Jefferies(JEF) - 2019 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited interim consolidated financial statements for Jefferies Financial Group Inc. as of August 31, 2019, and for the three and nine-month periods then ended, including the Consolidated Statements of Financial Condition, Operations, Comprehensive Income (Loss), Cash Flows, and Changes in Equity, providing a detailed view of the company's financial position, performance, and cash movements during the period Consolidated Statements of Financial Condition Total assets and liabilities increased as of August 31, 2019, while shareholders' equity remained relatively stable Consolidated Statements of Financial Condition (Unaudited) | | August 31, 2019 (In billions) | November 30, 2018 (In billions) | | :--- | :--- | :--- | | Total assets | 49.26 | 47.13 | | Cash and cash equivalents | 6.01 | 5.26 | | Total financial instruments owned | 17.20 | 18.87 | | Total liabilities | 39.06 | 36.91 | | Trading liabilities, at fair value | 10.30 | 9.48 | | Long-term debt | 7.97 | 7.62 | | Total Jefferies Financial Group Inc. shareholders' equity | 10.02 | 10.06 | Consolidated Statements of Operations The company reported a significant decrease in quarterly net income, while nine-month net income was impacted by prior-year discontinued operations gains Key Performance Indicators (Three Months Ended) | | August 31, 2019 (In millions) | September 30, 2018 (In millions) | | :--- | :--- | :--- | | Total revenues | 1,223.16 | 1,458.98 | | Net revenues | 856.78 | 1,150.85 | | Income from continuing operations | 49.39 | 182.30 | | Net income attributable to common shareholders | 48.48 | 192.64 | | Diluted EPS | 0.15 | 0.55 | Key Performance Indicators (Nine Months Ended) | | August 31, 2019 (In millions) | September 30, 2018 (In millions) | | :--- | :--- | :--- | | Total revenues | 3,928.54 | 3,863.91 | | Net revenues | 2,786.88 | 2,957.44 | | Income from continuing operations | 768.69 | 296.41 | | Net income attributable to common shareholders | 764.05 | 1,042.69 | | Diluted EPS | 2.41 | 2.91 | Consolidated Statements of Cash Flows Operating cash flow shifted to a significant use of cash, while investing and financing activities provided cash, resulting in a net increase in cash and equivalents Consolidated Statements of Cash Flows (Nine Months Ended) | | August 31, 2019 (In millions) | September 30, 2018 (In millions) | | :--- | :--- | :--- | | Net cash provided by (used for) operating activities | (1,251.32) | 199.91 | | Net cash provided by (used for) investing activities | 1,103.17 | (118.54) | | Net cash provided by (used for) financing activities | 835.51 | (37.44) | | Net increase in cash, cash equivalents and restricted cash | 669.12 | 27.46 | Notes to Consolidated Financial Statements This section details accounting policies, fair value measurements, and significant events, including the HomeFed acquisition and National Beef stake sale Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, segment results, liquidity, capital resources, and risk management strategies, highlighting Q3 income decline and a nine-month tax benefit - Q3 2019 income from continuing operations was $13.26 million before taxes, down from $272.69 million in Q3 2018, driven by a $146.00 million decrease in the fair value of the investment in The We Company, which offset a $72.10 million pre-tax gain from the HomeFed acquisition and $75.90 million in income from National Beef[299] - For the first nine months of 2019, income from continuing operations was $768.69 million after taxes, up from $296.41 million in the prior year, largely due to a non-recurring tax benefit of $544.60 million from the sale of the available-for-sale portfolio[300] - The company manages its business across three reportable segments: Jefferies Group (investment banking and securities), Merchant Banking (direct investments), and Corporate[287] Segment Performance Jefferies Group's pre-tax income slightly decreased, Merchant Banking reported a loss due to a prior-year gain, and Corporate's loss narrowed Income (Loss) from Continuing Operations Before Income Taxes by Segment (Three Months Ended) | | August 31, 2019 (In millions) | September 30, 2018 (In millions) | | :--- | :--- | :--- | | Jefferies Group | 83.08 | 87.10 | | Merchant Banking | (42.95) | 218.53 | | Corporate | (11.78) | (15.37) | | Total Consolidated | 13.26 | 272.69 | Income (Loss) from Continuing Operations Before Income Taxes by Segment (Nine Months Ended) | | August 31, 2019 (In millions) | September 30, 2018 (In millions) | | :--- | :--- | :--- | | Jefferies Group | 300.80 | 331.70 | | Merchant Banking | 28.38 | 119.22 | | Corporate | (47.01) | (58.11) | | Total Consolidated | 246.06 | 347.97 | Liquidity and Capital Resources The parent company maintains strong liquidity and actively manages capital through share repurchases, while Jefferies Group employs a comprehensive risk framework - Parent company liquidity stood at $1.40 billion as of August 31, 2019, significantly exceeding the minimum liquidity target of $571.80 million[382][394] - During the first nine months of 2019, the company repurchased 17.70 million common shares for $352.10 million, with an additional $147.90 million remaining available for repurchase under the existing authorization, plus a new authorization for 9.25 million shares related to the HomeFed merger[385] - Jefferies Group's long-term debt ratings are investment grade: Baa3 (Moody's), BBB- (S&P), and BBB (Fitch), with S&P revising its outlook to Positive in July 2019[428] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company manages market risk primarily through equity price risk and Jefferies Group's VaR, supplemented by stress tests and counterparty monitoring - Excluding Jefferies Group, a primary market risk is the investment in Spectrum Brands, valued at $419.80 million, where a hypothetical 10% decline in its market price would result in a $42.00 million decrease in value[444] Jefferies Group Daily Value-at-Risk (VaR) (In millions) | Risk Category | VaR at Aug 31, 2019 (In millions) | Q3 2019 Average (In millions) | Q2 2019 Average (In millions) | | :--- | :--- | :--- | :--- | | Interest Rates | 5.49 | 5.87 | 4.41 | | Equity Prices | 5.94 | 7.70 | 9.99 | | Firmwide | 9.71 | 8.64 | 8.70 | - Jefferies Group's risk management framework includes VaR, stress tests, scenario analysis, and monitoring of concentration risk, aged inventory, and counterparty exposure to manage its risk profile within its stated appetite[449][464] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of August 31, 2019, with no material changes to internal controls - The Company's management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of August 31, 2019[483] - There were no changes in the Company's internal control over financial reporting during the quarter ended August 31, 2019, that materially affected, or are reasonably likely to materially affect, internal controls[484] PART II – OTHER INFORMATION Item 1. Legal Proceedings The company is involved in routine legal and regulatory proceedings not expected to significantly impact its financial position or liquidity - The company is involved in routine legal and regulatory proceedings incidental to its business, which are not expected to have a significant adverse effect on its financial position or liquidity[260][487] Item 2. Unregistered Sale of Equity Securities and Use of Proceeds The company repurchased common shares during Q3 2019, with significant authorization remaining for future repurchases Issuer Purchases of Equity Securities (Q3 2019) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | June 2019 | 8,570 | $18.24 | | July 2019 | 375,361 | $20.38 | | August 2019 | 17,184 | $19.04 | | Total | 401,115 | N/A | - As of August 31, 2019, $147.90 million remained under the January 2019 share repurchase authorization, with an additional authorization for 9.25 million shares approved in connection with the HomeFed merger[489] Item 6. Exhibits This section lists filed exhibits, including CEO and CFO certifications and financial statements in iXBRL format - The report includes CEO and CFO certifications under Sarbanes-Oxley Sections 302 and 906[493] - Financial statements are provided in Inline Extensible Business Reporting Language (iXBRL) format as Exhibit 101[493]