jefferies' obligation to issue these shares remains contingent.
 
(3) As earned restricted stock units are no longer contingent upon a future service condition and are issuable upon a certain date in the future, earned restricted stock units are added to shares outstanding in the calculation of basic EPS.
 
(4) Other shares issuable include shares issuable to settle previously granted restricted stock awards and shares issuable under certain deferred compensation plans.
 
(5) Calculated under the treasury stock method. The treasury stock method assumes the issuance of only a net incremental number of shares as proceeds from issuance are assumed to be used to repurchase shares at the average stock price for the period.
 
(6) Calculated under the if-converted method. The if-converted method assumes the conversion of convertible securities at the beginning of the period.
 
(7) Represents the potential common shares issuable under the conversion spread (the excess conversion value over the accreted debt value) based on the average stock price for the period.
 

 
JEFFERIES GROUP, INC. AND SUBSIDIARIES
FINANCIAL HIGHLIGHTS
(Amounts in Thousands, Except Per Share Amounts)
(Unaudited)
                                   
Quarter Ended

May 31,
2012

February 29,
2012

May 31,
2011

 

Results:

Net earnings to common shareholders $ 63,498 $ 77,136 $ 80,616
Basic EPS (1) $ 0.28 $ 0.33 $ 0.36
Diluted EPS (1) $ 0.28 $ 0.33 $ 0.36
Effective tax rate 35.8% 35.0% 35.1%
 

Common share data:

Common shares outstanding 203,989 205,819 202,154
Adjusted shares outstanding (2) 226,459 228,382 227,720
 
Share issued during quarter 619 11,864 25,376
Shares purchased during the quarter 2,201 3,160 158
 

Financial position:

Total assets (in millions) (3) $ 35,717 $ 34,564 $ 40,967
Average total assets for quarter (in millions) (3) $ 43,849 $ 42,158 $ 47,207
Cash and cash equivalents (in millions) $ 2,358 $ 2,589 $ 2,499
Financial instruments owned (in millions) (3) $ 15,018 $ 14,101 $ 17,768
 
Total common stockholders' equity (in millions) $ 3,310 $ 3,288 $ 3,165
Adjusted common stockholders' equity (in millions) (4) $ 3,475 $ 3,473 $ 3,347
Common book value per share (5) $ 16.23 $ 15.97 $ 15.66
Adjusted book value per share (6) $ 15.35 $ 15.21 $ 14.70
Tangible common book value per share (7) $ 14.36 $ 14.10 $ 13.83
Adjusted tangible book value per share (6) $ 13.66 $ 13.52 $ 13.07
 

Level 3 financial instruments:

Level 3 financial instruments owned (in millions) (3) (8) $ 487 $ 490 $ 725
Level 3 financial instruments owned with economic exposure (in millions) (3)(9) $ 446 $ 435 $ 533
Level 3 financial instruments owned - % total assets (3) 1.4% 1.4% 1.8%
Level 3 financial instruments owned - % total financial instruments owned (3) 3.2% 3.5% 4.1%
Level 3 financial instruments owned with economic exposure - % total financial instruments owned (3) 3.0% 3.1% 3.0%
Level 3 financial instruments owned with economic exposure - % common stockholders' equity (3) 13.5% 13.2% 16.8%
 

Other data and financial ratios:

Total capital (in millions) (10) $ 8,541 $ 8,320 $ 8,223
Leverage ratio (3) (11) 9.8 9.5 11.7
Adjusted leverage ratio (3) (12) 9.1 8.9 12.5
 
Average firmwide VaR (in millions) (13) $ 8.83 $ 9.90 $ 12.96
 
Number of employees, at quarter end 3,809 3,851 3,222
 

 
Footnotes
   
(1) The following details the calculation of basic and diluted earnings per share as included in our quarterly and annual reports.
                                   
Quarter Ended

 

 

 

May 31,
2012

February 29,
2012

May 31,
2011

Earnings for basic earnings per common share:
Net earnings $ 68,379 $ 96,717 $ 84,700
Net earnings to noncontrolling interests 4,881 19,581 4,084
Net earnings to common shareholders 63,498 77,136 80,616
Less: Allocation of earnings to participating securities (A) 3,740 4,643 3,756
Net earnings available to common shareholders $ 59,758 $ 72,493 $ 76,860
Earnings for diluted earnings per common share:
Net earnings $ 68,379 $ 96,717 $ 84,700
Net earnings to noncontrolling interests 4,881 19,581 4,084
Net earnings to common shareholders 63,498 77,136 80,616
Add: Convertible preferred stock dividends 1,016 1,016 1,016
Less: Allocation of earnings to participating securities (A) 3,751 4,639 3,748
Net earnings available to common shareholders $ 60,763 $ 73,513 $ 77,884
Weighted Average Common Shares:
Basic 216,597 218,049 210,751
Diluted 220,711 222,162 214,870
Earnings per common share:
Basic $ 0.28 $ 0.33 $ 0.36
Diluted $ 0.28 $ 0.33 $ 0.36
 
 
    (A) Represents dividends declared during the period on participating securities plus an allocation of undistributed earnings to participating securities. Losses are not allocated to participating securities. Participating securities represent restricted stock and restricted stock units for which requisite service has not yet been rendered and amounted to weighted average shares of 13,208,000, 14,198,000, and 10,260,000 for the three months ended May 31, 2012, February 29, 2012 and May 31, 2011, respectively. Dividends declared on participating securities during the three months ended May 31, 2012, February 29, 2012 and May 31, 2011 amounted to approximately $1,106,000, $959,000 and $794,000, respectively. Undistributed earnings are allocated to participating securities based upon their right to share in earnings if all earnings for the period had been distributed.
 
(2) Adjusted shares outstanding equals common shares outstanding plus outstanding restricted stock units.
 
(3) 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 May 31, 2012.
 
(4) Adjusted common stockholders’ equity (non-GAAP financial measure) represents total common stockholders’ equity plus the unrecognized compensation cost related to nonvested share based awards, i.e. granted restricted stock and restricted stock units which contain future service requirements. As of May 31, 2012, unrecognized compensation cost related to nonvested share based awards was $165.0 million. We believe that adjusted common stockholders’ equity is a meaningful measure as it reflects the current capital outstanding to stockholders, including employee common shareholders, that would be required to be paid out in liquidation.
 
(5) Common book value per share equals total common stockholders' equity divided by common shares outstanding.
 
(6) Adjusted book value per share (non-GAAP financial measure) equals adjusted common stockholders’ equity divided by adjusted shares outstanding. Adjusted tangible book value per share (non-GAAP financial measure) equals adjusted common stockholders’ equity less goodwill and identifiable intangible assets divided by adjusted common shares outstanding. As of May 31, 2012, goodwill and identifiable intangible assets equals $381.1 million. We believe these are meaningful measures as investors often incorporate the dilutive effects of outstanding capital in their valuations.
 
(7) Tangible common book value per share (non-GAAP financial measure) equals tangible common stockholders' equity divided by common shares outstanding. As of May 31, 2012, tangible common stockholders' equity equals total common stockholders' equity of $3,310.2 million less goodwill and identifiable intangible assets of $381.1 million. We believe that tangible common book value per share and tangible common stockholders' equity is meaningful as a valuation of financial companies are often measured as a multiple of tangible common stockholders' equity making these ratios meaningful for investors.
 
(8) Level 3 financial instruments represent those financial instruments classified as such under ASC 820, accounted for at fair value and included within Financial instruments owned. Level 3 financial instruments for which we bear no economic exposure were $40.5 million at May 31, 2012, which is reflective of the portion of our Level 3 financial instruments that are financed by nonrecourse secured financing or attributable to third party or employee noncontrolling interests in certain consolidated entities.
 
(9) Level 3 financial instruments owned with economic exposure represents Level 3 financial instruments owned adjusted for Level 3 assets that are financed by nonrecourse secured financing or attributable to third party or employee noncontrolling interests in certain consolidated entities.
 
(10) Total capital includes our long-term debt, mandatorily redeemable convertible preferred stock, mandatorily redeemable preferred interest of consolidated subsidiaries and total stockholders' equity. Long-term debt included in total capitalization at May 31, 2012 is reduced by the amount of debt maturing in less than one year and revolving credit facility.
 
(11) Leverage ratio equals total assets divided by total stockholders' equity.
 
(12) Adjusted leverage ratio (non-GAAP financial measure) equals adjusted assets divided by tangible stockholders' equity. Adjusted assets (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 May 31, 2012, adjusted assets were $29,722.3 million. 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.
 
(13) VaR is 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, 2011.
 

 

JEFFERIES GROUP, INC. AND SUBSIDIARIES

SELECTED FINANCIAL INFORMATION

(Amounts in Thousands, Except Per Share Amounts)

(Unaudited)

     

 

                                         

Three Months
Ended
May 31, 2012

Amortization of
Debt Discount,
Impairment Charge
and Certain
Acquisition Items

Three Months Ended
May 31, 2012
(Excluding
Amortization of Debt
Discount, Impairment
Charge and Certain
Acquisition Items)

Six Months
Ended
May 31, 2012

Debt Accounting
Gain and
Amortization of
Debt Discount,
Impairment Charge
and Certain
Acquisition Items

Six Months Ended May
31, 2012 (Excluding Debt
Accounting Gain and
Amortization of Debt
Discount, Impairment
Charge and Certain
Acquisition Items)

 
Net revenues $ 711,031 $ (1,201) (A) $ 712,232 $ 1,490,997 $ 10,884 (F) $ 1,480,113
 
Compensation and benefits 423,541 9,214 (B) $ 414,327 870,003 19,564 (G) 850,439
Noncompensation expenses 176,452 3,581 (C) $ 172,871 339,243 4,282 (C) 334,961
 
Total non-interest expenses 599,993 12,795 587,198 1,209,246 23,846 1,185,400
Earnings before income taxes 106,582 (13,996) 120,578 255,451 (12,962) 268,413
Income tax expense (benefit) 38,203 (5,650) (D) 43,853 90,355 (5,483) 95,838
 
Net earnings 68,379 (8,346) 76,725 165,096 (7,479) 172,575
 
Net earnings to common shareholders $ 63,498 $ (8,346) $ 71,844 $ 140,634 $ (7,479) $ 148,113
Earnings per common share:
Basic $ 0.28 $ (0.04) $ 0.31 $ 0.61 $ (0.04) $ 0.64
Diluted

$ 0.28

$ (0.04) (E) $ 0.31 $ 0.61 $ (0.04) (E) $ 0.64
 
Weighted average common shares:
Basic 216,597 216,597 216,597 217,384 217,384 217,384
Diluted 220,711 216,601 220,711 221,497 217,387 221,497
 
Compensation and benefits/Net revenues 59.6% 58.2% 58.4% 57.5%
Effective tax rate 35.8% 36.4% 35.4% 35.7%
 

The selected financial information for the three and six months ended May 31, 2012 excluding the effects of purchases and sales of our debt in November and December 2011, certain items identified and recognized in connection with the acquisition of Hoare Govett from The Royal Bank of Scotland Group plc on February 1, 2012 and the acquisition of the Global Commodities Group (the "Bache entities") from Prudential Financial, Inc. ("Prudential") on July 1, 2011 and the impairment of certain intangible assets are non-GAAP financial measures. We believe this presentation provides meaningful information to shareholders as it provides comparability of our results of operations for the three and six months ended May 31, 2012 with the results for periods ended May 31, 2011.

FOOTNOTES TO SELECTED FINANCIAL INFORMATION
   
(A) Net revenues in the second quarter of 2012 include additional interest expense of $1.2 million from the amortization of discounts on long-term debt reissued in November and December 2011 in connection with trading activities in our debt.
 
(B) Compensation expense for the three months ended May 31, 2012 includes expense related to the amortization of retention and stock replacement awards granted in connection with the acquisition of the Bache entities and Hoare Govett.
 
(C) Reflects an impairment charge of $2.9 million on indefinite-lived intangible assets and amortization of intangible assets recognized in connection with the acquisitions of Hoare Govett and the Bache entities.
 
(D) Reflects the tax benefit on the additional interest expense, Hoare Govett and Bache related expense items and the impairment charge at a domestic and foreign marginal tax rate of 41.5% and 25.3%, respectively.
 
(E) The conversion of our mandatorily redeemable convertible preferred stock was considered anti-dilutive for purposes of these calculations.
 
(F) Includes a gain on debt extinguishment of $9.9 million relating to trading activities in our own debt and a bargain purchase gain of $3.4 million resulting from the acquisition of Hoare Govett recorded in Other revenues, partially offset by additional interest expense of $2.4 million from subsequent amortization of debt discounts upon reissuance of our long-term debt.
 
(G) Includes compensation expense related to the amortization of retention and stock replacement awards granted in connection with the acquisition of the Bache entities and Hoare Govett and bonus costs for employees as a result of the completion of the Hoare Govett acquisition.

Contacts

Jefferies Group, Inc.
Peregrine C. Broadbent, (212)-284-2338
Chief Financial Officer

Sharing

Contacts

Jefferies Group, Inc.
Peregrine C. Broadbent, (212)-284-2338
Chief Financial Officer