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Jefferies Reports Fourth Quarter And 2012 Fiscal Year Financial Results

 
JEFFERIES GROUP, INC. AND SUBSIDIARIES
FINANCIAL HIGHLIGHTS
(Amounts in Thousands, Except Per Share Amounts)
(Unaudited)
               
Quarter Ended
November 30, August 31, November 30,
2012   2012   2011  
 

Results:

Net earnings to common shareholders $ 71,604 $ 70,171 $ 48,386
Basic EPS (1) $ 0.31 $ 0.31 $ 0.21
Diluted EPS (1) $ 0.31 $ 0.31 $ 0.21
Pretax operating margin 15.0 % 16.7 % 12.7 %
Effective tax rate 30.0 % 36.0 % 35.5 %
 
Basic and Diluted EPS impact from share ownership in Knight Capital (13) $ 0.04 $ 0.08 N/a
 

Common share data:

Common shares outstanding 203,312 203,070 197,160
Adjusted shares outstanding (2) 214,616 214,177 218,406
 
Share issued during quarter 945 926 2,072
Shares purchased during the quarter 603 1,702 5,135
 
Weighted average common shares- Basic 214,415 214,756 215,628
Weighted average common shares- Diluted 218,527 218,867 215,629
 

Financial position:

Total assets (in millions) (3) $ 36,294 $ 34,407 $ 34,971
Average total assets for quarter (in millions) (3) $ 44,242 $ 42,594 $ 50,087
Cash and cash equivalents (in millions) $ 2,693 $ 2,845 $ 2,394
Financial instruments owned (in millions) (3) $ 16,670 $ 13,917 $ 16,679
 
Total common stockholders' equity (in millions) $ 3,436 $ 3,369 $ 3,224
Tangible common stockholders' equity (in millions) (4) $ 3,055 $ 2,988 $ 2,839
Common book value per share (5) $ 16.90 $ 16.59 $ 16.35
Adjusted book value per share (6) $ 16.01 $ 15.73 $ 14.76
Tangible common book value per share (4) $ 15.03 $ 14.71 $ 14.40
Adjusted tangible book value per share (6) $ 14.24 $ 13.95 $ 13.00
 

Level 3 financial instruments:

Level 3 financial instruments owned (in millions) (3) (7) $ 504 $ 487 $ 498
Level 3 financial instruments owned with economic exposure (in millions) (3)(8) $ 450 $ 436 $ 452
Level 3 financial instruments owned - % total assets (3) 1.4 % 1.4 % 1.4 %
Level 3 financial instruments owned - % total financial instruments owned (3) 3.0 % 3.5 % 3.0 %
Level 3 financial instruments owned with economic exposure - % total financial instruments owned (3) 2.7 % 3.1 % 2.7 %
Level 3 financial instruments owned with economic exposure - % common stockholders' equity (3) 13.1 % 12.9 % 14.0 %
 

Other data and financial ratios:

Total capital (in millions) (9) $ 8,710 $ 8,622 $ 8,227
Leverage ratio (3) (10) 9.6 9.3 9.9
Adjusted leverage ratio (3) (11) 9.0 8.8 9.4
 
Number of trading days 63 65 63
 
Average firmwide VaR (in millions) (12) $ 13.38 $ 10.53 $ 9.43
Average firmwide VaR excluding Knight Capital (in millions) (12) $ 7.95 $ 8.35 N/a
 
Number of employees, at quarter end 3,804 3,814 3,898
 
Compensation and benefits / Net revenues 59.9 % 59.6 % 55.6 %
 

  Footnotes
 
(1) The following details the calculation of basic and diluted earnings per share as included in our quarterly and annual reports.
                   
Quarter Ended
November 30, August 31,

November 30,

2012 2012 2011  
Earnings for basic earnings per common share:
Net earnings $ 79,732 $ 78,321 $ 45,614
Net earnings (loss) to noncontrolling interests   8,128   8,150   (2,772 )
Net earnings to common shareholders 71,604 70,171 48,386
Less: Allocation of earnings to participating securities (A)   5,143   3,913   2,560  
Net earnings available to common shareholders $ 66,461 $ 66,258 $ 45,826  
Earnings for diluted earnings per common share:
Net earnings $ 79,732 $ 78,321 $ 45,614
Net earnings (loss) to noncontrolling interests   8,128   8,150   (2,772 )
Net earnings to common shareholders 71,604 70,171 48,386
Add: Convertible preferred stock dividends (B) 1,016 1,016 -
Less: Allocation of earnings to participating securities (A)   5,146   3,916   2,560  
Net earnings available to common shareholders $ 67,474 $ 67,271 $ 45,826  
Weighted Average Common Shares:
Basic 214,415 214,756 215,628
Diluted 218,527 218,867 215,629
Earnings per common share:
Basic $ 0.31 $ 0.31 $ 0.21
Diluted $ 0.31 $ 0.31 $ 0.21
 
(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 16,406,000, 12,732,000 and 11,755,000 for the three months ended November 30, 2012, August 31, 2012 and November 30, 2011, respectively. Dividends declared on participating securities during the three months ended November 30, 2012, August 31, 2012 and November 30, 2011 amounted to approximately $1,270,000, $924,000 and $959,000, 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.
 
(B) The conversion of our mandatorily redeemable convertible preferred stock was considered anti-dilutive for our three-months ended November 30, 2011.
 
(2) The following details the calculation of adjusted shares outstanding:
                   
November 30, August 31, November 30,
2012   2012   2011  
 
Common shares outstanding 203,312 203,070 197,160
Unearned restricted stock (8,058 ) (8,166 ) (9,032 )
Earned restricted stock units 16,656 17,331 18,994
Other issuable shares 2,706   1,942   11,284  
Adjusted shares outstanding 214,616   214,177   218,406  
 
(3) This amount represents a preliminary estimate as of the date of this earnings release and may be revised in our Annual Report on Form 10-K for the year ended November 30, 2012.
 
(4) Tangible common stockholders’ equity represents total common stockholders’ equity less goodwill and identifiable intangible assets. As of November 30, 2012, tangible common stockholders' equity equals total common stockholders' equity of $3,436.0 million less goodwill and identifiable intangible assets of $380.9 million. Tangible common book value per share equals tangible common stockholders' equity divided by common shares outstanding. 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.
 
(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 total common stockholders’ equity divided by adjusted shares outstanding. Adjusted tangible book value per share (non-GAAP financial measure) equals tangible common stockholders’ equity divided by adjusted shares outstanding. We believe these are meaningful measures as investors often incorporate the dilutive effects of outstanding capital in their valuations.
 
(7) 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.
 
(8) Level 3 financial instruments owned with economic exposure represents 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.
 
(9) 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 November 30 and August 31, 2012 and November 30, 2011 is reduced by amounts outstanding under the revolving credit facility.
 
(10) Leverage ratio equals total assets divided by total stockholders' equity.
 
(11) 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 November 30, 2012, August 31, 2012 and November 30, 2011 adjusted assets were $30,604 million, $29,232 million and $29,534 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.
 
(12) 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.
 
(13) Principal transaction revenues of $48.7 million and $103.3 million from our share ownership of Knight Capital had a positive impact on our basic and diluted EPS of $0.04 and $0.08 for the three months ended November 30, 2012 and August 31, 2012, respectively, on a non-GAAP basis after considering compensation costs at a ratio of 59.5% and 59.6%, allocations to mandatorily redeemable preferred interests of $2.6 million and $5.5 million, net earnings to noncontrolling interests of $2.5 million and $5.4 million, and income tax expense at an effective rate of 36.8% and 41.5%, for the three months ended November 30 and August 31, 2012, respectively.
 

 
JEFFERIES GROUP, INC. AND SUBSIDIARIES
COMMON SHARES OUTSTANDING AND COMMON SHARES FOR BASIC AND DILUTED EPS CALCULATIONS
(Amounts in Thousands)
(Unaudited)
           
 
November 30, 2012
 
Common shares outstanding 203,312
Unearned restricted stock (8,058)
Earned restricted stock units 16,656
Other issuable shares 2,706
Adjusted shares outstanding 214,616
 

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

 
Quarter Ended Year Ended
November 30, 2012 November 30, 2012
 
Shares outstanding (weighted average) (1) 203,145 203,369
Unearned restricted stock (2) (7,998) (8,549)
Earned restricted stock units (3) 17,154 17,942
Other issuable shares (4) 2,114 3,227
Common Shares for Basic EPS 214,415 215,989
 
Stock options (5) 2 2
Mandatorily redeemable convertible preferred stock (6) 4,110 4,110
Convertible debt (7) - -
Common Shares for Diluted EPS 218,527 220,101
 
(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
RECONCILIATION OF GAAP TO NON GAAP FINANCIAL MEASURES
(Amounts in Thousands, Except Per Share Amounts)
(Unaudited)
                       
Three Months Ended

November 30, 2012

Amortization of Debt Discount, Certain Acquisition Items and Hurricane Sandy Relief Three Months Ended November 30, 2012 (Excluding Amortization of Debt Discount, Certain Acquisition Items and Hurricane Sandy Relief) Year Ended

November 30, 2012

Debt Accounting Gain and Amortization of Debt Discount, Impairment Charge, Certain Acquisition Items and Hurricane Sandy Relief Year Ended November 30, 2012 (Excluding Debt Accounting Gain and Amortization of Debt Discount, Impairment Charge, Certain Acquisition Items and Hurricane Sandy Relief)
 
Net revenues $ 768,849 $ (1,245 ) (A) $ 770,094 $ 2,998,784 $ 8,416 (E) $ 2,990,368
 
Compensation and benefits 460,404 2,496 (B) $ 457,908 1,770,798 24,675 (F) 1,746,123
Noncompensation expenses   186,191     9,014   (C) $ 177,177     693,308     14,510   (G)   678,798  
 
Total non-interest expenses   646,595     11,510     635,085     2,464,106     39,185     2,424,921  
Earnings before income taxes 113,975 (12,755 ) 126,730 491,795 (30,769 ) 522,564
Income tax expense (benefit)   34,243     (3,499 ) (D)   37,742     168,646     (11,404 ) (D)   180,050  
 
Net earnings 79,732 (9,256 ) 88,988 323,149 (19,365 ) 342,514
 
Net earnings to common shareholders $ 71,604 $ (9,256 ) $ 80,860 $ 282,409 $ (19,365 ) $ 301,774
Earnings per common share:
Basic $ 0.31   $ 0.35   $ 1.23   $ 1.31  
Diluted $ 0.31   $ 0.35   $ 1.22   $ 1.31  
 
Weighted average common shares:
Basic 214,415 214,415 215,989 215,989
Diluted 218,527 218,527 220,101 220,101
 
Compensation and benefits/Net revenues 59.9 % 59.5 % 59.1 % 58.4 %
Effective tax rate 30.0 % 29.8 % 34.3 % 34.5 %
 
 
 
Three Months Ended

November 30, 2011

Debt Accounting Gain and Certain Bache Acquisition Items Three Months Ended November 30, 2011 (Excluding Debt Accounting Gain and Certain Bache Acquisition Items) Year Ended

November 30, 2011

Debt Accounting Gain and Certain Bache Acquisition Items Year Ended November 30, 2011 (Excluding Debt Accounting Gain and Certain Bache Acquisition Items)
 
Net revenues $ 553,983 $ 20,175 (H) $ 533,808 $ 2,548,813 $ 72,684 (H) $ 2,476,129
 
Compensation and benefits 308,137 2,721 (I) $ 305,416 1,482,604 11,785 (I) 1,470,819
Noncompensation expenses   177,727     704   (J) $ 177,023     643,253     7,826   (K)   635,427  
 
Total non-interest expenses   485,864     3,425     482,439     2,125,857     19,611     2,106,246  
Earnings before income taxes 70,680 16,750 53,930 419,334 53,073 366,261
Income tax expense (benefit)   25,066     6,985   (L)   18,081     132,966     235   (L)   132,731  
 
Net earnings 45,614 9,765 35,849 286,368 52,838 233,530
 
Net earnings to common shareholders $ 48,386 $ 9,765 $ 38,621 $ 284,618 $ 52,838 $ 231,780
Earnings per common share:
Basic $ 0.21   $ 0.17   $ 1.28   $ 1.04  
Diluted $ 0.21   $ 0.17   $ 1.28   $ 1.04  
 
Weighted average common shares:
Basic 215,628 215,628 211,056 211,056
Diluted 215,629 215,629 215,171 215,171
 
Compensation and benefits/Net revenues 55.6 % 57.2 % 58.2 % 59.4 %
Effective tax rate 35.5 % 33.5 % 31.7 % 36.2 %
 

The selected financial information for the three months and year ended November 30, 2012 and 2011 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, the impairment of certain intangible assets in the three months ended May 31, 2012, donations to Hurricane Sandy relief in November 2012 and transaction costs associated with the announced merger with Leucadia National Corporation incurred in the third and fourth fiscal quarter of 2012, are non-GAAP financial measures. We believe this presentation provides meaningful information to shareholders as it provides comparability for our results of operations for the three months and year ended November 30, 2012 with the results for periods ended November 30, 2011.

 

FOOTNOTES TO SELECTED FINANCIAL INFORMATION
 
(A) Net revenues in the fourth quarter of 2012 includes additional interest expense from the amortization of discounts on long-term debt re-issued in November and December 2011 in connection with trading activities in our own debt.
 
(B) Compensation expense for the three months ended November 30, 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 amortization of intangible assets recognized in connection with the acquisitions of Hoare Govett and the Bache entities, donations to Hurricane Sandy relief of $4.1 million and transaction costs (primarily professional fees) associated with the announced merger with Leucadia National Corporation of $4.2 million.
 
(D) For the three months and year ended November 30, 2012, reflects the tax benefit on the additional interest expense, Hoare Govett and Bache related expense items, Hurricane Sandy relief donations and transaction costs associated with the announced merger with Leucadia at a domestic and foreign marginal tax rate of 42.3% and 24.7%, respectively.
 
(E) Includes a gain on debt extinguishment of $9.9 million in accordance with debt extinguishment accounting under ASC 405 and 470 relating to trading activities in our own long term 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 $4.8 million from subsequent amortization of debt discounts upon reissuance of our long-term debt.
 
(F) 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.
 
(G) 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, donations to Hurricane Sandy relief of $4.1 million and transaction costs (primarily professional fees) associated with the announced merger with Leucadia National Corporation of $4.7 million.
 
(H) In accordance with debt extinguishment accounting under ASC 405 and 470, we recorded a gain on debt extinguishment of $20.2 million in Other revenues for the three and twelve months ended November 30, 2011, relating to trading activities in our own long term debt. The twelve months ended November 30, 2011 includes a bargain purchase gain of $52.5 million resulting from the acquisition of the Bache entities from Prudential recorded in Other revenues in the third quarter of 2011.
 
(I) In connection with the acquisition of the Bache entities, compensation expense was recognized for the three months and year ended November 30, 2011 related to 1) severance costs for certain employees of the acquired Bache entities that were terminated subsequent to the acquisition, 2) the amortization of stock awards granted to former Bache employees as replacement awards for previous Prudential stock awards that were forfeited in the acquisition and 3) bonus costs for employees as a result of the completion of the acquisition.
 
(J) Reflects the amortization of intangible assets recognized in connection with the acquisition of the Bache entities.
 
(K) Includes the amortization of intangible assets of $0.7 million recognized during the three months ended November 30, 2011 in connection with the acquisition of the Bache entities as well as expenses (primarily professional fees) totaling $7.1 million related to the acquisition and/or integration of the Bache entities within the Jefferies Group, Inc.
 
(L) For the three and twelve months ended November 30, 2011, the total domestic marginal tax rate of 41.7% was applied. The bargain purchase gain of $52.5 million on the acquisition of the Bache entities is not a taxable item.




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