Jefferies

Press Release

FOR IMMEDIATE RELEASE
Jefferies Reports Fiscal Fourth-Quarter 2014 Financial Results; Pursuing Strategic Alternatives for Bache Business

NEW YORK, December 16, 2014 -- Jefferies Group LLC today announced financial results for its fiscal fourth quarter 2014. 

Highlights for the three months ended November 30, 2014, with adjusted amounts excluding the operating results and goodwill and intangible asset impairments attributable to our Bache business:

  • Total Net revenues of $538 million
  • Total Adjusted Net Revenues (excluding Bache) of $494 million1
  • Pre-tax earnings of negative $101 million, which includes both a goodwill impairment of $52 million and a write off of $8 million of intangible assets related to our Bache business, and a $52 million bad debt provision in respect of a receivable from OW Bunker
  • Adjusted Operating income (excluding Bache) of positive $30 million1
  • Net earnings of negative $93 million, reflecting the same items as noted in pre-tax earnings; the charge due to the impairment of Bache goodwill is not tax-deductible and the full-year tax rate has been trued up for the final regional mix of pre-tax earnings, which was significantly impacted by the OW Bunker bad debt provision
  • Adjusted Net earnings (excluding Bache) of $19 million1

Highlights for the twelve months ended November 30, 2014:

  • Total Net revenues of $3,003 million
  • Investment Banking Net revenues of $1,529 million
  • Equities and Fixed Income Net revenues of $1,457 million
  • Total Adjusted Net revenues (excluding Bache) of $2,828 billion1
  • Pre-tax earnings of $316 million
  • Adjusted Operating income (excluding Bache) of $517 million1
  • Net earnings of $168 million
  • Adjusted Net earnings of $325 million1

Richard B. Handler, Chairman and Chief Executive Officer, and Brian P. Friedman, Chairman of the Executive Committee, commented: “After four consecutive strong quarters, we experienced a very challenging fourth quarter. Our Net revenues for the quarter were $538 million and our pre-tax earnings were negative $101 million. Excluding Bache, our adjusted Net revenues for the quarter were $494 million and our adjusted pre-tax profits were $30 million. Despite these results and our decision in respect of pursuing strategic alternatives for our Bache business, we believe Jefferies’ prospects for 2015 are solid, with our Investment Banking backlog currently robust, and an expectation of more normal trading markets.”

“Heightened volatility from mid-September through mid-November and a tepid trading environment throughout the quarter led to poor Fixed Income results, including mark-to-market write-downs in our inventory. Fixed Income revenues were $61 million for the quarter, compared to $227 million for the fourth quarter of last year, a decline of 73%, or $166 million. In particular, our distressed trading revenues for the quarter were negative $55 million versus positive $29 million for the comparable quarter last year, a decline of $84 million, much of which is unrealized. This decline was primarily due to mark to market inventory losses as a result of the broad sell-off in distressed and post-reorganization securities that followed the September 30 court decision regarding Fannie Mae and Freddie Mac. Mark downs between about $1 million and $5 million per name were recorded in securities of over twenty distressed and post re-organization issuers held by our core trading desks, including Freddie Mac and Fannie Mae, various issues in the energy and transport sectors, as well as several high yield municipal issuers, with most of the mark downs below $2 million per issuer. As is the nature of the distressed market making business, Jefferies holds positions of varying sizes across sectors where the firm is most active, with mark to market gains and losses recognized on a daily basis. The balance of our Fixed Income year-over-year quarterly revenue decline of about $82 million is primarily attributable to slower activity, heightened volatility and more modest inventory write downs in our other U.S. and international credit businesses, where no write downs exceeded $3 million for any individual security position.”

“While adversely impacted by events in October, our core Equities business otherwise performed well. Equities Net revenues for the period were $158 million compared to $290 million in the same quarter last year, a decrease of $132 million. $126 million of this decrease may be attributed to the mark to market gains of $110 million recorded in last year’s fourth quarter in respect of KCG and Harbinger, and the $16 million mark to market loss we recorded this quarter with respect to our investment in KCG. The Harbinger position was sold to Leucadia, at the then market price, during the second quarter of fiscal 2014.”

“Jefferies Investment Banking Net revenues of $316 million are below last year’s $417 million fourth quarter, primarily as a result of dampened capital markets activity due to the unsettled markets, which in turn led to the postponement of deals into future periods. The impact from the unusual publicity in late October and November was immaterial.”

“As a result of the growth and margin challenges we have recently faced in the Bache business we acquired in mid-2011, we are pursuing strategic alternatives for this business, and discussions with third parties in this regard are already underway.  We are focused on the potential combination of Bache with another similar business that improves the combined businesses’ competitive standing and margin.  In connection with this, we have reversed the entire $52 million in goodwill and $8 million of the intangible assets that were both allocated to the Bache business as a function of the purchase accounting that arose upon our 2013 transaction with Leucadia. This goodwill was not initially recorded as a result of our acquisition of Bache, which we acquired below tangible book value.  This amount is included in our non-compensation expenses, as is a 100% bad debt provision in respect of a $52 million receivable we hold from OW Bunker, which abruptly declared bankruptcy in early November after saying it uncovered risk-management issues that would result in $150 million in losses and a separate fraud that would result in a further $125 million in losses, the combined effect of which would wipe out its equity.  We provided futures clearing and execution services to OW Bunker, which was a public company in Denmark, the stock market capitalization of which was over $1 billion only six weeks before its bankruptcy filing.  The amount of our receivable was increased considerably by the relatively high volatility in energy prices at the time of OW Bunker’s failure to meet margin calls and during our realization process.  We are pursuing a recovery of the amounts owed to us by OW Bunker. Since the bankruptcy process is in its early stages and we cannot currently estimate what portion of the receivable is likely to be recovered, we have written off the entire amount and value our unsecured creditor position at zero.”

This release contains “forward looking statements” within the meaning of the safe harbor provisions of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward looking statements include statements about our future. These forward looking statements are usually preceded by the words “believe,” “intend,” “expect” or similar expressions. Forward looking statements include our belief as to our future prospects, including our strategy for our Bache business.  Forward looking statements represent only our belief regarding future events, many of which by their nature are inherently uncertain.  We will not update any forward looking statement to reflect future events or circumstances, except as required by applicable law.

The attached financial tables should be read in connection with our Quarterly Report on Form 10-Q for the quarter ended August 31, 2014 and our Annual Report on Form 10-K for the year ended November 30, 2013.

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.

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[1] Adjusted financial measures are non-GAAP financial measures.  Management believes such measures provide meaningful information to investors as they enable investors to evaluate the Company's results in the context of our pursuing various strategic alternatives for the Bache business.  Refer to the Supplemental Schedules on pages 6-7 for a reconciliation of Adjusted measures to the respective direct U.S. GAAP financial measures.

 
For further information, please contact:

 

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