2018 ANNUAL REPORT
January 10, 2019
Dear Fellow Shareholders,
By most measures, 2018 was a year of meaningful accomplishment at Jefferies
Financial Group, as we achieved our overriding priorities identified in last year’s
letter. We delivered consistent and solid results at Jefferies Group LLC, completed
significant and very profitable transactions involving two of our Merchant Banking
portfolio companies and drove solid progress across much of the rest of our principal
investments. This was a lot of work and we are incredibly proud of everyone at
Jefferies Financial Group for getting so many difficult jobs done so well.
In our fiscal year ended November 30, 2018, Jefferies Financial Group recorded net income
attributable to common shareholders of $1.0 billion, or $2.90 per diluted share, and paid $0.45 per
share in dividends. Fully diluted tangible equity per share increased by 22% from $20.48 at the
beginning of the fiscal year to $24.90 on November 30.
There have been several periods in our careers when our stock price has been out of sync with our operating
performance and future prospects. Since this mis-alignment evolved to such a material extent in 2018, it
was as if we were “getting the call” from our own company about a compelling new investment opportunity
and, in 2018, JEF was our single largest investment. We repurchased 50 million shares, representing 13% of
our fully diluted shares outstanding at the beginning of the year and including 24 million shares repurchased
in October and November, at an average price per share of $22.86, a material discount to both tangible and
intrinsic values, or a total of $1.14 billion. We believe this buyback is highly accretive and rewarding to all
our long-term shareholders. In our experience, perception does eventually reflect reality, particularly when
the investment story is becoming more focused and straightforward.
Combining the share buyback with the dividends paid in the eleven-month period of 2018, we returned
to our shareholders an aggregate of $1.3 billion, or 17% of our beginning of year tangible common
shareholders’ equity. Even after this return of capital to our shareholders and our $400 million of
investments to expand Vitesse Energy Finance and Leucadia Asset Management, we ended fiscal 2018
with an increase of $300 million in parent company liquidity, which now totals $1.6 billion. This leaves
us continuing in a strong position to defend against adversity and to take advantage of new
opportunities, whether to acquire businesses or investments, expand our existing franchise or return
additional capital to shareholders.
Perhaps even more important than the strong results, we believe the strategic changes made in 2018
will become more apparent and productive starting in fiscal 2019. Despite the many benefits and
opportunities that arose from the combination, the merger of Leucadia and Jefferies was confusing to
investors and others to understand. The full consolidation of National Beef’s results, given Beef’s high
revenues and relatively low operating margin, made it very difficult to comprehend our consolidated
income statement. With the deconsolidation of National Beef, we simplified our story considerably and
marked this increased focus by changing the name of our parent company to Jefferies Financial Group
Inc., a financial services holding company focused on investment banking and capital markets, asset
management and principal investing.
Jefferies Financial Group Inc. Annual Report 2018
1
Furthering this simplification, on October 1, we transferred into Jefferies Group our 50% interest in
Berkadia and our Leucadia Asset Management seed investments, thereby amalgamating our long-term
financial services operating businesses into one platform. Our merchant banking efforts will be presented
separately in semi-annual disclosures of the estimated fair market value of this portfolio.
The final and equally necessary simplification was the alignment of our two previously distinct fiscal year
ends. There is historical rationale for how we got there, but two different year ends made it more difficult to
follow our financial performance. With this alignment to a year ending on November 30, we will provide
timely financial information four times a year in a comprehensive, consistent and transparent format.
2019 should be our most straightforward and readily understandable financial reporting period in a
long time, and we believe this should help narrow substantially the gap between perception of value and
the reality of stock price. We are realists who care passionately about our responsibilities and
obligations to all our stakeholders. As long-term, large shareholders, we are fully aligned with all
shareholders and committed to not only creating value, but having it recognized.
Looking forward, our top priority is growth and margin improvement at Jefferies Group driven by
continued expansion of our Investment Banking effort, continuing market share gains in Equities,
recovery in Fixed Income and better results in Asset Management. We expect our Merchant Banking
portfolio will yield several further monetization events in the next couple of years. We will continue to
review opportunities for further direct investment, and will act when we find solid value that can accrue
for our shareholders. We enter 2019 in as strong a position as ever to build upon our solid foundation.
Investment Banking, Capital Markets and Asset Management
We recorded net revenues at Jefferies Group of almost $3.2 billion, pre-tax income of $410 million and
adjusted return on tangible equity of 8.7%. There is never a good excuse for missing our double digit
goal, but our lower than targeted adjusted ROTE primarily reflects the challenging markets of the
fourth quarter. However, despite heightened volatility, a significant decline in oil prices and a severe
backup in leveraged finance and all risk classes, all our businesses held up well, albeit, in a few cases, at
more moderate levels, but meaningfully better than in similar conditions in 2015 and early 2016.
Jefferies Group’s quarter end gross assets have remained at approximately $40 billion since the balance
sheet de-leveraging and de-risking we undertook in late 2015 and early 2016. Maintaining consistently
lower levels of risk and balance sheet for the last few years has helped limit the downside during times
of market stress.
Our competitive position strengthened further over the course of the year. Several of our primary
competitors continue to experience challenges, which may lead to further industry consolidation and
create additional market share growth opportunities.
Investment Banking. Our Investment Banking net revenues were $1.9 billion in 2018, or 60% of
Jefferies Group’s total net revenues, driven by record performance in our advisory and equity capital
markets businesses. We believe we are benefitting from our flat structure, our entrepreneurial culture,
our focus on prioritizing insight rather than balance sheet, and our approach to client service that
emphasizes partnership and the long-term. This has led to over 74% of 2018 Investment Banking net
revenues being from existing clients.
Over the last five years, our Investment Banking net revenues have grown at the highest annual rate of all
major global investment banks. In the U.S., our home market and the largest market for our services, our
overall fee market share increased considerably and, for the twelve months ended November 30, 2018,
2
Jefferies Financial Group Inc. Annual Report 2018
we ranked 7th in mergers and acquisitions, 6th in equity capital markets and 6th in leverage finance, all as
measured by Dealogic. The table below is testament to decades of effort by many people, perseverance in
our strategy and execution, and Jefferies Group’s good fortune to be the only full service investment
banking firm to survive the upheaval and challenges of the past 20+ years and break into the top ranks in
all relevant lines of business.
A&M
MCE
ecnaniFdegareveL
Market
Share Rank
Investment
Bank
Market
Share
Market
Share Rank
Investment
Bank
Market
Share
Market
Share Rank
Investment
Bank
Market
Share
Goldman Sachs
12.6%
JP Morgan
9.2%
Morgan Stanley
8.6%
Citi
Barclays
BAML
Jefferies
5.2%
5.0%
4.0%
3.9%
Credit Suisse
3.8%
1
2
3
4
5
6
7
8
9
Evercore
10
Lazard
Source: Dealogic
3.6%
2.6%
1
2
3
4
5
6
7
8
9
JP Morgan
12.3%
Goldman Sachs
11.2%
Morgan Stanley
11.0%
BAML
Citi
Jefferies
8.0%
6.3%
4.5%
Credit Suisse
4.4%
Barclays
3.5%
Deutsche Bank
2.7%
1
2
3
4
5
6
7
8
9
JP Morgan
11.1%
BAML
8.6%
Credit Suisse
7.7%
Barclays
7.2%
Goldman Sachs
6.6%
Jefferies
4.8%
Morgan Stanley
4.8%
Deutsche Bank
4.7%
Citi
4.4%
10
RBC
2.7%
10
Wells Fargo
4.3%
We continue to believe we are experiencing an inflection point in the scale and momentum of our
Investment Banking business, driven by our efforts to enter a large number of new industry sectors,
significantly expand our product capabilities and increase productivity from our senior investment
bankers as they become more tenured at Jefferies Group. We are growing our M&A franchise in larger
transactions, with transactions over $1 billion in size now accounting for over 50% of our M&A revenue,
while at the same time we remain a leader and continue to build our footprint in the middle market
M&A business. Finally, we are monetizing the large M&A and equity capital markets revenue
opportunities embedded in the incumbent corporate relationships that we have established as one of
the largest providers of U.S. leveraged buyout financing.
Net revenues and pre-tax income of Jefferies Finance, our corporate lending 50/50 joint venture with
MassMutual Life Insurance Company, were a record $438 million and $205 million, respectively, in
2018. Jefferies Finance originated a record $44 billion in corporate loans in 2018.
Established in 2004, Jefferies Finance has demonstrated growth and resilience across multiple market cycles
and has lead arranged over $195 billion in financing. In addition to its syndication business, Jefferies Finance is
an asset manager and also provides direct lending to middle market companies. Jefferies Finance completed
three new CLOs this year and manages over $7.5 billion of assets, a portion of which are retained from Jefferies
Finance-arranged transactions. Jefferies Finance’s strategy will remain focused on growing market share in
its core U.S. and European loan syndication business, as well as further expanding into middle market
direct lending (both origination and asset management), which represents a significant growth opportunity.
Jefferies Financial Group Inc. Annual Report 2018
3
Jefferies Finance
Total Arranged Deal Volume
($ Billions)
40
$3.8
64
69
$11.6
$7.7
Arranged Deal Volume
# of Deals
118
$21.1
132
$23.4
101
$21.4
80
$17.0
$42.1
161
$44.4
175
11M 2010
FY 2011
FY 2012
FY 2013
FY 2014
FY 2015
FY 2016
FY 2017
FY 2018
Since we may be late in the credit cycle, it is important to note that Jefferies Finance ended the year in a
strong position in terms of risk exposure, having successfully syndicated all deals we brought to market
during the year. Our commitments outstanding at year end were all of good quality, with terms
consistent with current market conditions, and should be fully syndicated readily in the near-term. We
remain vigilant in our underwriting process, while continuing to serve our clients and maintain our
market position.
Real Estate Finance. Berkadia, our commercial real estate finance and investment sales 50/50 joint
venture with Berkshire Hathaway, delivered a record $222 million of pre-tax income and a record $166
million of cash earnings for the eleven months ended November 30, 2018, up 37% and 12%,
respectively from last year’s first eleven months. Strong debt origination and additional third party loan
servicing arrangements increased our servicing portfolio to $234.7 billion. Our servicing portfolio has
experienced an almost complete turnover since the acquisition of the company in 2009, while the
change in mix of the portfolio, coupled with cost compression efforts, have consistently improved
revenue and margin. During the year, Berkadia placed a record $23.1 billion of debt for its clients, up over
4% compared to 20171. Similarly, investment sales volumes also set a record, up 6% from the prior year1,
totaling $7.5 billion, with 36% of investment sales volume resulting in a debt placement for Berkadia.
Berkadia’s improved performance was largely driven by increased productivity of existing mortgage bankers
and investment sales advisors, and recruiting of new ones, which bodes well for the future.
Equities. In Equities, we recorded 2018 net revenues of $666 million, relatively flat from the prior year,
as growth in our core equities business was offset by losses in certain block positions. The strong
performance in our core Equities business reflects continued market share gains driven by intense
client focus, enhanced global capabilities and the momentum of the overall Jefferies platform. We have
considerably diversified this business, with electronic trading and international markets now
representing a significant portion of our Equities net revenues. While absorbing the effects of MiFID II
and the increasing market volatility, we have risen to be ranked #5 in the U.S. with large global clients
and our overall global market share increased as well.
Fixed Income. Our 2018 Fixed Income net revenues were $560 million, down 9% from the prior year,
primarily due to the weakness in the fourth quarter, when our Fixed Income net revenues of $87 million
were 45% below the average of the first three quarters of the year. Despite these lower results, Fixed
Income is delivering more consistent performance, with increased capital efficiency and lower risk,
after further enhancing our team, focusing on our best opportunities and reducing risk, balance sheet
and capital utilization.
4
Jefferies Financial Group Inc. Annual Report 2018
Asset Management. Our Asset Management net revenues at Jefferies Group were near zero for the
year, as $21 million in fees earned were offset by $22 million in investment losses and net interest
expense associated with the capital utilized in Asset Management. At the parent company level, we
recorded a further $78 million in pre-tax losses largely due to negative returns in a small handful of our
strategies at Leucadia Asset Management prior to the October 1 transfer to Jefferies Group. These
investment losses were a product of the two challenging periods of 2018, which overwhelmed most
asset management strategies.
We are still in the early days of developing this business, and continue to make significant strides in
growing the portfolio of managers with whom we are partnered and the assets under management. We
announced partnerships with Weiss Multi-Strategy Advisers and Schonfeld Strategic Advisors in 2018,
with the former becoming effective May 1, 2018 and the latter having commenced earlier this month on
January 1, 2019. Both transactions allow us to partner with well-established firms in the broadly
defined multi-manager space that we believe will be in high demand for the foreseeable future.
To support these new efforts and our other ongoing initiatives, we have been adding to our marketing
and business development team. Combined with our world class infrastructure, this sets us apart as the
partner of choice for strong investment teams. Given our ability not only to invest in these platforms,
but also to help them grow and provide back office support, managers can focus on the most important
element to success, investment performance. We believe 2018 marks the end of the initial start-up
losses and growing pains for this business, and we look forward to earning reasonable returns as we
begin to scale this business with a much-improved level of diversification.
Merchant Banking
Merchant Banking is where we leverage our team, ideas, relationships and information flow to make
unique long-term principal investments. Realizations will happen from time to time, typically when we
believe the trajectory for growth has been substantially completed or where a third party comes along
and makes us the proverbial “offer we can’t refuse.” To help keep track of the progress of our portfolio
while we continue to build value and wait for the right time to realize value, we are providing fair value
estimates for our investments on a semi-annual basis. The second iteration of this process is below:
$
($ Millions)
Investments in Public Companies
Spectrum Brands
HomeFed
Other
Sub-Total
Investments in Private Companies
National Beef
Linkem
Oil and Gas (Vitesse and JETX)
WeWork
Idaho Timber
Other(A)
Sub-Total
As of November 30, 2018
Book Value
Estimated Fair
Value
Basis for Fair Value Estimate
374
338
263
975
654
165
641
254
78
558
2,350
$
374 Mark-to-market (same for GAAP book value)
488
263
1,125
695
555
671
254
145
684
3,004
Mark-to-market (equity method for GAAP book value)
Mark-to-market (same for GAAP book value)
Income approach, market comparable and market transaction method
Income approach, market comparable and market transaction method
Income approach, market comparable and market transaction method
Market transaction method and option pricing theory
Income approach, market comparable and market transaction method
Various
Total Merchant Banking Business
$
3,325
$
4,129
(A) Includes FXCM, Golden Queen, M Science, Foursight and various other investments.
Jefferies Financial Group Inc. Annual Report 2018
5
Realizations. In 2018, we completed two substantial realizations, booking considerable profits. In
June, we sold 48% of National Beef to Marfrig Global Foods, a Brazilian beef packer, for $908 million in
cash, reducing our ownership in National Beef from 79% to 31%. In 2018, we recognized a pre-tax gain
on this transaction of $873 million. We continue to designate two board members and have a series of
other rights in respect of our continuing equity interest, with a lockup period of five years and
thereafter a fair market value liquidity option. As of the closing of the sale on June 5, 2018, we
deconsolidated our investment in National Beef and account for our remaining 31% interest in National
Beef under the equity method of accounting.
During the third quarter of 2018, we sold 100% of our equity interests in Garcadia, our auto dealer
group, and our associated real estate holdings to our former partners, the Garff family, for $417 million
in cash. We recognized a pre-tax gain as a result of this transaction of $222 million.
Portfolio Update. National Beef’s 2018 EBITDA2 of $648 million was a run-away all-time record.
National Beef continues to benefit from being on the front-end of the multi-year cattle cycle, with cattle
available for slaughter continuing to grow. There is ample supply to run our plants efficiently and meet
consumer demand, which is the other half of the equation.
Having finished the clean-up of HRG’s other assets, HRG merged into Spectrum Brands in July.
Unfortunately, results at Spectrum Brands deteriorated considerably during 2018 and the stock price
declined significantly. We recorded a $419 million unrealized mark-to-market write-down of the value
of our Spectrum Brands shares in 2018. Needless to say, we are rolling up our sleeves to help fix
Spectrum Brands.
Vitesse Energy Finance completed a timely and value-creating $190 million acquisition of additional
Bakken oil assets in April 2018 and cumulatively has invested $439 million of our capital to acquire,
develop and produce cash flow from oil and gas properties in proven, lower risk oil and gas fields in the
growing core of the Bakken Field in North Dakota.
This was an eventful year for Linkem and one that has provided strong validation of its bright future.
Aside from continued strong subscriber growth and the development and launch of new products and
services, a handful of auctions for similar frequency to that owned by Linkem, including the Italian 3.6-
3.8GHz auction, resulted in prices far exceeding expectations. Linkem had 586,000 subscribers at
November 30, 2018.
While our $279 million rescue of FXCM has so far generated $350 million of principal, interest and fees
in cash back to Jefferies, FXCM had another challenging year. FXCM has done a good job streamlining
operations and improving its product offerings and remains well positioned to take advantage of rising
interest rates and the return of volatility to the FX and equities markets.
HomeFed had a strong year. At its Otay Land project in San Diego county, which is entitled for
approximately 13,050 residential units and 1.85 million square feet of commercial space, 340 of the 992
planned home sales have closed at the Village of Escaya, its initial development at Otay. Construction has
also started on its first mixed-use project at Otay, The Residences and Shops at The Village of Escaya.
It was a tale of two halves for Idaho Timber. Thankfully the two halves added up to a very good year as
a whole. The first half saw record spreads and margin thanks to sustained high prices due to supply
limitations industry-wide. The second half saw a deterioration in demand and increased supply which
contributed to a steep drop in prices that left many wood suppliers off-balance. Of late, the
supply/demand dynamic has stabilized, with operations returning to solid levels of profitability.
6
Jefferies Financial Group Inc. Annual Report 2018
Annual Meeting and Investor Day
We look forward to answering your questions at our upcoming Annual Meeting on March 28, 2019. We also
will hold our annual Jefferies Investor Day on October 16, 2019, at which time you will have the opportunity
to hear from our senior leaders across the Jefferies platform.
We thank all of you—our clients and customers, employee-partners, fellow shareholders, bondholders,
vendors and all others associated with our businesses—for your continued partnership and support.
Sincerely,
Richard B. Handler
Chief Executive Officer
Brian P. Friedman
President
1 Berkadia year-over-year comparisons are for the first eleven months of 2018 compared to the first eleven months of 2017.
2 National Beef’s EBITDA is for the first eleven months of 2018.
Jefferies Financial Group Inc. Annual Report 2018
7
Appendix
The following tables reconcile financial results reported in accordance with generally accepted
accounting principles (“GAAP”) to non-GAAP financial results. The shareholders’ letter contains non-
GAAP financial information to aid investors in viewing our businesses and investments through the
eyes of management while facilitating a comparison across historical periods. However, these non-
GAAP financial measures should be viewed in addition to, and not as a substitute for, reported results
prepared in accordance with GAAP.
Note: Berkadia and National Beef are not consolidated by Jefferies Financial Group and are accounted
for under the equity method. The Berkadia and National Beef reconciliations below are provided for
convenience only.
JEFFERIES FINANCIAL GROUP
BERKADIA
Reconciliation of Shares Outstanding to Fully Diluted Shares Outstanding
Reconciliation of Pre-Tax Income to Cash Earnings
(Thousands of shares)
Shares outstanding (GAAP)
Restricted stock units
Other
Fully diluted shares outstanding (non-GAAP)
Nov. 30, 2018
Dec. 31, 2017
307,515
19,779
878
328,172
356,227
16,000
887
373,114
($ millions)
Pre-tax income (GAAP)
Adjustments:
Eleven Months
Ended
Nov. 30, 2018
$
222
Note: Fully diluted shares exclude shares for options, preferred shares and, at December 31, 2017,
convertible debt. The convertible debt was redeemed in early 2018. Fully diluted shares include
the target number of shares under the senior executive award plan.
Amortization, impairment and depreciation
Gains attributable to origination of mortgage servicing rights
Unrealized (gains) losses; and all other, net
Cash earnings (non-GAAP)
$
124
(191)
12
166
Reconciliation of Shareholders' Equity to Tangible Common Shareholders' Equity
Reconciliation of Book Value of Merchant Banking Investments to Estimated Fair Value
JEFFERIES FINANCIAL GROUP
($ millions)
($ millions)
Shareholders' equity (GAAP)
Less: Intangible assets, net and goodwill
ehold
Tangible common shareholders' equity (non-GAAP)
Tangible common
sha
Nov. 30, 2018
Dec. 31, 2017
$
$
10,061 $
10,106
)098,1(
8,171
$
)364,2(
7,643
Book Value
Fair Value
Nov. 30, 2018
(GAAP)
Adjustments
Estimated
Fair Value
Nov. 30, 2018
(Non-GAAP)
Note: Fully diluted tangible equity per share, a non-GAAP measure, is defined as tangible common
shareholders' equity divided by fully diluted shares outstanding.
JEFFERIES GROUP LLC
Reconciliation of Member's Equity to Adjusted Tangible Member's Equity
($ millions)
Investments in Public Companies
Spectrum Brands
$
HomeFed
Other
Sub-Total
Investments in Private Companies
National Beef
Linkem
Nov. 30, 2017
Oil and Gas (Vitesse and JETX)
Total Jefferies Group LLC member's equity (GAAP)
Less: Intangible assets, net and goodwill
Tangible Jefferies Group LLC member's equity
Less: Return of capital to Jefferies Financial Group
Adjusted tangible Jefferies Group LLC member's equity (non-GAAP)
$
$
957,5
)348,1(
3,916
(200)
3,716
WeWork
Idaho Timber
Other
374
338
263
975
654
165
641
254
78
558
$
-
$
150
-
150
41
390
30
-
67
126
374
488
263
1,125
695
555
671
254
145
684
3,004
4,129
Sub-Total
Total Merchant Banking Business
$
2,350
3,325 $
654
804 $
Reconciliation of Net Earnings to Adjusted Net Earnings
NATIONAL BEEF
($ millions)
Net earnings (GAAP)
Provisional tax charge
Adjusted net earnings (non-GAAP)
Twelve Months
Ended
Nov. 30, 2018
$
$
159
165
324
Note: Adjusted return on tangible equity, a non-GAAP measure, is defined as adjusted net earnings
divided by beginning of year adjusted tangible Jefferies Group LLC member's equity.
Note: As a result of Jefferies Financial Group's previous fiscal year end being December 31, the
charge recorded by Jefferies Group LLC related to the Tax Cuts and Jobs Act was included in
Jefferies Financial Group's consolidated results during 2017, and, therefore, excluded from
Jefferies Financial Group's 2018 financial results.
Reconciliation of Pre-Tax Income to EBITDA
($ millions)
Eleven Months
Ended
Nov. 30, 2018
Pre-tax income (GAAP)
Adjustments:
Interest expense/(income), net
Depreciation and amortization
EBITDA (non-GAAP)
$
$
544
9
94
648
Note: Amounts may not sum due to rounding.
8
Jefferies Financial Group Inc. Annual Report 2018
Cautionary Note on Forward-Looking Statements
This letter 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 Act of 1934. Forward-
looking statements 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,” 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 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.
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).
Jefferies Financial Group Inc. Annual Report 2018
9
92472_01_Leucadia_AR_10K.qxp 2/6/19 7:29 PM Page FC1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________
FORM 10-K
□ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended ________________
or
(cid:1) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from January 1, 2018 to November 30, 2018
Commission file number: 1-5721
JEFFERIES FINANCIAL GROUP INC.
13-2615557
(I.R.S. Employer Identification No.)
(Exact Name of Registrant as Specified in its Charter)
New York
(State or Other Jurisdiction of
Incorporation or Organization)
520 Madison Avenue
New York, New York 10022
(212) 460-1900
(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
________________
Common Shares, par value $1 per share
Name of Each Exchange
on Which Registered
_______________________
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None.
(Title of Class)
Indicate by check mark if the registrant is a well- known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes (cid:1)
No □
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
No (cid:1)
No □
No □
Yes □
Yes (cid:1)
Yes (cid:1)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S- T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S- K is not contained herein, and will
not be contained, to the best of registrant’s knowledge, in definitive proxy or information statement incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. (cid:1)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non- accelerated filer, a smaller
reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller
reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer (cid:1) Accelerated filer □ Non- accelerated filer □
Smaller reporting company □ Emerging growth company □
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. □
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes □
No (cid:1)
Aggregate market value of the voting stock of the registrant held by non- affiliates of the registrant at June 30, 2018 (computed
by reference to the last reported closing sale price of the Common Shares on the New York Stock Exchange on such date):
$6,974,359,578.
On January 18, 2019, the registrant had outstanding 305,716,112 Common Shares.
DOCUMENTS INCORPORATED BY REFERENCE:
Certain portions of the registrant’s Definitive Proxy Statement pursuant to Regulation 14A of the Securities Exchange Act of
1934 in connection with the 2019 Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K.
LOCATION OF EXHIBIT INDEX
The index of exhibits is contained in Part IV on page 66.
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PART I
Item 1. Business.
Overview
Jefferies Financial Group Inc. (“Jefferies” or the “Company”), formerly known as Leucadia National Corporation, is a
diversified financial services company engaged in investment banking and capital markets, asset management and direct
investing. Jefferies Group LLC (“Jefferies Group”), our largest subsidiary, is the largest independent full- service global
investment banking firm headquartered in the U.S. Jefferies Group retains a credit rating separate from Jefferies and
remains a U.S. Securities and Exchange Commission (“SEC”) reporting company.
Our executive offices are located at 520 Madison Avenue, New York, NY 10022, as is the global headquarters of Jefferies
Group. Our primary telephone number is (212) 460-1900 and our website address is www.jefferies.com. At November 30,
2018, we had approximately 4,700 full- time employees.
The following discussion should be read in conjunction with the Risk Factors presented in Item 1A of Part I and the
Cautionary Statement for Forward- Looking Information and Management’s Discussion and Analysis of Financial
Condition and Results of Operations set forth in Item 7 of Part II.
Recent Events
On June 5, 2018, we completed the sale of 48% of National Beef to Marfrig Global Foods S.A. (“Marfrig”) for $907.7
million in cash, reducing our ownership in National Beef from 79% to 31%. In 2018, we recognized a pre- tax gain as a
result of this transaction of $873.5 million. During 2018, prior to the closing, we received an additional $229.4 million
in distributions of recent profits plus a true- up to the debt amount set in the enterprise valuation associated with the sale.
Marfrig also acquired an additional 3% of National Beef from other equity owners and owns 51% of National Beef. We
have the right to designate two board members and have a series of other rights in respect of our continuing equity
interest, with a lockup period of five years and thereafter fair market value liquidity protections. As of the closing of the
sale on June 5, 2018, we deconsolidated our investment in National Beef and account for our remaining 31% interest in
National Beef under the equity method of accounting. We have classified the results of National Beef prior to June 5,
2018 and the pre- tax gain as discontinued operations in the Consolidated Statements of Operations.
During the third quarter of 2018, we sold 100% of our equity interests in Garcadia, our auto dealer group, and our
associated real estate to our former partners, the Garff family, for $417.2 million in cash. We recognized a pre- tax gain
as a result of this transaction of $221.7 million during 2018.
These sales and particularly the related deconsolidation of National Beef transformed Jefferies into a more focused
financial services company. To further this strategy, on October 1, 2018, we amalgamated all our primary financial
services operating businesses into one platform by transferring our 50% membership interest in Berkadia and our
Leucadia Asset Management (“LAM”) seed investments into Jefferies Group. The balance of our businesses and
investments comprise our Merchant Banking business, including our interests in National Beef, Spectrum Brands
(formerly HRG Group), Vitesse Energy Finance, HomeFed, Linkem and other companies.
During 2018, we repurchased a total of 50,000,000 of our common shares for $1,143.0 million at an average price per
share of $22.86.
In the fourth quarter of 2018, we changed our fiscal year end from December 31 to November 30, aligning our fiscal
year end with that of Jefferies Group.
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Jefferies Group
Jefferies Group is the largest independent U.S. headquartered global full- service, integrated investment banking and
securities firm. Jefferies Group’s largest subsidiary, Jefferies LLC, was founded in the U.S. in 1962 and its first
international operating subsidiary, Jefferies International Limited, was established in the U.K. in 1986. As of
November 30, 2018, Jefferies Group had 3,596 employees in the Americas, Europe and Asia. The net book value (assets
less liabilities and noncontrolling interests) of our investment in Jefferies Group was $6.2 billion at November 30, 2018.
Investment Banking
Jefferies Group provides its clients around the world with a full range of equity capital markets, debt capital markets and
financial advisory services. Jefferies Group’s services are enhanced by its deep industry expertise, its global distribution
capabilities and its senior level commitment to its clients.
Approximately 900 investment banking professionals operate in the Americas, Europe and Asia, and are organized into
industry, product and geographic coverage groups. Jefferies Group’s industry coverage groups include Consumer and
Retail; Energy; Financial Institutions; Healthcare; Industrials; Media, Communications and Information Services; Real
Estate; Gaming and Lodging; Technology; Financial Sponsors; and Public Finance. Jefferies Group’s product coverage
groups include equity capital markets, debt capital markets, and advisory, which includes both mergers and acquisitions
and restructuring and recapitalization expertise. Jefferies Group’s geographic coverage groups include teams based in
major cities in the United States, Toronto, London, Frankfurt, Paris, Milan, Amsterdam, Stockholm, Mumbai, Hong
Kong, Singapore, Sydney, Tokyo and Zurich.
Equity Capital Markets
Jefferies Group provides a broad range of equity financing capabilities to companies and financial sponsors. These
capabilities include private equity placements, initial public offerings, follow- on offerings, block trades and equity- linked
convertible securities transactions.
Debt Capital Markets
Jefferies Group provides a wide range of debt and acquisition financing capabilities for companies, financial sponsors
and government entities. Jefferies Group focuses on structuring, underwriting and distributing public and private debt,
including investment grade debt, high yield bonds, leveraged loans, municipal debt, mortgage- and other asset- backed
securities, and liability management solutions.
Advisory Services
Jefferies Group provides mergers and acquisition and restructuring and recapitalization services to companies, financial
sponsors and government entities. In the mergers and acquisition area, Jefferies Group advises sellers and buyers on
corporate sales and divestitures, acquisitions, mergers, tender offers, spinoffs, joint ventures, strategic alliances and
takeover and proxy fight defense. In the restructuring and recapitalization area, Jefferies Group provides companies,
bondholders and lenders a full range of restructuring advisory capabilities as well as expertise in the structuring, valuation
and placement of securities issued in recapitalizations.
Corporate Lending
Jefferies Finance LLC (“Jefferies Finance”), a 50/50 joint venture between Jefferies Group and Massachusetts Mutual
Life Insurance Company, is a commercial finance company that structures, underwrites and syndicates primarily senior
secured loans to corporate borrowers and manages proprietary and third- party investments in middle market and broadly
syndicated loans. Since its inception in 2004, Jefferies Finance has served as lead arranger of over 950 transactions
representing over $195 billion in arranged volume. Jefferies Finance conducts its operations primarily through two
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business lines, Leveraged Finance Arrangement and Portfolio and Asset Management. Its Leveraged Finance
Arrangement business line participates in transactions typically ranging from $250 million to $1.5 billion for borrowers
generating between $50 million and $300 million of annual Earnings before interest, taxes, depreciation and amortization.
Jefferies Finance typically syndicates to third party investors substantially all of its arranged volume. Its Portfolio and
Asset Management business line manages a broad portfolio comprised of portions of loans it has arranged as well as
loan positions that it has purchased in the primary and secondary markets. The Portfolio and Asset Management business
is comprised of three registered Investment Advisers: Jefferies Finance, Apex Credit Partners LLC and JFIN Asset
Management LLC. Jefferies Finance manages its investments in cash flow and traditional asset- based revolving credit.
Apex Credit Partners LLC manages collateralized loan obligations which invest in predominately broadly syndicated
loans. JFIN Asset Management LLC manages proprietary and third- party investments in middle market loans held in
private funds and separately managed accounts.
Equities
Equities Research, Sales and Trading
Jefferies Group provides its clients full- service equities research, sales and trading capabilities across global securities
markets. Jefferies Group earns commissions or spread revenue by executing, settling and clearing transactions for clients
across these markets in equity and equity- related products, including common stock, American depository receipts,
global depository receipts, exchange- traded funds, exchange- traded and over- the- counter (“OTC”) equity derivatives,
convertible and other equity- linked products and closed- end funds. Jefferies Group equity research, sales and trading
efforts are organized across three geographical regions: the Americas; Europe and the Middle East and Africa; and Asia
Pacific. Jefferies Group’s clients are primarily institutional market participants such as mutual funds, hedge funds,
investment advisers, pension and profit sharing plans, and insurance companies. Through its global research team and
sales force, Jefferies Group maintains relationships with its clients, distributes investment research and strategy, trading
ideas, market information and analyses across a range of industries and receives and executes client orders. Jefferies
Group’s equity research covers over 2,000 companies around the world and a further more than 800 companies are
covered by nine leading local firms in Asia Pacific with which Jefferies Group maintains alliances.
Equity Finance
Jefferies Group’s Equity Finance business provides financing, securities lending and other prime brokerage services.
Jefferies Group offers prime brokerage services in the U.S. that provide hedge funds, money managers and registered
investment advisers with execution, financing, clearing, reporting and administrative services. Jefferies Group finances
its clients’ securities positions through margin loans that are collateralized by securities, cash or other acceptable liquid
collateral. Jefferies Group earns an interest spread equal to the difference between the amount Jefferies Group pays for
funds and the amount Jefferies Group receives from its clients. Jefferies Group also operates a matched book in equity
and corporate bond securities, whereby Jefferies Group borrows and lends securities versus cash or liquid collateral and
earns a net interest spread. Jefferies Group offers selected prime brokerage clients the option of custodying their assets
at an unaffiliated U.S. broker- dealer that is a subsidiary of a bank holding company. Under this arrangement, Jefferies
Group directly provides its clients with all customary prime brokerage services.
Wealth Management
Jefferies Group provides tailored wealth management services designed to meet the needs of high net worth individuals,
their families and their businesses, private equity and venture funds and small institutions. Jefferies Group’s advisers
provide access to all of its institutional execution capabilities and delivers other financial services. Jefferies Group’s
open architecture platform affords clients access to products and services from both its firm and from a variety of other
major financial services institutions.
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Fixed Income
Fixed Income Sales and Trading
Jefferies Group provides its clients with sales and trading of investment grade corporate bonds, U.S. and European
government and agency securities, municipal bonds, mortgage- and asset- backed securities, leveraged loans,
consumer loans, high yield and distressed securities, emerging markets debt, interest rate and credit derivative
products, as well as foreign exchange trade execution and securitization capabilities. Jefferies LLC is designated as
a Primary Dealer by the Federal Reserve Bank of New York and Jefferies International Limited is designated in
similar capacities for several countries in Europe. Additionally, through the use of repurchase agreements, Jefferies
Group acts as an intermediary between borrowers and lenders of short- term funds and obtains funding for various
of its inventory positions. Jefferies Group trades and makes markets globally in cleared and uncleared swaps and
forwards referencing, among other things, interest rates, investment grade and non- investment grade corporate
credits, credit indexes and asset- backed security indexes.
Jefferies Group’s strategists and economists provide ongoing commentary and analysis of the global fixed income
markets. In addition, Jefferies Group’s fixed income desk strategists provide ideas and analysis to clients across a variety
of fixed income products.
Other
Jefferies Group also makes principal investments in private equity and hedge funds managed by third parties as well as,
from time to time, take on strategic positions. On October 1, 2018, we transferred to Jefferies Group our investment in
Berkadia Commercial Mortgage Holding LLC (“Berkadia”). Berkadia is a 50/50 joint venture with Berkshire Hathaway,
Inc. that provides capital solutions, investments sales advisory and mortgage servicing for multifamily and commercial
real estate. Berkadia originates commercial real estate loans, primarily in respect of multifamily housing units, for Fannie
Mae, Freddie Mac and the Federal Housing Authority using their underwriting guidelines and will typically sell the
loans to such entities shortly after the loans are funded with Berkadia retaining the mortgage servicing rights. For loans
sold to Fannie Mae, Berkadia assumes a shared loss position throughout the term of each loan, with a maximum loss
percentage of approximately one- third of the original principal balance. Berkadia also originates and brokers
commercial/multifamily mortgage loans which are not part of the government agency programs.
In addition, Berkadia originates loans for its own balance sheet. These loans provide interim financing to borrowers who
intend to refinance the loan with longer- term loans from an eligible government agency or other third party. Berkadia
also provides services related to the acquisition and disposition of multifamily real estate projects, including brokerage
services, asset review, market research, financial analysis and due diligence support and is a servicer of U.S. commercial
real estate loans, performing primary, master and special servicing functions for U.S. government agency programs,
commercial mortgage- backed securities transactions, banks, insurance companies and other financial institutions.
Berkadia is required under its servicing agreements to maintain certain minimum servicer ratings or qualifications from
the ratings agencies. These ratings currently exceed the minimum ratings required by the related servicing agreements.
Asset Management
Jefferies Group manages, invests in and provides services to a diverse group of alternative asset management platforms
across a spectrum of investment strategies and asset classes, many of these under the LAM umbrella. Jefferies Group is
supporting and developing focused strategies managed by distinct management teams. Products are currently offered
by Jefferies Investment Advisers to pension funds, insurance companies, sovereign wealth funds, and other institutional
investors through various platforms.
On October 1, 2018, we transferred our LAM seed investments to Jefferies Group. LAM continued to expand its asset
management efforts including the formation of strategic relationships with Weiss Multi- Strategy Advisers LLC (“Weiss”)
and Schonfeld Strategic Advisors LLC (“Schonfeld”). We invested $250 million in Weiss’ strategy and own a profit
share in the firm for the first year and a revenue share thereafter. In addition, LAM entered into an agreement with
Schonfeld to merge the business of Folger Hill Asset Management with Schonfeld’s fundamental equities business,
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under the Schonfeld brand. In connection with the transaction, LAM agreed to make a $250 million investment in the
combined strategy, and will receive a revenue share in the combined ongoing fundamental equity business. This
transaction closed on January 1, 2019.
Competition
All aspects of Jefferies Group’s business are intensely competitive. Jefferies Group competes primarily with large global
bank holding companies that engage in capital markets activities, but also with other broker- dealers, asset managers and
investment banking firms. The large global bank holding companies have substantially greater capital and resources
than Jefferies Group does. Jefferies Group believes that the principal factors affecting its competitive standing include
the quality, experience and skills of its professionals, the depth of its relationships, the breadth of its service offerings,
its ability to deliver consistently its integrated capabilities, and its culture, tenacity and commitment to serve its clients.
Regulation
Regulation in the United States. The financial services industry in which Jefferies Group operates is subject to extensive
regulation. In the U.S., the SEC is the federal agency responsible for the administration of federal securities laws, and
the Commodity Futures Trading Commission (“CFTC”) is the federal agency responsible for the administration of laws
relating to commodity interests (including futures, commodity options and swaps). In addition, the Financial Industry
Regulatory Authority (“FINRA”) and the National Futures Association (“NFA”) are self- regulatory organizations that
are actively involved in the regulation of financial services businesses. The SEC, CFTC, FINRA and the NFA conduct
periodic examinations of broker- dealers, investment advisers, futures commission merchants (“FCMs”) and swap dealers.
The designated examining authority for Jefferies LLC’s activities as a broker- dealer is FINRA, and the designated self-
regulatory organization for Jefferies LLC’s non- clearing FCM activities is the NFA. Financial services businesses are
also subject to regulation and examination by state securities commissions and attorneys general in those states in which
they do business.
Broker- dealers are subject to SEC and FINRA regulations that cover all aspects of the securities business, including
sales and trading methods, trade practices among broker- dealers, use and safekeeping of customers’ funds and securities,
capital structure and requirements, anti- money laundering efforts, recordkeeping and the conduct of broker- dealer
personnel, including officers and employees. Registered investment advisers are subject to, among other requirements,
SEC regulations concerning marketing, transactions with affiliates, custody of client assets, disclosure to clients, conflict
of interest, insider trading and recordkeeping; and investment advisers that are also registered as commodity trading
advisers or commodity pool operators are also subject to regulation by the CFTC and the NFA. FCMs, introducing
brokers and swap dealers that engage in commodity options, futures or swap transactions are subject to regulation by
the CFTC and the NFA. Additional legislation, changes in rules promulgated by the SEC, CFTC, FINRA or NFA, or
changes in the interpretation or enforcement of existing laws or rules may directly affect the operations and profitability
of broker- dealers, investment advisers, FCMs, commodity trading advisers, commodity pool operators and swap dealers.
The SEC, CFTC, FINRA, NFA, state securities commissions and state attorneys general may conduct administrative
proceedings or initiate civil litigation that can result in adverse consequences for Jefferies LLC, its affiliates, including
affiliated investment advisers, as well as its and their officers and employees (including, without limitation, injunctions,
censures, fines, suspensions, directives that impact business operations (including proposed expansions), membership
expulsions, or revocations of licenses and registrations). In addition, broker- dealers, investment advisers, FCMs and
swap dealers must also comply with the rules and regulation of clearing houses, exchanges, swap execution facilities
and trading platforms of which they are a member.
Regulatory Capital Requirements. Several Jefferies Group entities are subject to financial capital requirements that are
set by regulation. Jefferies LLC is a dually- registered broker- dealer and FCM and is required to maintain net capital in
excess of the greater of the SEC or CFTC minimum financial requirements. As a broker- dealer, Jefferies LLC is subject
to the SEC’s Uniform Net Capital Rule (the “Net Capital Rule”). Jefferies LLC has elected to compute its minimum net
capital requirement in accordance with the “Alternative Net Capital Requirement” as permitted by the Net Capital Rule,
which provides that a broker- dealer shall not permit its net capital, as defined, to be less than the greater of 2% of its
aggregate debit balances (primarily customer- related receivables) or $250,000 ($1.5 million for prime brokers).
Compliance with the Net Capital Rule could limit Jefferies LLC’s operations, such as underwriting and trading activities,
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that could require the use of significant amounts of capital, and may also restrict its ability to make loans, advances,
dividends and other payments.
As a non- clearing FCM, Jefferies LLC is required to maintain minimum adjusted net capital of $1.0 million.
Jefferies Group subsidiaries that are provisionally registered swap dealers will become subject to capital requirements
under Title VII of The Dodd- Frank Wall Street Reform and Consumer Protection Act (the “Dodd- Frank Act”) once the
relevant rules become final. For additional information see Item 1A. Risk Factors.
Jefferies Group is not subject to any regulatory capital rules.
See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Note 25 to
our consolidated financial statements for additional discussion of net capital calculations.
Regulation outside the United States. Jefferies Group is an active participant in the international capital markets and
provides investment banking services internationally, primarily in Europe and Asia. As is true in the U.S., Jefferies
Group’s international subsidiaries are subject to extensive regulations proposed, promulgated and enforced by, among
other regulatory bodies, the European Commission and European Supervisory Authorities (including the European
Banking Authority and European Securities and Market Authority), U.K. Financial Conduct Authority, German Federal
Financial Supervisory Authority, Investment Industry Regulatory Organization of Canada, Hong Kong Securities and
Futures Commission, the Japan Financial Services Agency and the Monetary Authority of Singapore. Every country in
which Jefferies Group does business imposes upon it laws, rules and regulations similar to those in the U.S., including
with respect to some form of capital adequacy rules, customer protection rules, data protection regulations, anti- money
laundering and anti- bribery rules, compliance with other applicable trading and investment banking regulations and
similar regulatory reform. For additional information see Item 1A. Risk Factors.
Merchant Banking
In our Merchant Banking business, we own a diverse portfolio of businesses and investments that have the potential for
significant long- term value creation. We continue to seek new investments with similar characteristics and that typically
come to our attention through the activities of Jefferies Group. Investments may be reflected in our consolidated results
as consolidated subsidiaries, equity investments, securities or in other ways, depending on the structure of our specific
holdings. We periodically evaluate the retention and disposition of our businesses and investments. Changes in the mix
of our businesses and investments should be expected.
Our Merchant Banking portfolio currently includes investments in National Beef Packing Company (“National Beef ”),
31% (beef processing); Spectrum Brands Holdings, Inc. (“Spectrum Brands”), 14% (consumer products); Linkem, 54%
(fixed wireless broadband services); Vitesse Energy, LLC (“Vitesse Energy Finance”), 97% (oil and gas); HomeFed
Corporation (“HomeFed”), 70% (45% voting) (real estate); Idaho Timber, 100% (manufacturing); FXCM Group, LLC
(“FXCM”), up to 75% (50% voting) (online foreign exchange trading); WeWork, less than 1% (global network of
workspaces); and others. The net book value of our entire Merchant Banking portfolio was $3.3 billion at November 30,
2018.
National Beef
We own 31% of National Beef, one of the largest beef processing companies in the U.S., accounting for approximately
12.5% of the fed cattle slaughter market. National Beef processes and markets fresh and chilled boxed beef, ground
beef, beef by- products, consumer- ready beef and pork, and wet blue leather for domestic and international markets. The
largest share of National Beef’s revenue, about 86%, is generated from the sale of boxed beef and beef by-
products. National Beef also generates revenues through value- added production with its case- ready products. National
Beef’s profitability typically fluctuates seasonally as well as cyclically, based on the availability of fed cattle. The net
book value of our investment in National Beef was $653.6 million at November 30, 2018.
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Spectrum Brands
We own about 14% of Spectrum Brands, a publicly traded (NYSE: SPB) global and diversified consumer products
company and a leading supplier of residential locksets, residential builders’ hardware, plumbing, shaving and grooming
products, personal care products, small household appliances, specialty pet supplies, lawn and garden and home pest
control products, and personal insect repellents. Over the past few months, Spectrum Brands has announced the sale of
its consumer battery and auto care segments. We own 7.5 million common shares of Spectrum Brands, which we reflect
in Trading assets in our financial statements at fair value. One of our officers currently serves as a director on Spectrum
Brands board and we have the right to designate an unaffiliated person to be nominated to serve as independent director
on Spectrum Brands board. The net book value of our investment in Spectrum Brands was $374.2 million at
November 30, 2018.
Linkem
We own 54% (48% voting) of Linkem S.p.A., a fast- growing fixed wireless broadband service provider in Italy with
586,000 subscribers. Its solution, delivered via radio communications between a base station and indoor or outdoor
antennae installed at the customers’ premises, utilizes its valuable 3.5GHz spectrum holdings of 84MHz covering over
82% of the population of Italy and at least 42MHz covering all of Italy. Linkem’s proprietary network currently utilizes
LTE technology and covers approximately 66% of Italian households, while its 3.5GHz frequency band has been
designated globally as one of the core bands for 5G services making Linkem well placed to take market share and
broaden its service offerings in a challenged Italian infrastructure market. Linkem plans to increase its network coverage
and service offerings over the coming years as it adds subscribers and leverages its assets. Expansion and customer
acquisition costs are expected to result in operating losses over the next couple of years.
Our initial investment in Linkem was made in July 2011. Since that time, we have funded much of Linkem’s growth and
become its largest shareholder. We own approximately 42% of the common shares of Linkem, as well as convertible
preferred shares which, if converted, would increase our ownership to approximately 54% of Linkem’s common equity
at November 30, 2018. We have approximately 48% of the total voting securities of Linkem. The net book value of our
investment in Linkem was $165.2 million at November 30, 2018.
Vitesse Energy Finance
Vitesse Energy Finance is our 97% owned consolidated subsidiary that acquires and invests in non- operated working
interests and royalties predominately in the Bakken Shale oil field in North Dakota. These non- operated interests include
working interests and minerals in flowing wells and leasehold interests in drilling spacing units expected to be developed
in the future by Vitesse Energy Finance’s dozen or more operators. As Vitesse Energy Finance’s operators convert
undeveloped acreage into flowing horizontal wells, our interests in the leasehold acreage and minerals are converted
into cash flows produced by the new wells. Vitesse Energy Finance has acquired more than 44,500 net acres of Bakken
leaseholds and has an interest in approximately 4,600 producing wells (95 net wells) with current production as of
November 2018 in excess of 9,000 barrels of oil equivalent per day. Vitesse Energy Finance also has over 1,150 gross
wells (29 net wells) that are currently drilling, completing, shut- in for offset completion activity or permitted for drilling.
Our strategic priorities for Vitesse Energy Finance are to selectively add to our core acreage, participate in future profitable
horizontal wells, increase aggregate cash flow, limit volatility of cash flow from flowing wells by appropriately hedging
oil and profitably sell selective assets when appropriate. The net book value of our investment in Vitesse Energy Finance
was $532.8 million at November 30, 2018.
HomeFed
We own 70% of HomeFed, a developer and owner of residential and mixed- use real estate properties in California, New
York, Florida, Virginia, South Carolina and Maine. After many years in the entitlement process, the majority of HomeFed’s
assets are now either operating real estate or entitled land ready for sale. HomeFed is a public company traded on the
NASD OTC Bulletin Board (Symbol: HOFD). We own 70% of HomeFed’s common stock; however, our voting rights
are limited such that we are not able to vote more than 45% of HomeFed’s total voting securities voting on any
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matter. Resulting from a 1998 distribution to all of our shareholders, about 5% of HomeFed is beneficially owned by
our Chairman at November 30, 2018. Three of our executives serve on the board of directors of HomeFed, including our
Chairman who serves as HomeFed’s Chairman, and our President. At November 30, 2018, our investment had a net
book value of $337.5 million and we report HomeFed as an equity investment in our financial statements.
Idaho Timber
Idaho Timber manufactures and distributes an extensive range of quality wood products to markets across North
America. Its activities include remanufacturing dimension lumber; remanufacturing, bundling and bar coding of home
center boards for large retailers; and production of pine dimension lumber and 5/4” radius- edge, pine decking. In addition
to its headquarters in Meridian, Idaho, Idaho Timber has plants in Idaho, Arkansas, Florida, Louisiana, New Mexico,
North Carolina and Texas. The net book value of our investment in Idaho Timber was $78.2 million at November 30,
2018.
FXCM
FXCM is a provider of online foreign exchange trading, contract for difference trading, spread betting and related
services. Its mission is to provide global traders with access to the world’s largest and most liquid market by offering
innovative trading tools, hiring excellent trading educators, meeting strict financial standards and striving for the best
online trading experience in the market.
During 2015, we invested $279.0 million in FXCM through a combination of a term loan now due in the first quarter
of 2019 and rights to up to 75% of all future distributions. We also have the right to appoint three of the six board
members of FXCM. We have had the right, as has Global Brokerage Holdings, LLC (“Global Brokerage Holdings”),
the owner of the remaining 50% voting interest of FXCM that is not held by Jefferies, to require a sale of FXCM
beginning in January 2018. Distributions to Jefferies are currently: 100% until amounts due under the loan are repaid;
50% of the next $350 million; then 90% of the next $600 million; and 60% of all amounts thereafter. Through
November 30, 2018, we have received cumulatively $349.8 million of principal, interest and fees from our initial $279.0
million investment in FXCM. At November 30, 2018, the remaining principal due under the term loan was $67.6 million
and the interest rate is 20.5%. We include this loan receivable in our Consolidated Statements of Financial Condition in
Trading assets at its fair value of $73.2 million. Our 50% voting interest and share of distributions are reflected as an
equity method investment and classified as Loans to and investments in associated companies. At November 30, 2018,
our equity method investment is recorded at $75.0 million, and the total amount of both our term loan and equity method
investment is $148.2 million.
WeWork
Founded in 2010, WeWork creates collaborative office communities that are responsive to the productivity needs and
stylistic preferences of today’s mobile, creative workforce. WeWork provides incubator- like space with small offices
and hip common areas meant to promote interaction. WeWork serves a range of customers, from startups and small
businesses to large enterprises. In addition to physical space, the company provides services, events and technologies
designed to connect members within the WeWork ecosystem. We invested $9.0 million in 2013 in WeWork and have
realized $12.7 million in cash to date. We currently own less than 1% of the company. Our interest in WeWork is reflected
in Trading assets in our financial statements and is carried at fair value. The net book value of our investment in WeWork
was $254.4 million at November 30, 2018.
Financial Information about Segments
Our operating and reportable segments consist of Jefferies Group, Merchant Banking and Corporate. Our Merchant
Banking segment included LAM and Berkadia prior to their transfer to Jefferies Group in the fourth quarter of 2018,
and Garcadia, prior to its sale in August 2018. Our financial information regarding our reportable segments is contained
in Note 29, in our consolidated financial statements.
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Information about Jefferies on the Internet
We file annual, quarterly and current reports and other information with the SEC. These SEC filings are also available
to the public from commercial document retrieval services and the website maintained by the SEC at www.sec.gov.
The following documents and reports are available on or through our website (www.jefferies.com) as soon as reasonably
practicable after we electronically file such materials with, or furnish to, the SEC, as applicable:
• Code of Business Practice;
• Reportable waivers, if any, from our Code of Business Practice by our executive officers;
• Board of Directors Corporate Governance Guidelines;
• Charter of the Audit Committee of the Board of Directors;
• Charter of the Nominating and Corporate Governance Committee of the Board of Directors;
• Charter of the Compensation Committee of the Board of Directors;
• Annual reports on Form 10-K;
• Quarterly reports on Form 10-Q;
• Current reports on Form 8-K;
• Beneficial ownership reports on Forms 3, 4 and 5; and
• Any amendments to the above- mentioned documents and reports.
Shareholders may also obtain a printed copy of any of these documents or reports free of charge by sending a request to
Jefferies Financial Group Inc., Investor Relations, 520 Madison Avenue, New York, NY 10022 or by calling
(212) 460-1900.
Item 1A. Risk Factors.
Our business is subject to a number of risks. You should carefully consider the following risk factors, together with all
of the other information included or incorporated by reference in this report, before you decide whether to purchase our
securities. The risks set out below are not the only risks we face. In addition to the specific risks mentioned in this report,
we may also be affected by other factors that affect businesses generally such as global or regional changes in economic,
business or political conditions, acts of war, terrorism or natural disasters. If any of such risks occur, our business,
financial condition and results of operations could be materially adversely affected. In such case, the trading price of
our securities could decline, and you may lose all or part of your investment.
We have also set forth certain specific risks associated with certain of our investments. The inclusion or non- inclusion
of these risks for specific investments should not be interpreted to mean that a mentioned or non- mentioned investment
is more or less important or material than another. Additionally, some of our investments are in securities of issuers that
file reports with the SEC. You should also carefully consider the additional risks disclosed by those issuers with the SEC
as those risks may also impact your investment in our securities.
Future acquisitions and dispositions of our businesses and investments are possible, changing the components
of our assets and liabilities, and if unsuccessful or unfavorable, could reduce the value of our securities. Any
future acquisitions or dispositions may result in significant changes in the composition of our assets and liabilities, as
well as our business mix and prospects. Consequently, our financial condition, results of operations and the trading price
of our securities may be affected by factors different from those affecting our financial condition, results of operations
and trading price at the present time.
We face numerous risks and uncertainties as we expand our business. We expect the growth and development of
our business to come primarily from internal expansion and through acquisitions, investments, and strategic partnering. As
we expand our business, there can be no assurance that financial controls, the level and knowledge of personnel,
operational abilities, legal and compliance controls and other corporate support systems will be adequate to manage our
business and growth. The ineffectiveness of any of these controls or systems could adversely affect our business and
prospects. In addition, if we acquire new businesses and introduce new products, we face numerous risks and uncertainties
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integrating their controls and systems, including financial controls, accounting and data processing systems, management
controls and other operations. A failure to integrate these systems and controls, and even an inefficient integration of
these systems and controls, could adversely affect our business and prospects.
Certain business initiatives, including expansions of existing businesses, may bring us into contact directly or indirectly,
with individuals and entities that are not within our traditional client and counterparty base and may expose us to new
asset classes and new markets. These business activities expose us to new and enhanced risks, greater regulatory scrutiny
of these activities, increased credit- related, sovereign and operational risks, and reputational concerns regarding the
manner in which these assets are being operated or held.
Our business, financial condition and results of operations are dependent upon those of our individual businesses,
and our aggregate investments in particular industries. We are a holding company with investments in businesses
and assets in a number of industries. Jefferies Group is our largest investment and we have significant additional
investments in the financial services industry. Our business, financial condition and results of operations are dependent
upon our various businesses and investments. Any material adverse change in one of our businesses or investments, or
in a particular industry in which we operate or invest, may cause material adverse changes to our business, financial
condition and results of operations. The more capital we devote to a particular investment or industry may increase the
risk that such investment could significantly impact our financial condition and results of operations, possibly in a
material adverse way.
Conditions in the financial markets and the economy may adversely impact our businesses and
investments. These include economic conditions that may be specific to the industries in which our businesses and
investments operate, as well as a general economic slowdown, prolonged recession or other market downturn or
disruption. Adverse impacts may include the following:
• A market downturn could lead to a decline in client and customer activity levels, and therefore a decline in
services provided, causing reduced revenues from fees, commissions, spreads and other forms of revenue.
• Adverse changes in the market could lead to decreases in the value of our holdings, both realized and
unrealized.
• Adverse changes in the market could also lead to a reduction in revenues from asset management fees and
investment income from managed funds. The build out of our asset management business could also be
impacted as adverse conditions could lead to a decrease in new capital raised and may cause investors to
withdraw their investments and commitments. Even in the absence of a market downturn, below- market
investment performance by funds and portfolio managers could reduce asset management revenues and
assets under management and result in reputational damage that might make it more difficult to attract new
investors.
• Limitations on the availability of credit, such as occurred during 2008, can affect the ability of our businesses
and investments to borrow on a secured or unsecured basis, which may adversely affect liquidity and results
of operations. Global market and economic conditions have been particularly disrupted and volatile in the
last several years and may be in the future. Cost and availability of funding could be affected by illiquid
credit markets and wider credit spreads.
• Certain of our current and future businesses and investments may require additional third- party funding to
succeed, such as venture capital funding, joint venture funding or other third- party capital. Failure to obtain
such third- party funding may cause such business, investment or prospective investment to fail or progress
slower than expected which could adversely affect its and our funding, liquidity, operations and profitability.
In addition, such failure could also adversely affect our reputation which could adversely affect our business
and future business prospects.
• Additional changes in tax law could impact our ability to utilize our deferred tax assets, decrease current
and anticipated cash flows, or prompt revisions to compensation arrangements.
• Should one or more of the competitors of our businesses or investments fail, business prospects and revenue
could be negatively impacted due to negative market sentiment causing customers to cease doing business
with, and lenders to cease extending credit to, our businesses and investments, which could adversely affect
our operations, funding and liquidity.
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• Unfavorable economic conditions could have an adverse effect on the demand for new loans and the servicing
of loans originated by third parties, which would have an adverse impact on the operations and profitability
of some of our financial services businesses and investments.
• Unfavorable conditions or changes in general political, economic or market conditions could adversely
impact our business and prospects. In particular, the increasing trend toward sovereign protectionism and
deglobalization resulting from the current populist political movement has resulted or could result in
decreases in free trade, erosion of traditional international coalitions, the imposition of sanctions and tariffs,
governmental closures and no- confidence votes, domestic and international strife, and general market
upheaval in response to such results, all of which could negatively impact our business and prospects.
We are exposed to market risk. We are, directly and indirectly, affected by changes in market conditions. Market risk
generally represents the risk that values of assets and liabilities or revenues will be adversely affected by changes in
market conditions. For example, changes in interest rates could adversely affect our net interest spread, the difference
between the yield we earn on our assets and the interest rate we pay for sources of funding, which, in turn, impacts our
net interest revenue and earnings. Changes in interest rates could affect the interest earned on assets differently than
interest paid on liabilities. In our brokerage operations, a rising interest rate environment generally results in our earning
a larger net interest spread. Conversely, in those operations, a falling interest rate environment generally results in our
earning a smaller net interest spread. If we are unable to effectively manage our interest rate risk, changes in interest
rates could have a material adverse effect on our profitability.
Market risk is inherent in the financial instruments associated with our operations and activities, including trading
account assets and liabilities, loans, securities, short- term borrowings, corporate debt, and derivatives. Market conditions
that change from time to time, thereby exposing us to market risk, include fluctuations in interest rates, equity prices,
relative exchange rates, and price deterioration or changes in value due to changes in market perception or actual credit
quality of an issuer.
In addition, disruptions in the liquidity or transparency of the financial markets may result in our inability to sell,
syndicate, or realize the value of security positions, thereby leading to increased concentrations. The inability to reduce
our positions in specific securities may not only increase the market and credit risks associated with such positions, but
also increase the level of risk- weighted assets on our balance sheet, thereby increasing capital requirements, which could
have an adverse effect on our business, results of operations, financial condition and liquidity.
Our principal trading and investments expose us to risk of loss. A considerable portion of our revenues is derived
from trading in which we act as principal. We may incur trading losses relating to the purchase, sale or short sale of
fixed income, high yield, international, convertible, and equity securities, loans and futures and commodities for our
own account. In any period, we may experience losses on our positions as a result of price fluctuations, lack of trading
volume, and illiquidity. From time to time, we may engage in a large block trade in a single security or maintain large
position concentrations in a single security, securities of a single issuer, securities of issuers engaged in a specific industry,
or securities from issuers located in a particular country or region. In general, because certain of our investments are
marked to market on a daily basis, any adverse price movement in these investments could result in a reduction of our
revenues and profits. In addition, we may engage in hedging transactions that if not successful, could result in losses.
Damage to our reputation could damage our business. Maintaining our reputation is critical to our attracting and
maintaining customers, investors and employees. If we fail to deal with, or appear to fail to deal with, various issues that
may give rise to reputational risk, we could significantly harm our business prospects. These issues include, but are not
limited to, any of the risks discussed in this Item 1A, appropriately dealing with potential conflicts of interest, legal and
regulatory requirements, ethical issues, money- laundering, cybersecurity and privacy, record keeping, sales and trading
practices, failure to sell securities we have underwritten at the anticipated price levels, and the proper identification of
the legal, reputational, credit, liquidity and market risks inherent in our products. A failure to deliver appropriate standards
of service and quality, or a failure or perceived failure to treat customers and clients fairly, can result in customer
dissatisfaction, litigation and heightened regulatory scrutiny, all of which can lead to lost revenue, higher operating costs
and harm to our reputation. Further, negative publicity regarding us, whether or not true, may also result in harm to our
prospects. Our operations in the past have been impacted as some clients either ceased doing business or temporarily
slowed down the level of business they do, thereby decreasing our revenue. There is no assurance that we will be able to
successfully reverse the negative impact of allegations and rumors in the future and our potential failure to do so could
have a material adverse effect on our business, financial condition and liquidity.
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We may incur losses if our risk management is not effective. We seek to monitor and control our risk exposure. Our
risk management processes and procedures are designed to limit our and certain of our subsidiaries’ exposure to
acceptable levels as we conduct our businesses. We and certain of our subsidiaries apply comprehensive frameworks of
limits on a variety of key metrics to constrain the risk profile of our business activities. The size of the limits reflects risk
tolerance for certain activities. The frameworks may include inventory position and exposure limits on a gross and net
basis, scenario analysis and stress tests, value- at- risk, sensitivities, exposure concentrations, aged inventory, amount of
Level 3 assets, counterparty exposure, leverage, cash capital, and performance analysis. While we and certain of our
subsidiaries employ various risk monitoring and risk mitigation techniques, those techniques and the judgments that
accompany their application, including risk tolerance determinations, cannot anticipate every economic and financial
outcome or the specifics and timing of such outcomes. As a result, we may incur losses notwithstanding our risk
management processes and procedures.
Operational risks may disrupt our business, result in regulatory action against us or limit our growth. Our
businesses are highly dependent on our ability to process, on a daily basis, a large number of transactions across numerous
and diverse markets in many currencies, and the transactions we process have become increasingly complex. If any of
our financial, accounting or other data processing systems do not operate properly or are disabled or if there are other
shortcomings or failures in our internal processes, people or systems, we could suffer an impairment to our liquidity,
financial loss, a disruption of our businesses, liability to clients, regulatory intervention or reputational damage. These
systems may fail to operate properly or become disabled as a result of events that are wholly or partially beyond our
control, including a disruption of electrical or communications services or our inability to occupy one or more of our
buildings. The inability of our systems to accommodate an increasing volume of transactions could also constrain our
ability to expand our businesses.
Certain of our financial and other data processing systems rely on access to and the functionality of operating systems
maintained by third parties. If the accounting, trading or other data processing systems on which we are dependent are
unable to meet increasingly demanding standards for processing and security or, if they fail or have other significant
shortcomings, we could be adversely affected. Such consequences may include our inability to effect transactions and
manage our exposure to risk.
In addition, despite the contingency plans we and certain of our subsidiaries have in place, our ability to conduct business
may be adversely impacted by a disruption in the infrastructure that supports our businesses and the communities in
which they are located. This may include a disruption involving electrical, communications, transportation or other
services used by us or third parties with which we conduct business.
We rely on the security of our information technology systems and those of our third party providers to protect
our proprietary information and information of our customers. Some of our businesses involve the storage and
transmission of customers’ personal and/or identifying information, consumer preferences and credit card information.
While we believe that we have implemented protective measures to effectively secure information and prevent security
breaches, and we continue to assess and improve these measures, our information technology systems have been and
may continue to be vulnerable to unauthorized access, computer hacking, computer viruses or other unauthorized attempts
by third parties to access the proprietary information of our customers. Information technology breaches and failures
could disrupt our ability to function in the normal course of business resulting in lost revenue, the disclosure or
modification of sensitive or confidential information and the incurrence of remediation and notification costs, resulting
in legal and financial exposure. Moreover, loss of confidential customer identification information could harm our
reputation and subject us to liability under laws that protect confidential personal data, resulting in increased costs or
loss of revenues.
Our information and technology systems are critical components of our business and operations, and a failure
of those systems or other aspects of our operations infrastructure may disrupt our business, cause financial loss,
increase our legal liability and constrain our growth. Our operations rely extensively on the secure processing, storage
and transmission of confidential financial, personal and other information in our computer systems and networks.
Although we take protective measures and devote significant resources to maintaining and upgrading our systems and
networks with measures such as intrusion and detection prevention systems, monitoring firewalls to safeguard critical
business applications and supervising third party providers that have access to our systems, our computer systems,
software and networks may be vulnerable to unauthorized access, computer viruses or other malicious code, and other
events that could have a security impact. Additionally, if a client’s computer system, network or other technology is
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compromised by unauthorized access, we may face losses or other adverse consequences by unknowingly entering into
unauthorized transactions. If one or more of such events occur, this potentially could jeopardize our or our clients’ or
counterparties’ confidential and other information processed and stored in and transmitted through our computer systems
and networks. Furthermore, such events may cause interruptions or malfunctions in our, our clients’, our counterparties’
or third parties’ operations, including the transmission and execution of unauthorized transactions. We may be required
to expend significant additional resources to modify our protective measures or to investigate and remediate
vulnerabilities or other exposures, and we may be subject to litigation and financial losses that are either not covered or
not fully covered through our insurance. The increased use of smartphones, tablets and other mobile devices as well as
cloud computing may also heighten these and other operational risks. Similar to other firms, we and our third party
providers continue to be the subject of attempted unauthorized access, computer viruses and malware, and cyber attacks
designed to disrupt or degrade service or cause other damage and denial of service. Additional challenges are posed by
external parties, including foreign state actors. There can be no assurance that such unauthorized access or cyber incidents
will not occur in the future, and they could occur more frequently and on a larger scale.
We are also subject to laws and regulations relating to the privacy of the information of our clients, employees or others,
and any failure to comply with these regulations could expose us to liability and/or reputational damage. In addition,
our businesses are increasingly subject to laws and regulations relating to surveillance, encryption and data on- shoring
in the jurisdictions in which we operate. Compliance with these laws and regulations may require us to change our
policies, procedures and technology for information security, which could, among other things, make us more vulnerable
to cyber attacks and misappropriation, corruption or loss of information or technology.
Any cyber attack or other security breach of our technology systems, or those of our clients or other third- party
vendors we rely on, could subject us to significant liability and harm our reputation. Our operations rely heavily
on the secure processing, storage and transmission of sensitive and confidential financial, personal and other information
in our computer systems and networks. There have been several highly publicized cases involving financial services
companies reporting the unauthorized disclosure of client or other confidential information in recent years, as well as
cyber attacks involving theft, dissemination and destruction of corporate information or other assets, in some cases as a
result of failure to follow procedures by employees or contractors or as a result of actions by third parties. Like other
financial services firms, we have been the target of attempted cyber attacks. Cyber attacks can originate from a variety
of sources, including third parties affiliated with foreign governments, organized crime or terrorist organizations. Third
parties may also attempt to place individuals within our firm or induce employees, clients or other users of our systems
to disclose sensitive information or provide access to our data, and these types of risks may be difficult to detect or
prevent. Although cybersecurity incidents among financial services firms are on the rise, we are not aware of any material
losses relating to cyber attacks or other information security breaches. However, the techniques used in these attacks are
increasingly sophisticated, change frequently and are often not recognized until launched. Although we seek to maintain
a robust suite of authentication and layered information security controls, these controls could fail to detect, mitigate or
remediate these risks in a timely manner. Despite our implementation of protective measures and endeavoring to modify
them as circumstances warrant, our computer systems, software and networks may be vulnerable to human error, natural
disasters, power loss, spam attacks, unauthorized access, distributed denial of service attacks, computer viruses and
other malicious code, and other events that could result in significant liability and damage to our reputation, and have
an ongoing impact on the security and stability of our operations.
We also rely on numerous third- party service providers to conduct other aspects of our business operations, and we face
similar risks relating to them. While we regularly conduct security assessments on these third- party vendors, we cannot
be certain that their information security protocols are sufficient to withstand a cyber attack or other security breach. In
addition, in order to access our products and services, our customers may use computers and other devices that are
beyond our security control systems and processes.
Notwithstanding the precautions we take, if a cyber attack or other information security breach were to occur, this could
jeopardize the information we confidentially maintain, or otherwise cause interruptions in our operations or those of
our clients and counterparties, exposing us to liability. As attempted attacks continue to evolve in scope and sophistication,
we may be required to expend substantial additional resources to modify or enhance our protective measures, to
investigate and remediate vulnerabilities or other exposures or to communicate about cyber attacks to our customers.
Though we have insurance against some cyber risks and attacks, we may be subject to litigation and financial losses that
exceed our policy limits or are not covered under any of our current insurance policies. A technological breakdown could
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also interfere with our ability to comply with financial reporting and other regulatory requirements, exposing us to
potential disciplinary action by regulators. Additionally, the SEC issued guidance in February 2018 stating that, as a
public company, we are expected to have controls and procedures that relate to cybersecurity disclosure, and are required
to disclose information relating to certain cyber attacks or other information security breaches in disclosures required to
be made under the federal securities laws. Further, successful cyber attacks at other large financial institutions or other
market participants, whether or not we are affected, could lead to a general loss of customer confidence in financial
institutions that could negatively affect us, including harming the market perception of the effectiveness of our security
measures or the financial system in general, which could result in a loss of business.
Further, in light of the high volume of transactions we process, the large number of our clients, partners and counterparties,
and the increasing sophistication of malicious actors, a cyber attack could occur and persist for an extended period of
time without detection. We expect that any investigation of a cyber attack would take substantial amounts of time, and
that there may be extensive delays before we obtain full and reliable information. During such time we would not
necessarily know the extent of the harm or how best to remediate it, and certain errors or actions could be repeated or
compounded before they are discovered. All of which would further increase the costs and consequences of such an attack.
We may also be subject to liability under various data protection laws. In providing services to clients, we manage, utilize
and store sensitive or confidential client or employee data, including personal data. As a result, we are subject to numerous
laws and regulations designed to protect this information, such as U.S. federal, state and international laws governing the
protection of personally identifiable information. These laws and regulations are increasing in complexity and number. If
any person, including any of our associates, negligently disregards or intentionally breaches our established controls with
respect to client or employee data, or otherwise mismanages or misappropriates such data, we could be subject to significant
monetary damages, regulatory enforcement actions, fines and/or criminal prosecution. In addition, unauthorized disclosure
of sensitive or confidential client or employee data, whether through system failure, employee negligence, fraud or
misappropriation, could damage our reputation and cause us to lose clients and related revenue. Potential liability in the
event of a security breach of client data could be significant. Depending on the circumstances giving rise to the breach,
this liability may not be subject to a contractual limit or an exclusion of consequential or indirect damages.
Recent legislation and new and pending regulation may significantly affect Jefferies Group or our other businesses
and investments. In recent years, there has been significant legislation and increased regulation affecting the financial
services industry. In addition, there has also been recent discussions of proposed legislative and regulatory changes that
would also affect the financial services industry. These legislative and regulatory initiatives affect not only us (particularly
Jefferies Group, Berkadia and FXCM) but also our competitors and certain of our clients and customers. These changes
could have an effect on our revenue and profitability, limit our ability to pursue certain business opportunities, impact
the value of assets that we hold, require us to change certain business practices, impose additional costs on us and
otherwise adversely affect our business. Accordingly, we cannot provide assurance that legislation and regulation will
not eventually have an adverse effect on our business, results of operations, cash flows and financial condition.
Extensive regulation of our businesses limits our activities, and, if we violate these regulations, we may be subject
to significant penalties. The financial services industry is subject to extensive laws, rules and regulations in every
country in which we operate. Firms that engage in trading, wealth and asset management and investment banking must
comply with the laws, rules and regulations imposed by national and state governments and regulatory and self- regulatory
bodies with jurisdiction over such activities. Such laws, rules and regulations cover all aspects of the financial services
business, including, but not limited to, sales and trading methods, trade practices, use and safekeeping of customers’
funds and securities, capital structure, anti- money laundering and anti- bribery and corruption efforts, recordkeeping and
the conduct of directors, officers and employees.
Regulators supervise certain of our business activities to monitor our compliance with such laws, rules and regulations
in the relevant jurisdiction. In addition, if there are instances in which our regulators question our compliance with laws,
rules, and regulations, they may investigate the facts and circumstances to determine whether we have complied. At any
moment in time, we may be subject to one or more such investigation or similar review. At this time, all such investigations
and similar reviews are insignificant in scope and immaterial to us. However, there can be no assurance that, in the
future, we will not violate such laws, rules, or regulations and such investigations and similar reviews will not result in
adverse regulatory requirements, regulatory enforcement actions and/or fines.
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Any violation of these laws, rules and regulations could subject us to one or more of the following events: civil and
criminal liability; sanctions, which could include the revocation of registrations as registered financial service firms
(including registered investment advisers and broker- dealers); the revocation of the licenses of our financial advisers;
censures; fines; or a temporary suspension or permanent bar from conducting business. The occurrence of any of these
events could have a material adverse effect on our business, financial condition and prospects.
Certain of our subsidiaries are subject to regulatory financial capital holding requirements, such as the Net Capital Rule,
that could impact various capital allocation decisions or limit the operations of its broker- dealers. In particular, compliance
with the Net Capital Rule may restrict a broker- dealers’ ability to engage in capital- intensive activities such as
underwriting and trading, and may also limit their ability to make loans, advances, dividends and other payments.
Additional legislation, changes in rules, changes in the interpretation or enforcement of existing laws and rules, conflicts
and inconsistencies among rules and regulations, or the entering into businesses that subject us to new rules and
regulations may directly affect our business, results of operations and financial condition. We continue to monitor the
impact of new U.S. and international regulation on our businesses.
The United Kingdom’s exit from the European Union could adversely affect our businesses and investments.
The referendum held in the U.K. on June 23, 2016 resulted in a determination that the U.K. should exit the European
Union. In March 2017, the U.K. government initiated the exit process under Article 50 of the Treaty of the EU,
commencing a period of up to two years for the United Kingdom and the other EU member states to negotiate the terms
of the withdrawal. The uncertainty surrounding the timing, terms and consequences of the U.K.’s exit could adversely
impact customer and investor confidence, result in additional market volatility, and adversely affect Jefferies Group,
FXCM, as well as certain of Spectrum’s subsidiaries, particularly those with operations or customers in Europe.
Jefferies Group operates substantial parts of its EU businesses from entities based in the U.K. Upon the U.K. leaving the
EU, the regulatory and legal environment that would then exist, and to which its U.K. operations would then be subject,
will depend on, in certain respects, the nature of the arrangements the U.K. agreed with the EU and other trading partners.
It is highly likely that changes to its legal entity structure and operations in Europe will be required as a result of these
arrangements, which might result in a less efficient operating model across its European legal entities. Jefferies Group
is in the process of finalizing plans to ensure its continued ability to operate in the U.K. and the EU beyond the expected
exit date.
A credit rating agency downgrade could significantly impact our businesses. We and Jefferies Group have credit
ratings issued by various credit rating agencies. Maintaining our credit ratings is important to our and Jefferies Group’s
business and financial condition. We advised certain credit rating agencies that we would target specific concentration,
leverage and liquidity principles, expressed in the form of certain ratios and percentages. A failure to meet these ratios
and percentages could trigger a ratings downgrade. We and Jefferies Group intend to access capital markets and issue
debt securities from time to time, and a ratings downgrade may decrease demand for such offered security. A decrease
in demand would not only make a successful financing more difficult, but also increase our respective capital costs.
Similarly, our and Jefferies Group’s access to other forms of credit may be limited and our respective borrowing costs
may increase if our or Jefferies Group’s credit ratings are downgraded. A downgrade could also negatively impact our
and Jefferies Group’s outstanding debt prices and our stock price. In addition, in connection with certain over- the- counter
derivative contract arrangements and certain other trading arrangements, a ratings downgrade could cause us or Jefferies
Group to provide additional collateral to counterparties, exchanges and clearing organizations which would negatively
impact our and Jefferies Group’s liquidity and financial condition. There can be no assurance that our or Jefferies Group’s
credit ratings will not be downgraded.
In addition, if Berkadia does not maintain specified servicer ratings from the credit rating agencies, customers would
have the right to terminate their mortgage servicing agreements. If mortgage servicing agreements were terminated as
a result of a servicer ratings downgrade, we could lose a significant portion of the value of our equity investment.
Increased competition may adversely affect our revenues and profitability. Many aspects of our business are
intensely competitive. We compete directly with a number of bank holding companies and commercial banks, broker-
dealers, investment banking firms and other financial institutions. In addition to competition from firms currently in the
securities business, there has been increasing competition from others offering financial services, including automated
trading and other services based on technological innovations. We believe that the principal factors affecting competition
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involve market focus, reputation, the abilities of professional personnel, the ability to execute the transaction, relative
price of the service and products being offered, bundling of products and services and the quality of products and
service. Increased competition or an adverse change in our competitive position could lead to a reduction of business
and therefore a reduction of revenues and profits.
The ability to attract, develop and retain highly skilled and productive employees is critical to the success of our
business. Our ability to develop and retain our clients depends on the reputation, judgment, business generation
capabilities and skills of our professionals. To compete effectively, we must attract, retain and motivate qualified
professionals, including successful financial advisers, investment bankers, trading professionals, portfolio managers and
other revenue producing or specialized personnel. Competitive pressures we experience with respect to employees could
have an adverse effect on our business, results of operations, financial condition and liquidity.
Turnover in the financial services industry is high. The cost of retaining skilled professionals in the financial services
industry has escalated considerably. Financial industry employers are increasingly offering guaranteed contracts, upfront
payments, and increased compensation. These can be important factors in a current employee’s decision to leave us as
well as in a prospective employee’s decision to join us. As competition for skilled professionals in the industry remains
intense, we may have to devote significant resources to attracting and retaining qualified personnel.
If we were to lose the services of certain of our professionals, we may not be able to retain valuable relationships and
some of our clients could choose to use the services of a competitor instead of our services. If we are unable to retain
our professionals or recruit additional professionals, our reputation, business, results of operations and financial condition
will be adversely affected. Further, new business initiatives and efforts to expand existing businesses frequently require
that we incur compensation and benefits expense before generating additional revenues.
Moreover, companies in our industries whose employees accept positions with competitors often claim that those
competitors have engaged in unfair hiring practices. We may be subject to such claims in the future as we seek to hire
qualified personnel who have worked for our competitors. Some of these claims may result in material litigation. We
could incur substantial costs in defending against these claims, regardless of their merits. Such claims could also
discourage potential employees who work for our competitors from joining us.
We could experience significant increases in operating costs and reduced profitability due to competition for
skilled management and staff employees in our operating businesses. We compete with many other entities for
skilled management and staff employees, including entities that operate in different market sectors than us. Costs to
recruit and retain adequate personnel could adversely affect results of operations.
Legal liability may harm our business. Many aspects of our businesses involve substantial risks of liability, and in the
normal course of business, we have been named as a defendant or codefendant in lawsuits involving primarily claims
for damages. The risks associated with potential legal liabilities often may be difficult to assess or quantify and their
existence and magnitude often remain unknown for substantial periods of time. The expansion of our businesses,
including expansions into new products or markets, impose greater risks of liability. In addition, unauthorized or illegal
acts of our employees could result in substantial liability. Substantial legal liability could have a material adverse financial
effect or cause us significant reputational harm, which in turn could seriously harm our businesses and our prospects.
Although our current assessment is that, other than as disclosed in this report, there is no pending litigation that could
have a significant adverse impact, if our assessment proves to be in error, then the outcome of litigation could have a
significant impact on our financial statements.
We may not be able to insure certain risks economically. We cannot be certain that we will be able to insure all risks
that we desire to insure economically or that all of our insurers or reinsurers will be financially viable if we make a
claim. If an uninsured loss or a loss in excess of insured limits should occur, or if we are required to pay a deductible for
an insured loss, results of operations could be adversely affected.
Recent U.S. tax legislation may have a material adverse effect on our financial condition, results of operations
and cash flows. On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted. This legislation has
made significant changes to the U.S. Internal Revenue Code, including the taxation of U.S. corporations by, among other
things, limiting interest deductions, limiting deductibility of certain executive compensation, reducing the U.S. corporate
income tax rate, disallowing certain deductions that had previously been allowed, altering the expensing of capital
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expenditures, adopting elements of a territorial tax system, assessing a repatriation tax or “transition tax” on undistributed
earnings and profits of U.S. owned foreign corporations, and introducing certain anti- base erosion provisions. The
legislation is highly complex and remains unclear in certain respects and will require final interpretations and regulations
by the Internal Revenue Service and state tax authorities. Additionally, the legislation could be subject to potential
amendments and technical corrections, any of which could lessen or increase certain adverse impacts of the legislation.
Thus, the impact of certain aspects of the legislation on us remains unclear and could have an adverse impact on our
financial condition, results of operations and cash flows.
We may not be able to generate sufficient taxable income to fully realize our deferred tax asset. At November 30,
2018, we have recognized net deferred tax assets of $512.8 million. If we are unable to generate sufficient taxable income,
we will not be able to fully realize the recorded amount of the net deferred tax asset. If we are unable to generate sufficient
taxable income prior to the expiration of our federal income tax net operating loss carryforwards (“NOLs”), all or a
portion of the NOLs would expire unused. Our projections of future taxable income required to fully realize the recorded
amount of the net deferred tax asset reflect numerous assumptions about our operating businesses and investments, and
are subject to change as conditions change specific to our business units, investments or general economic
conditions. Changes that are adverse to us could result in the need to increase the deferred tax asset valuation allowance
resulting in a charge to results of operations and a decrease to total shareholders’ equity.
If our tax filing positions were to be challenged by federal, state and local or foreign tax jurisdictions, we may
not be wholly successful in defending our tax filing positions. We record reserves for unrecognized tax benefits
based on our assessment of the probability of successfully sustaining tax filing positions. Management exercises
significant judgment when assessing the probability of successfully sustaining tax filing positions, and in determining
whether a contingent tax liability should be recorded and, if so, estimating the amount. If our tax filing positions are
successfully challenged, payments could be required that are in excess of reserved amounts or we may be required to
reduce the carrying amount of our net deferred tax asset, either of which result could be significant to our financial
condition or results of operations.
From time to time we may invest in illiquid securities that are subject to standstill agreements or are otherwise
restricted. From time to time we may invest in securities that are subject to restrictions which prohibit us from selling
the subject securities for a period of time. Such agreements may limit our ability to generate liquidity quickly through
the disposition of the underlying investment while the agreement is effective.
Our common shares are subject to transfer restrictions. We and certain of our subsidiaries have significant NOLs
and other tax attributes, the amount and availability of which are subject to certain qualifications, limitations and
uncertainties. In order to reduce the possibility that certain changes in ownership could result in limitations on the use
of the tax attributes, our certificate of incorporation contains provisions that generally restrict the ability of a person or
entity from acquiring ownership (including through attribution under the tax law) of 5% or more of our common shares
and the ability of persons or entities now owning 5% or more of our common shares from acquiring additional common
shares. The restriction will remain until the earliest of (a) December 31, 2024, (b) the repeal of Section 382 of the Internal
Revenue Code (or any comparable successor provision) and (c) the beginning of a taxable year to which these tax benefits
may no longer be carried forward. The restriction may be waived by our Board of Directors on a case by case
basis. Shareholders are advised to carefully monitor their ownership of our common shares and consult their own legal
advisers and/or us to determine whether their ownership of our common shares approaches the proscribed level.
Jefferies Group’s business is subject to significant credit risk. In the normal course of Jefferies Group’s businesses,
Jefferies Group is involved in the execution, settlement and financing of various customer and principal securities and
derivative transactions. These activities are transacted on a cash, margin or delivery- versus- payment basis and are subject
to the risk of counterparty or customer nonperformance. Although transactions are generally collateralized by the
underlying security or other securities, Jefferies Group still faces the risks associated with changes in the market value
of the collateral through settlement date or during the time when margin is extended and collateral has not been secured
or the counterparty defaults before collateral or margin can be adjusted. Jefferies Group may also incur credit risk in its
derivative transactions to the extent such transactions result in uncollateralized credit exposure to counterparties.
Jefferies Group seeks to control the risk associated with these transactions by establishing and monitoring credit limits
and by monitoring collateral and transaction levels daily. Jefferies Group may require counterparties to deposit additional
collateral or return collateral pledged. In certain circumstances, Jefferies Group may, under industry regulations, purchase
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the underlying securities in the market and seek reimbursement for any losses from the counterparty. However, there
can be no assurances that Jefferies Group’s risk controls will be successful.
Our investment in Berkadia may not prove to be successful and may adversely affect our results of operations
or financial condition. As of November 30, 2018, we had an approximately $245 million investment in Berkadia. Many
factors, most of which are outside of our control, can affect Berkadia’s business, including loan losses in excess of
reserves, a change in the relationships with U.S. Government- Sponsored Enterprises or federal agencies, a significant
loss of customers, and other factors that directly and indirectly effect the results of operations, including the sales and
profitability of Berkadia, and consequently may adversely affect our results of operations or financial condition.
If Berkadia suffered significant losses and was unable to repay its commercial paper borrowings, we would be
exposed to loss pursuant to a reimbursement obligation to Berkshire Hathaway. Berkadia obtains funds generated
by commercial paper sales of an affiliate of Berkadia. All of the proceeds from the commercial paper sales are used by
Berkadia to fund new mortgage loans, servicer advances, investments and other working capital requirements. Repayment
of the commercial paper is supported by a $1.5 billion surety policy issued by a Berkshire Hathaway insurance subsidiary
and a Berkshire Hathaway corporate guaranty, and we have agreed to reimburse Berkshire Hathaway for one- half of any
losses incurred thereunder. If Berkadia suffers significant losses and is unable to repay its commercial paper borrowings,
we would suffer losses to the extent of our reimbursement obligation to Berkshire Hathaway. As of November 30, 2018,
the aggregate amount of commercial paper outstanding was $1.47 billion.
Our semi- annual estimates of the fair values of holdings of certain of our merchant banking investments may
differ from what can be realized and how these investments are reflected in our financial statements prepared
in accordance with GAAP. During our October 2018 Investor Meeting and our January 10, 2019 letter to shareholders,
we disclosed certain estimated fair values of our merchant banking investments and disclosed our intention to provide
semi- annual disclosures relating to the estimated fair value of our holdings of certain merchant banking investments,
some of which are consolidated. These semi- annual estimates may differ from how these investments are reflected in
our financial statements prepared in accordance with GAAP. Factors to consider in connection with reviewing these
semi- annual estimates of fair value include, but are not limited to, the following:
• These estimates are forward- looking statements and should be read in connection with our Cautionary
Statement for Forward- Looking Information.
• Although we believe these estimates to be fair and reasonable, these semi- annual estimates may differ
materially from realized values or future estimates.
• Our semi- annual fair values are, indeed, estimates only and are subject to change.
• We may determine to change the timing of providing these semi- annual estimates or stop providing such
estimates at any time and for any reason.
• Management does not necessarily use these estimates in making business decisions regarding the operation
of our business or any decision relating to these investments.
• These estimates may constitute non- GAAP financial measures and should be read in connection with
disclosures relating to our use of non- GAAP financial measures.
Our investment in National Beef may not prove to be successful and may adversely affect our results of operations
or financial condition. As of November 30, 2018, we had an approximately $654 million investment in National Beef.
Many factors, most of which are outside of our control, can affect the prices and availability of key raw materials, beef
processing and manufacturing operations, labor relations, demand for the products offered, sales volume and prices,
regulatory compliance, legal liability, reputational issues concerning National Beef and/or its products, national and
international politics and other factors that directly and indirectly effect the results of operations, including the sales and
profitability of National Beef and consequently may adversely affect our results of operations.
The performance of our oil and gas production and development investments, Vitesse Energy Finance and JETX
Energy, is impacted by uncertainties specific to the oil and gas industry which we cannot control and may
adversely affect our results of operations or financial condition. As of November 30, 2018, we had an approximately
$641 million investment in Vitesse Energy Finance and JETX Energy. The oil and gas industry, by its nature, involves a
high degree of risk. The value of these investments may be impacted by changes in the prices of oil, gas and natural gas
liquids, which are affected by local, regional and global events or conditions that affect supply and demand and which
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have a history of significant price volatility. These investments are also exposed to changes in regulations affecting the
industry, which could increase our cost of compliance, increase taxes or reduce or delay business opportunities. In
addition, there are numerous uncertainties inherent in the estimation of future oil and gas production and future income
streams associated with production. As a result, actual results could materially differ from those we currently anticipate
and our ability to profitably grow these investments could be adversely affected.
Our investment in WeWork may not prove to be successful and may adversely affect our results of operations or
financial condition. As of November 30, 2018, we had an approximately $254 million investment in WeWork. Many
factors, most of which are outside of our control, can affect WeWork’s business, including the expansion of its business,
number of customers and other factors that directly and indirectly effect the results of operations, including the sales
and profitability of WeWork, and consequently may adversely affect our results of operations or financial condition.
Our investment in Spectrum Brands may not prove to be successful and may adversely affect our results of
operations or financial condition. As of November 30, 2018, we had an approximately $374 million investment in
Spectrum Brands. Many factors, most of which are outside of our control, can affect the results of operations, including
the sales and profitability of Spectrum Brands which can lead to changes in the market price of Spectrum Brand’s shares.
Adverse changes in the market price of Spectrum Brand’s shares may adversely affect our results of operations or financial
condition. For additional risk factors concerning Spectrum Brands, see its SEC filings.
Our investment in HomeFed may not prove to be successful and may adversely affect our results of operations
or financial condition. As of November 30, 2018, we had an approximately $338 million investment in HomeFed.
Many factors, most of which are outside of our control, can affect HomeFed’s business, including the state of the housing
market in general and other factors that directly or indirectly effect the results of operations, including the sales and
profitability of HomeFed, and consequently may adversely affect our results of operations or financial condition. For
additional risk factors concerning HomeFed, see its SEC filings.
Our investment in Linkem may not prove to be successful and may adversely affect our results of operations or
financial condition. As of November 30, 2018, we had an approximately $165 million investment in Linkem. Many
factors, most of which are outside of our control, can affect Linkem’s business, including the state of the Italian economy
and capital markets in general, competition in the Italian telecommunications markets and other factors that directly and
indirectly effect the results of operations, including the sales and profitability of Linkem, and consequently may adversely
affect our results of operations or financial condition.
Our investment in FXCM may not prove to be successful and may adversely affect our results of operations or
financial condition. As of November 30, 2018, we had an approximately $148 million investment in FXCM. Many
factors, most of which are outside of our control, can affect FXCM’s business, including the state of international market
and economic conditions which impact trading volume and currency volatility, changes in regulatory requirements and
other factors that directly or indirectly effect the results of operations, including the sales and profitability of FXCM,
and consequently may adversely affect our results of operations or financial condition.
Our investment in Idaho Timber may not prove to be successful and may adversely affect our results of operations
or financial condition. As of November 30, 2018, we had an approximately $78 million investment in Idaho Timber.
Many factors, most of which are outside of our control, can affect Idaho Timber’s business, including demand for its
products, prices and availability of raw materials and other factors that directly and indirectly effect the results operations,
including the sales and profitability of Idaho Timber, and consequently may adversely affect our results of operations or
financial condition.
Item 1B. Unresolved Staff Comments.
Not applicable.
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Item 2. Properties.
Our and Jefferies Group’s global executive offices and principal administrative offices are located at 520 Madison
Avenue, New York, New York under an operating lease arrangement.
Jefferies Group maintains additional offices in over 30 cities throughout the world including its European headquarters
in London and its Asian headquarters in Hong Kong. In addition, Jefferies Group maintains backup data center facilities
with redundant technologies for each of its three main data center hubs in Jersey City, London and Hong Kong. Jefferies
Group leases all of its office space, or contract via service arrangement, which management believes is adequate for its
business.
Idaho Timber’s plants, which are the principal properties used in its business, are described in Item 1 of this report.
Our businesses lease numerous other manufacturing, warehousing, office and headquarters facilities. The facilities vary
in size and have leases expiring at various times, subject, in certain instances, to renewal options. See Note 24 to our
consolidated financial statements.
Item 3. Legal Proceedings.
The information required by this Item 3 is incorporated by reference from the “Contingencies” section in Note 24 in the
Notes to consolidated financial statements in Item 8 of Part II of this report, which is incorporated herein by reference.
Item 4. Mine Safety Disclosures.
Not applicable.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities.
Our common shares are traded on the NYSE under the symbol JEF. As of January 18, 2019, there were approximately
1,455 record holders of the common shares.
We paid quarterly cash dividends of $0.125 per share for the last two quarters of 2018 and $0.10 per share for each of
the first two quarters of 2018. We paid quarterly cash dividends of $0.10 per share for the each of the last two quarters
of 2017 and $0.0625 per share for each of the first two quarters of 2017 and each quarter of 2016. We have indicated
our intention to pay quarterly dividends currently at the annual rate of $0.50 per common share. The payment of dividends
in the future is subject to the discretion of the Board of Directors and will depend upon general business conditions,
legal and contractual restrictions on the payment of dividends and other factors that the Board of Directors may deem
to be relevant.
Certain of our subsidiaries have significant NOLs and other tax attributes, the amount and availability of which are
subject to certain qualifications, limitations and uncertainties. In order to reduce the possibility that certain changes in
ownership could result in limitations on the use of our tax attributes, our certificate of incorporation contains provisions
which generally restrict the ability of a person or entity from acquiring ownership (including through attribution under
the tax law) of 5% or more of the common shares and the ability of persons or entities now owning 5% or more of the
common shares from acquiring additional common shares. The restrictions will remain in effect until the earliest of
(a) December 31, 2024, (b) the repeal of Section 382 of the Internal Revenue Code (or any comparable successor
provision) or (c) the beginning of a taxable year to which these tax benefits may no longer be carried forward.
In April 2018, the Board of Directors approved an increase to our existing share repurchase program, bringing total
common shares authorized for repurchase to 25,000,000. In July 2018, the Board of Directors approved another increase
to our share repurchase program, authorizing the repurchase of an additional 25,000,000 common shares. During the
eleven months ended November 30, 2018, we repurchased a total of 50,000,000 shares pursuant to this program.
Separately, during the eleven months ended November 30, 2018, we repurchased an aggregate of 222,857 shares in
connection with our share compensation plans which allow participants to use shares to satisfy certain tax liabilities
arising from the vesting of restricted shares and the distribution of restricted share units. The total number of shares
purchased does not include unvested shares forfeited back to us pursuant to the terms of our share compensation plans.
In January 2019, the Board of Directors approved an additional $500.0 million share repurchase authorization.
There were no unregistered sales of equity securities during the period covered by this report.
The following table presents information on our purchases of our common shares during the two months ended
November 30, 2018:
Total Number of
Total Shares Purchased as Maximum Number
Number of Average Part of Publicly of Shares that May Yet
Shares Price Paid Announced Plans Be Purchased Under the
Purchased (1) per Share or Programs Plans or Programs
____________ _________ ________________ ____________________
October 1, 2018 - October 31, 2018 . . . . . . . 11,759,622 $21.31 11,733,767 12,146,750
November 1, 2018 - November 30, 2018 (2) . 12,146,750 $21.57 12,146,750 –
_________ _________
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,906,372 23,880,517
_________ _________
_________ _________
(1) Includes an aggregate 25,855 shares repurchased other than as part of our publicly announced Board authorized
repurchase program. We repurchased these securities in connection with our share compensation plans which
allow participants to use shares to satisfy certain tax liabilities arising from the vesting of restricted shares and
the distribution of restricted share units. The total number of shares purchased does not include unvested shares
forfeited back to us pursuant to the terms of our share compensation plans.
(2) Includes 801,654 shares that settled in December 2018.
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Stockholder Return Performance Graph
Set forth below is a graph comparing the cumulative total stockholder return on our common shares against the
cumulative total return of the Standard & Poor’s 500 Stock Index and the Standard & Poor’s 500 Financials Index for
the period commencing December 31, 2013 to November 30, 2018. Index data was furnished by Standard & Poor’s
Capital IQ. The graph assumes that $100 was invested on December 31, 2013 in each of our common stock, the S&P
500 Index and the S&P 500 Financials Index and that all dividends were reinvested.
Comparison of Cumulative Five Year Total Return
$200
$150
$100
$50
$0
12/31/13
12/31/14
12/31/15
12/31/16
12/31/17
11/30/18
Jefferies Financial Group
S&P 500 Index
S&P 500 Financials Index
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Item 6. Selected Financial Data.
The following selected financial data have been summarized from our consolidated financial statements. They should
be read in conjunction with our consolidated financial statements and Item 7, Management’s Discussion and Analysis
of Financial Condition and Results of Operations of this report.
Eleven
Months
Ended
November 30, __________________________________________________________________________________
2018 2017 2016 2015 2014
______________________ ________ ________ ________ ________
(In thousands, except per share amounts)
Twelve Months Ended December 31,
Selected Statements of Operations Data (a)
Net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,764,034 $4,077,445 $3,035,374 $3,484,039 $3,654,061
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,524,957 3,396,042 3,202,564 3,113,869 3,371,063
Income (loss) related to associated companies . . . . . . . 57,023 (74,901) 154,598 110,281 138,527
Income (loss) from continuing operations before
income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 296,100 606,502 (12,592) 480,451 421,525
Income tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,008 642,286 25,773 142,744 177,636
Income (loss) from continuing operations . . . . . . . . . . . 277,092 (35,784) (38,365) 337,707 243,889
Income (loss) from discontinued operations, including
gain (loss) on disposal, net of taxes . . . . . . . . . . . . . . 773,984 288,631 232,686 (85,596) (44,864)
Net (income) loss attributable to the redeemable
noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . . (37,263) (84,576) (65,746) 26,543 8,616
Net income attributable to Jefferies Financial
Group common shareholders . . . . . . . . . . . . . . . 1,022,318 167,351 125,938 279,587 204,306
Per share:
Basic earnings (loss) per common share attributable to
Jefferies Financial Group common shareholders:
Income (loss) from continuing operations . . . . . . . . . $0.82 $(0.10) $(0.10) $ 0.90 $ 0.63
Income (loss) from discontinued operations,
including gain (loss) on disposal . . . . . . . . . . . . . . 2.11 0.55 0.44 (0.16) (0.09)
_____ ______ ______ ______ ______
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2.93 $ 0.45 $ 0.34 $ 0.74 $ 0.54
_____ ______ ______ ______ ______
_____ ______ ______ ______ ______
Diluted earnings (loss) per common share attributable
to Jefferies Financial Group common shareholders:
Income (loss) from continuing operations . . . . . . . . . $0.81 $(0.10) $(0.10) $ 0.90 $ 0.63
Income (loss) from discontinued operations,
including gain (loss) on disposal . . . . . . . . . . . . . . 2.09 0.55 0.44 (0.16) (0.09)
_____ ______ ______ ______ ______
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2.90 $ 0.45 $ 0.34 $ 0.74 $ 0.54
_____ ______ ______ ______ ______
_____ ______ ______ ______ ______
(a) Prior to the fourth quarter of 2018, because our fiscal year end was December 31, we reflected Jefferies Group
in our consolidated financial statements utilizing a one month lag. In connection with our change in fiscal year
end to November 30, we eliminated the one month lag utilized to reflect Jefferies Group results beginning with
the fourth quarter of 2018. Therefore, our results for the eleven months ended November 30, 2018, include
twelve month results for Jefferies Group and eleven months for the remainder of our results.
At
November 30, __________________________________________________________________________________
2018 2017 2016 2015 2014
______________________ ________ ________ ________ ________
(In thousands, except per share amounts)
Selected Statements of Financial Condition Data
At December 31,
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $47,131,095 $47,169,108 $45,071,307 $46,331,184 $52,614,324
Long- term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,617,563 7,885,783 7,380,443 7,400,582 8,519,584
Mezzanine equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144,779 551,593 461,809 316,633 311,686
Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,060,866 10,105,957 10,128,100 10,401,211 10,302,158
Book value per common share . . . . . . . . . . . . . . . . . . . . $32.72 $28.37 $28.18 $28.68 $28.03
Cash dividends per common share . . . . . . . . . . . . . . . . $0.45 $0.325 $0.25 $0.25 $0.25
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The purpose of this section is to discuss and analyze our consolidated financial condition, liquidity and capital resources
and results of operations. This analysis should be read in conjunction with the consolidated financial statements and
related footnote disclosures contained in this report and the following “Cautionary Statement for Forward- Looking
Information.”
Cautionary Statement for Forward- Looking Information
Statements included in this report may contain forward- looking statements. Such statements may relate, but are not
limited, to projections of revenues, income or loss, development expenditures, plans for growth and future operations,
competition and regulation, as well as assumptions relating to the foregoing. Such forward- looking statements are made
pursuant to the safe- harbor provisions of the Private Securities Litigation Reform Act of 1995.
Forward- looking statements are inherently subject to risks and uncertainties, many of which cannot be predicted or
quantified. When used in this report, the words “will,” “could,” “estimates,” “expects,” “anticipates,” “believes,” “plans,”
“intends” and variations of such words and similar expressions are intended to identify forward- looking statements that
involve risks and uncertainties. Future events and actual results could differ materially from those set forth in,
contemplated by or underlying the forward- looking statements.
Factors that could cause actual results to differ materially from any results projected, forecasted, estimated or budgeted
or may materially and adversely affect our actual results include, but are not limited to, those set forth in Item 1A. Risk
Factors and elsewhere in this report and in our other public filings with the SEC.
Undue reliance should not be placed on these forward- looking statements, which are applicable only as of the date hereof.
Except as may be required by law, we undertake no obligation to revise or update these forward- looking statements to
reflect events or circumstances that arise after the date of this report or to reflect the occurrence of unanticipated events.
Results of Operations
We are a diversified financial services company engaged in investment banking and capital markets, asset management
and direct investing. Jefferies Group, our largest subsidiary, is the largest independent full- service global investment
banking firm headquartered in the U.S.
In the fourth quarter of 2018, we changed our fiscal year end from a calendar year basis to a fiscal year ending on
November 30. Our 2018 fiscal year consists of the eleven month transition period beginning January 1, 2018 through
November 30, 2018. Financial statements for 2017 and 2016 continue to be presented on the basis of our previous
calendar year end. Jefferies Group has a November 30 year end. Prior to the fourth quarter of 2018, because our fiscal
year end was December 31, we reflected Jefferies Group in our consolidated financial statements utilizing a one month
lag. In connection with our change in fiscal year end to November 30, we eliminated the one month lag utilized to reflect
Jefferies Group results beginning with the fourth quarter of 2018. Therefore, our results for the eleven months ended
November 30, 2018, include twelve month results for Jefferies Group and eleven months for the remainder of our results.
During the second and third quarters of 2018, we closed three previously announced transactions that impacted our
results for the eleven months ended November 30, 2018. These include the sale of 48% of National Beef in June 2018,
reducing our ownership to 31%. We deconsolidated National Beef and are accounting for our remaining investment as
an equity method investment within our Merchant Banking business. In August 2018, we sold 100% of our equity interest
in Garcadia and our associated real estate. Vitesse Energy Finance also acquired a package of non- operated Bakken
assets for $190.0 million in April 2018, of which approximately $144.0 million was funded as equity.
Our pre- tax income from continuing and discontinued operations was $1.3 billion for the eleven months ended
November 30, 2018, significantly higher than $1.0 billion for the twelve months ended December 31, 2017. Income
from continuing operations before income taxes was $296.1 million for the eleven months ended November 30, 2018
as compared to $606.5 million for the twelve months ended December 31, 2017.
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Results for the eleven months ended November 30, 2018 include a pre- tax gain of $873.5 million, or $643.9 million net
of tax expense, from the National Beef transaction. This gain is reflected in our results as a gain on disposal of
discontinued operations. Our share of the results of National Beef prior to the transaction have also been reflected as
discontinued operations, including prior year amounts. Results for the eleven months ended November 30, 2018 include
the pre- tax gain of $221.7 million from the Garcadia transaction. The twelve months ended December 31, 2017 include
a pre- tax gain on the sale of Conwed Plastics (“Conwed”) of $178.2 million.
A number of other items also impacted comparability of 2018 with the prior year. Results for the eleven months ended
November 30, 2018 includes a mark- to- market decrease in the value of our investment in Spectrum Brands of $418.8
million, a mark- to- market increase in the value of our investment in WeWork of $70.9 million, a $62.1 million impairment
loss related to our investment in FXCM, a $47.9 million impairment loss related to Golden Queen Mining Company,
LLC (“Golden Queen”), a net loss at LAM and continued strong performance by Berkadia. The twelve months ended
December 31, 2017 includes a $130.2 million impairment loss related to FXCM and a mark- to- market increase in the
value of our investment in HRG Group, Inc. (“HRG”) of $64.8 million.
A summary of results of operations for the eleven months ended November 30, 2018 is as follows (in thousands):
Parent
Jefferies Merchant Company Consolidation
Group Banking Corporate Interest Adjustments Total
________________ ________________ __________________ ________________ _______________________ ________
Net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . $3,183,376 $571,831 $ 22,300 $ – $(13,473) $3,764,034
___________________ __________________ ________________ _______________ ________________ ___________________
Expenses:
Compensation and benefits . . . . . . . . . . . . . 1,736,264 77,169 50,222 – (873) 1,862,782
Cost of sales. . . . . . . . . . . . . . . . . . . . . . . . . – 307,071 – – – 307,071
Floor brokerage and clearing fees . . . . . . . . 189,068 – – – (4,858) 184,210
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . – 35,159 – 54,090 – 89,249
Depreciation and amortization . . . . . . . . . . 68,296 48,852 3,169 – – 120,317
Selling, general and other expenses. . . . . . . 780,081 150,115 35,049 – (3,917) 961,328
___________________ __________________ ________________ _______________ ________________ ___________________
Total expenses . . . . . . . . . . . . . . . . . . . . . 2,773,709 618,366 88,440 54,090 (9,648) 3,524,957
___________________ __________________ ________________ _______________ ________________ ___________________
Income (loss) from continuing operations
before income taxes and income related
to associated companies . . . . . . . . . . . . 409,667 (46,535) (66,140) (54,090) (3,825) 239,077
Income related to associated companies . . . . . – 57,023 – – – 57,023
___________________ __________________ ________________ _______________ ________________ ___________________
Income (loss) from continuing operations
___________________ __________________ ________________ _______________ ________________
___________________ __________________ ________________ _______________ ________________
before income taxes . . . . . . . . . . . . . . . $ 409,667 $ 10,488 $(66,140) $(54,090) $ (3,825) 296,100
Income tax provision from continuing
operations. . . . . . . . . . . . . . . . . . . . . . . . . . . 19,008
Income from discontinued operations,
net of income tax provision . . . . . . . . . . . . . 130,063
Gain on disposal of discontinued operations,
net of income tax provision . . . . . . . . . . . . 643,921
___________________
Net income . . . . . . . . . . . . . . . . . . . . . . . . $1,051,076
___________________
___________________
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A summary of results of operations for the twelve months ended December 31, 2017 is as follows (in thousands):
Parent
Jefferies Merchant Company Consolidation
Group Banking Corporate Interest Adjustments Total
_______________ _______________ __________________ ________________ ______________________ _______
Net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . $3,198,109 $876,180 $ 6,306 $ – $ (3,150) $4,077,445
___________________ __________________ __________________ _______________ ________________ ___________________
Expenses:
Compensation and benefits . . . . . . . . . . . . . 1,829,096 73,811 46,655 – 1,373 1,950,935
Cost of sales. . . . . . . . . . . . . . . . . . . . . . . . . – 280,952 – – – 280,952
Floor brokerage and clearing fees . . . . . . . . 179,478 – – – (4,972) 174,506
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . – 42,259 – 58,943 – 101,202
Depreciation and amortization . . . . . . . . . . 62,668 44,257 3,470 – – 110,395
Selling, general and other expenses. . . . . . . 621,943 131,627 34,983 – (10,501) 778,052
___________________ __________________ __________________ _______________ ________________ ___________________
Total expenses . . . . . . . . . . . . . . . . . . . . . 2,693,185 572,906 85,108 58,943 (14,100) 3,396,042
___________________ __________________ __________________ _______________ ________________ ___________________
Income (loss) from continuing operations
before income taxes and loss related to
associated companies . . . . . . . . . . . . . . 504,924 303,274 (78,802) (58,943) 10,950 681,403
Loss related to associated companies . . . . . . . – (74,901) – – – (74,901)
___________________ __________________ __________________ _______________ ________________ ___________________
Income (loss) from continuing operations
___________________ __________________ __________________ _______________ ________________
___________________ __________________ __________________ _______________ ________________
before income taxes . . . . . . . . . . . . . . . $ 504,924 $228,373 $(78,802) $(58,943) $ 10,950 606,502
Income tax provision from continuing
operations. . . . . . . . . . . . . . . . . . . . . . . . . . . 642,286
Income from discontinued operations,
net of income tax provision . . . . . . . . . . . . . 288,631
___________________
Net income . . . . . . . . . . . . . . . . . . . . . . . . $ 252,847
___________________
___________________
A summary of results of operations for the twelve months ended December 31, 2016 is as follows (in thousands):
Parent
Jefferies Merchant Company Consolidation
Group Banking Corporate Interest Adjustments Total
_______________ _______________ __________________ ________________ ______________________ _______
Net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . $2,414,614 $621,804 $ 2,689 $ – $ (3,733) $3,035,374
___________________ __________________ __________________ _______________ ________________ ___________________
Expenses:
Compensation and benefits . . . . . . . . . . . . . 1,568,948 84,486 35,015 – (124) 1,688,325
Cost of sales. . . . . . . . . . . . . . . . . . . . . . . . . – 337,039 – – – 337,039
Floor brokerage and clearing fees . . . . . . . . 167,205 – – – – 167,205
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . – 36,876 – 58,881 – 95,757
Depreciation and amortization . . . . . . . . . . 60,206 53,286 3,619 – – 117,111
Selling, general and other expenses. . . . . . . 588,283 179,527 36,399 – (7,082) 797,127
___________________ __________________ __________________ _______________ ________________ ___________________
Total expenses . . . . . . . . . . . . . . . . . . . . . 2,384,642 691,214 75,033 58,881 (7,206) 3,202,564
___________________ __________________ __________________ _______________ ________________ ___________________
Income (loss) from continuing operations
before income taxes and income related
to associated companies . . . . . . . . . . . . 29,972 (69,410) (72,344) (58,881) 3,473 (167,190)
Income related to associated companies . . . . . – 154,598 – – – 154,598
___________________ __________________ __________________ _______________ ________________ ___________________
Income (loss) from continuing
___________________ __________________ __________________ _______________ ________________
___________________ __________________ __________________ _______________ ________________
operations before income taxes . . . . . . $ 29,972 $ 85,188 $(72,344) $(58,881) $ 3,473 (12,592)
Income tax provision from continuing
operations. . . . . . . . . . . . . . . . . . . . . . . . . . . 25,773
Income from discontinued operations,
net of income tax provision . . . . . . . . . . . . . 232,686
___________________
Net income . . . . . . . . . . . . . . . . . . . . . . . . $ 194,321
___________________
___________________
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Jefferies Group
Jefferies Group was acquired on March 1, 2013 and is reflected in our 2017 and 2016 consolidated financial statements
utilizing a one month lag; Jefferies Group’s fiscal year ends on November 30th. Jefferies Group financial data is presented
in each year based on the twelve months ended November 30. A summary of results of operations for Jefferies Group
is as follows (in thousands):
2018
____
2017
____
2016
____
Net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,183,376 $3,198,109 $2,414,614
_________________ _________________ _________________
Expenses:
Compensation and benefits . . . . . . . . . . . . . . . . . . . . . . 1,736,264 1,829,096 1,568,948
Floor brokerage and clearing fees . . . . . . . . . . . . . . . . . 189,068 179,478 167,205
Depreciation and amortization . . . . . . . . . . . . . . . . . . . 68,296 62,668 60,206
Selling, general and other expenses . . . . . . . . . . . . . . . . 780,081 621,943 588,283
_________________ _________________ _________________
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,773,709 2,693,185 2,384,642
_________________ _________________ _________________
Income from continuing operations before
income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 409,667 $ 504,924 $ 29,972
_________________ _________________ _________________
_________________ _________________ _________________
Jefferies Group comprises many business units, with many interactions and much integration among them. Business
activities include the sales, trading, origination and advisory effort for various equity, fixed income, commodities, foreign
exchange and advisory services. Jefferies Group’s business, by its nature, does not produce predictable or necessarily
recurring revenues or earnings. Jefferies Group’s results in any given period can be materially affected by conditions in
global financial markets, economic conditions generally, and its own activities and positions.
Revenues by Source
Net revenues presented for Jefferies Group’s businesses include allocations of interest income and interest expense as it
assesses the profitability of these businesses inclusive of the net interest revenue or expense associated with the respective
activities, which is a function of the mix of each business’s associated assets and liabilities and the related funding costs.
In connection with the adoption of the new revenue standard in the first quarter of 2018, Jefferies Group has made
changes to the presentation of its “Revenues by Source” to better align the manner in which we describe and present the
results of Jefferies Group’s performance with the manner in which it manages its business activities and serves its clients.
We believe that the reorganization of Jefferies Group’s revenue reporting will enable us to describe the business mix
more clearly and provide greater transparency in the communication of Jefferies Group’s results. Additionally, the results
of the investment banking business now include a new subcategory “Other investment banking”, which contains Jefferies
Group’s share of net earnings from its corporate lending joint venture, Jefferies Finance, as well as any gains and losses
from any securities or loans received or acquired in connection with its investment banking efforts. Previously reported
results are presented on a comparable basis in the tables below.
The following is a description of the changes that have been made:
• Equities revenues now represent the activities of Jefferies Group’s core equities sales and trading, securities
finance, prime brokerage and wealth management businesses. Revenues from other activities previously
presented within the Equities business have been disaggregated as follows:
˚ Jefferies Group’s share of net earnings from its Jefferies Finance joint venture, as well as any revenues
from securities and loans received or acquired in connection with its investment banking efforts, are now
presented as part of Jefferies Group’s investment banking business.
˚ Jefferies Group’s share of net earnings from its historic Jefferies LoanCore LLC (“Jefferies LoanCore”)
joint venture is presented as part of its fixed income business through its sale in October 2017.
˚ Revenues related to Jefferies Group’s principal investments in certain private equity funds and hedge
funds managed by third parties or related parties, investments in strategic ventures (including KCG
Holdings, Inc. (“KCG”) through its sale in July 2017), certain other securities owned, and investments
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held as part of obligations under employee benefit plans, including deferred compensation arrangements,
are now presented as part of its other business.
˚ Revenue related to Jefferies Group’s capital invested in asset management funds that are managed by
Jefferies Group is now presented within Jefferies Group’s asset management business.
• Revenues from Jefferies Group’s legacy futures business and revenues associated with structured notes issued
by Jefferies Group are now presented as part of its other business. Additionally, revenues derived from
securities or loans received or acquired in connection with Jefferies Group’s investment banking efforts are
now presented as part of investment banking revenues.
• Revenues from principal investments in certain private equity and asset management funds managed by
related parties, which were previously presented within Jefferies Group’s asset management revenue, are
now presented as part of its other business.
The changes to the manner in which we describe and disclose the performance of Jefferies Group’s business activities
has no effect on its historical consolidated results of operation. The composition of Jefferies Group’s net revenues has
varied over time as financial markets and the scope of its operations have changed. The composition of net revenues can
also vary from period to period due to fluctuations in economic and market conditions, and its own performance.
The following provides a summary of net revenues by source (in thousands):
2018
____
2017
____
2016
____
Equities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 665,557 $ 674,424 $ 597,445
Fixed income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 559,712 618,388 654,337
________________ _________________ _________________
Total sales and trading . . . . . . . . . . . . . . . . . . . . . . . . . . 1,225,269 1,292,812 1,251,782
________________ _________________ _________________
Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 454,555 344,973 235,207
Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 635,606 649,220 304,576
________________ _________________ _________________
Capital markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,090,161 994,193 539,783
Advisory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 820,042 770,092 654,190
Other investment banking . . . . . . . . . . . . . . . . . . . . . . . . . . 3,638 19,776 (108,487)
________________ _________________ _________________
Total investment banking . . . . . . . . . . . . . . . . . . . . . . . . 1,913,841 1,784,061 1,085,486
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,316 92,987 999
________________ _________________ _________________
Total capital markets . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,184,426 3,169,860 2,338,267
________________ _________________ _________________
Asset management fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,214 19,224 23,711
Investment return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (22,264) 9,025 52,636
________________ _________________ _________________
Total asset management . . . . . . . . . . . . . . . . . . . . . . . . . (1,050) 28,249 76,347
________________ _________________ _________________
Total net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,183,376 $3,198,109 $2,414,614
________________ _________________ _________________
________________ _________________ _________________
Equities Net Revenues
Equities are comprised of net revenues from:
•
services provided to Jefferies Group’s clients from which it earns commissions or spread revenue by
executing, settling and clearing transactions for clients;
• advisory services offered to clients;
•
financing, securities lending and other prime brokerage services offered to clients; and
• wealth management services, which includes providing clients access to all of its institutional execution
capabilities.
Total equities net revenues were $665.6 million for 2018, a decrease of $8.8 million, compared with $674.4 million for
2017. Equities posted record results in 2018 for Jefferies Group’s overall global core sales and trading business and
within the U.S., Europe and Asia Pacific regions. Jefferies Group’s results include records for its electronic trading,
equity derivatives and prime brokerage businesses. The increase in equities net revenues from its core equities sales and
trading businesses was offset by losses in certain block positions in 2018 compared with gains in 2017.
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The results in equities net revenues during 2018 reflect improved performance in various core global equities businesses,
primarily driven by higher revenues in Jefferies Group’s equity derivatives, electronic trading and prime brokerage
businesses, primarily due to higher equity volatility, overall improved market trading volumes and an increase in its
commissions. This was partially offset by a decrease in its U.S. and European cash equities, convertibles and securities
finance businesses, primarily due to lower customer activity. European revenues were also lower as a result of the delay
in advisory payments and the impact of unbundling due to the Market in Financial Instruments Directive (“MiFID II”)
regulation.
Equities net revenues were $674.4 million for 2017, an increase of $77.0 million compared with $597.4 million for 2016.
Equities net revenues increased with higher revenues in Jefferies Group’s electronic trading, prime brokerage services,
and Asia Pacific cash equities businesses, primarily due to increased customer activity and increased trading volumes.
The increase was partially offset by lower revenues in its equity derivatives and Europe cash equities businesses, primarily
due to reduced market making activities and lower equity volatility. In addition, results in 2017 included certain strategic
investment gains compared with losses in 2016. Equities commission revenues declined in Jefferies Group’s equity
derivative and U.S. cash equities businesses due to reduced trading volumes and lower levels of volatility, partially offset
by higher revenues in its electronic trading and Asia Pacific cash equities businesses due to increased trading volumes.
Fixed Income Net Revenues
Fixed income is comprised of net revenues from:
• executing transactions for clients and making markets in securitized products, investment grade, high- yield,
emerging markets, municipal and sovereign securities and bank loans;
foreign exchange execution on behalf of clients; and
interest rate derivatives and credit derivatives (used primarily for hedging activities).
•
•
Fixed income net revenues in 2017 and 2016 also included Jefferies Group’s share of the net earnings from its joint
venture investment in Jefferies LoanCore, which was accounted for under the equity method. On October 31, 2017,
Jefferies Group sold all of its membership interests in Jefferies LoanCore for approximately $173.1 million, the estimated
book value at October 31, 2017. In addition, Jefferies Group may be entitled to additional cash consideration over the
next four years in the event Jefferies LoanCore’s yearly return on equity exceeds certain thresholds.
Fixed income net revenues totaled $559.7 million for 2018, a decrease of $58.7 million compared with net revenues of
$618.4 million in 2017, primarily due to difficult market conditions in Jefferies Group’s global investment grade credit
businesses predominately in the fourth quarter of 2018. Further, performance in the first quarter of 2017 was bolstered
by robust trading activity following the 2016 U.S. Presidential election, which was not repeated in the current year.
Revenues in Jefferies Group’s U.S. securitized markets group were significantly improved, primarily as its business
continues to focus on the securitization of non- commoditized products. Revenues in Jefferies Group’s leveraged credit
business were strong as Jefferies Group enhanced its trading and coverage team across loans, bonds and distressed
products, as well as increased results from secondary trading of floating rate loans, while balancing market risk. Revenues
declined in Jefferies Group’s global investment grade credit business as lack of volatility and higher interest rates reduced
trading volumes resulting in increased competition chasing limited opportunities. During the fourth quarter, credit spreads
widened and new issue activity slowed, further reducing client trading activity. Revenues in Jefferies Group’s international
securitized markets group were down due to limited market opportunities as the European Central Bank’s quantitative
easing program comes to an end.
Global rates revenues in 2018 declined due to uncertainty over Brexit and international economic concerns. In
addition, the opportunities in the prior year, primarily in the first quarter of 2017, from volatility from the U.S.
Presidential election and European election cycles were not replicated in the current year. Revenues in Jefferies
Group’s municipal trading business were lower on reduced market activity driven by changes in federal tax legislation
and the backdrop of increased interest rates dampened investor interest. The business outperformed in the prior year,
as macro events drove a more favorable trading environment. The prior year also included revenues from Jefferies
Group’s share of Jefferies LoanCore, which was sold in October 2017, as well as revenues from non- core fixed
income products that have now been de- emphasized.
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Fixed income net revenues were $618.4 million for 2017, a decrease of $35.9 million, compared with net revenues
of $654.3 million in 2016. Jefferies Group recorded modestly lower revenues in 2017 as compared with 2016,
primarily due to a more challenging trading environment across most products, including most credit and rates
businesses. In 2017, volatility was dampened as quantitative easing continued across most markets Jefferies Group
transacts in. This was partially offset by better risk management, addition of staff in certain businesses, and refreshed
strategies in some businesses.
Net revenues in Jefferies Group’s leveraged credit business in 2017 were higher due to increased trading activities in
high yield and distressed products as a result of additions to staff and repositioned risk. This was compared to relatively
significant mark- to- market losses recognized in the early part of 2016. Higher revenues in Jefferies Group’s European
credit and international securitized markets group businesses were due to repositioned strategies taking advantage of
trading opportunities in certain industry sectors. This is compared to volatile oil prices and uncertainty as to bank liquidity
in 2016, which negatively impacted revenues in this business in the prior year. Jefferies Group’s municipal securities
business performed well for the greater part of the year, driven by increased client activity as new team members were
added and market share expanded. Performance for the municipal securities business was partially dampened at the end
of the 2017 fiscal year as the municipal bond market dislocated over concerns around the potential impacts of pending
U.S. tax reform on both municipal bond issuers and investors.
Revenues in Jefferies Group’s corporates and emerging markets business declined in a maturing credit cycle as volatility
and transaction spreads decreased from prior year levels, while demand for new issuances and higher yielding investments
and higher levels of volatility were prevalent in 2016. Lower revenues in Jefferies Group’s global rates and U.S. securitized
markets group business were due to lower levels of volatility resulting in lower transaction based revenues. In the U.S.
securitized markets businesses this was partially offset by increased activity in origination businesses including
collateralized loan obligations. Net revenues from Jefferies Group’s share of Jefferies LoanCore, which was sold in
October 2017, increased slightly during 2017 as compared to 2016 due to an increase in loan closings and syndications.
Investment Banking Revenues
Investment banking is comprised of revenues from:
• capital markets services, which include underwriting and placement services related to corporate debt,
municipal bonds, mortgage- and asset- backed securities and equity and equity- linked securities and loan
syndication;
• advisory services with respect to mergers and acquisitions and restructurings and recapitalizations;
•
•
Jefferies Group’s share of net earnings from its corporate lending joint venture Jefferies Finance; and
securities and loans received or acquired in connection with Jefferies Group’s investment banking activities.
Total investment banking revenues were $1,913.8 million for 2018, including an increase of $131.8 million in investment
banking net revenues as a result of the new revenue standard. See Notes 2 and 4, in our consolidated financial statements
included in this Annual Report on Form 10-K, for further details on the new revenue standard. Jefferies Group’s results
reflect continued strong performance in both its equity capital markets and advisory businesses, as Jefferies Group
increased its fee market share in both businesses.
Other investment banking revenues were $3.6 million for 2018 compared with $19.8 million for 2017. The results reflect
net revenues of $98.6 million and $90.8 million in 2018 and 2017, respectively, from Jefferies Group’s share of the
profits of the Jefferies Finance joint venture, which were offset by the amortization of costs and allocated interest expense
related to Jefferies Group’s investment in the Jefferies Finance business.
From equity and debt capital raising activities, Jefferies Group generated $454.6 million and $635.6 million in revenues,
respectively, for 2018. During 2018, Jefferies Group completed 969 public and private debt financings that raised $270.1
billion in aggregate and Jefferies Group completed 193 public and private equity and convertible offerings that raised
$43.3 billion (179 of which Jefferies Group acted as sole or joint bookrunner). Financial advisory revenues totaled
$820.0 million, including revenues from 180 merger and acquisition transactions and 15 restructuring and recapitalization
transactions with an aggregate transaction value of $193.9 billion.
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Total investment banking revenues were a then record $1,784.1 million for 2017, 64.4% higher than 2016. This increase
was due to strong performance across Jefferies Group’s debt capital markets, equity capital markets and advisory
businesses, supported by a strong overall capital raising and merger and acquisition environment. In 2016, new issue
equity and leveraged finance capital markets were virtually closed throughout January and February and remained slow
throughout 2016. Capital markets revenues in 2017 increased 84.2% from 2016. Advisory revenues for 2017 increased
17.7% compared to 2016. Other investment banking revenues were $19.8 million for 2017, compared with a loss of $108.5
million for 2016. The results reflect net revenues of $90.8 million and a net loss of $9.3 million in 2017 and 2016,
respectively, from Jefferies Group’s share of the profits of the Jefferies Finance joint venture, which were offset by the
amortization of costs and allocated interest expense related to Jefferies Group’s investment in the Jefferies Finance business.
From equity and debt capital raising activities during 2017, Jefferies Group generated $345.0 million and $649.2 million
in revenues, respectively. During 2017, Jefferies Group completed 1,121 public and private debt financings that raised
$292.1 billion in aggregate and Jefferies Group completed 173 public and private equity and convertible offerings that
raised $59.7 billion (164 of which Jefferies Group acted as sole or joint bookrunner). Financial advisory revenues totaled
$770.1 million, including revenues from 171 merger and acquisition transactions and ten restructuring and recapitalization
transactions with an aggregate transaction value of $180.6 billion.
Investment banking revenues were $1,085.5 million for 2016. From equity and debt capital raising activities during
2016, Jefferies Group generated $235.2 million and $304.6 million in revenues, respectively. During 2016, Jefferies
Group completed 892 public and private debt financings that raised $188.6 billion in aggregate and Jefferies Group
completed 129 public and private equity and convertible offerings that raised $24.4 billion (125 of which Jefferies Group
acted as sole or joint bookrunner). Financial advisory revenues totaled $654.2 million, including revenues from 161
merger and acquisition transactions and 18 restructuring and recapitalization transactions with an aggregate transaction
value of $135.2 billion.
Other Net Revenues
Other net revenues are comprised of revenues from:
•
strategic investments other than Jefferies Finance (such as KCG through its sale in July 2017);
• principal investments in private equity and hedge funds managed by third parties or related parties;
•
•
investments held as part of employee benefit plans, including deferred compensation plans (for which
Jefferies Group incurs corresponding compensation expenses); and
Jefferies Group’s legacy Futures business.
Other also includes Jefferies Group’s share of the income from Berkadia for the months of October and November 2018.
On October 1, 2018, Jefferies transferred to Jefferies Group its 50% interest in Berkadia.
Other net revenues totaled $45.3 million for 2018, a decrease of $47.7 million compared with $93.0 million for 2017.
Results for 2017 included a net gain of $93.4 million from Jefferies Group’s investment in KCG, which was sold in July
2017, partially offset by foreign currency gains. The results in 2018 include net revenues of $20.0 million due to Jefferies
Group’s share of income from Berkadia.
Other net revenues totaled $93.0 million for 2017, an increase of $92.0 million compared with $1.0 million for 2016.
Results for 2017 included a net gain of $93.4 million from Jefferies Group’s investment in KCG, which was sold in July
2017, compared with a net gain of $19.6 million for 2016.
Asset Management Net Revenues
Asset management revenues include the following:
• management and performance fees from funds and accounts managed by Jefferies Group; and
•
investment income from capital invested in and managed by Jefferies Group’s asset management business
and other asset managers.
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In the fourth quarter of 2018, Jefferies transferred to Jefferies Group capital investments in certain separately managed
accounts and funds. Due to this transfer, Jefferies Group has made changes to the presentation of its “Revenues by
Source” in the fourth quarter of 2018 and are including investment income from capital invested in these separately
managed accounts and funds within asset management revenues. Previously reported results are presented on a
comparable basis.
Asset management revenues were $(1.1) million for 2018, as compared with $28.2 million for 2017 and $76.3 million
for 2016. The decline in asset management revenues from 2016 to 2017 and from 2017 to 2018 is primarily due to
reduced returns on investments. The key components of asset management revenues are the level of assets under
management and the performance return, whether on an absolute basis or relative to a benchmark or hurdle. These
components can be affected by financial markets, profits and losses in the applicable investment portfolios and client
capital activity. Further, asset management fees vary with the nature of investment management services. The terms
under which clients may terminate Jefferies Group’s investment management authority, and the requisite notice period
for such termination, varies depending on the nature of the investment vehicle and the liquidity of the portfolio assets.
Compensation and Benefits
Compensation and benefits expense consists of salaries, benefits, commissions, annual cash compensation awards and
the amortization of certain share- based and cash compensation awards to employees. Cash and historical share- based
awards and a portion of cash awards granted to employees as part of year end compensation generally contain provisions
such that employees who terminate their employment or are terminated without cause may continue to vest in their
awards, so long as those awards are not forfeited as a result of other forfeiture provisions (primarily non- compete clauses)
of those awards. Accordingly, the compensation expense for a portion of awards granted at year end as part of annual
compensation is recorded in the year of the award.
Included in Compensation and benefits expense are share- based amortization and cash- based expense for senior executive
awards, non- annual share- based and cash- based awards to other employees and certain year end awards that contain
future service requirements for vesting, all of which are being amortized over their respective future service periods. In
addition, the senior executive awards contain market and performance conditions.
Compensation expense related to the amortization of share- based and cash- based awards amounted to $302.0 million,
$278.2 million and $287.2 million for 2018, 2017 and 2016, respectively. Compensation and benefits as a percentage
of Net revenues was 54.5%, 57.2% and 65.0% for 2018, 2017 and 2016, respectively.
Non- Compensation Expenses
Non- compensation expenses include floor brokerage and clearing fees, underwriting costs, technology and
communications expense, occupancy and equipment rental expense, business development, professional services, bad
debt provision, impairment charges, depreciation and amortization expense and other costs. All of these expenses, other
than floor brokerage and clearing fees and depreciation and amortization expense, are included in Selling, general and
other expenses in the Consolidated Statements of Operations.
The increase in non- compensation expenses during 2018 as compared to 2017 was primarily due to a $131.8 million
increase mostly in business development expenses and underwriting costs, as a result of applying the new revenue
standard to results of operations for 2018. The increase during 2018 was also due to an increase in technology and
communication expenses due to higher costs associated with the development of the various trading systems and Jefferies
Group’s efforts to provide its professionals with modern digital tools to help them better serve its clients. The increase
also includes higher professional service expenses due to an increase in legal and consulting fees.
In 2017, non- compensation expenses increased 5.9% compared to 2016. The increase in non- compensation expenses
during 2017 was consistent with the increased activity associated with higher net revenues, as well as increased spending
on technology. At the same time, non- compensation expenses as a percentage of Net revenues declined from 33.8% to
27.0% again demonstrating strategically the operating leverage inherent in Jefferies Group’s business. The increase in
non- compensation expenses was primarily due to an increase in Floor brokerage and clearing expenses due to the mix
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of costs across certain equities and fixed income businesses, technology and communications expenses due to costs
associated with the development of the various trading systems and projects associated with corporate support and core
business infrastructures, and an increase in certain other expenses.
Merchant Banking
A summary of results for Merchant Banking is as follows (in thousands):
Eleven
Months
Ended
Twelve
Months
Ended
November 30, December 31, December 31,
2016
2017
2018
____________
____________
_____________
Net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $571,831 $876,180 $621,804
______________
Expenses:
Compensation and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77,169 73,811 84,486
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 307,071 280,952 337,039
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,159 42,259 36,876
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . 48,852 44,257 53,286
Selling, general and other expenses . . . . . . . . . . . . . . . . . . . . . . 150,115 131,627 179,527
______________
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 618,366 572,906 691,214
______________
Income (loss) before income taxes and income (loss)
______________ ________________
______________ ________________
______________ ________________
Twelve
Months
Ended
related to associated companies . . . . . . . . . . . . . . . . . . . . (46,535) 303,274 (69,410)
Income (loss) related to associated companies . . . . . . . . . . . . . . . . 57,023 (74,901) 154,598
______________
Income from continuing operations before
______________ ________________
income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,488 $228,373 $ 85,188
______________
______________
______________ ________________
______________ ________________
Merchant Banking includes the consolidated results of Vitesse Energy Finance and JETX Energy (oil and gas production
and development), Conwed and Idaho Timber (manufacturing companies), LAM (asset management) and Foursight
Capital (vehicle finance). It also includes our ownership of Spectrum Brands/HRG shares, which is accounted for at
fair value and impacts our results through its mark- to- market adjustments reflected in Net revenues, our investment in
WeWork and the results of our investment in FXCM. Interest and gains related to the note receivable component of our
FXCM investment are included in Net revenues, while income (loss) related to our equity method investment in FXCM
is included in Income (loss) related to associated companies. Additionally, Merchant Banking includes our equity
investments in National Beef (beef processing), Berkadia, prior to its transfer to Jefferies Group on October 1, 2018
(commercial mortgage banking, investment sales and servicing), HomeFed (real estate company), Garcadia, prior to its
sale in August 2018 (automobile dealerships), Linkem (fixed wireless broadband services in Italy) and Golden Queen
(a gold and silver mining project).
In the fourth quarter of 2018, we amalgamated all our primary financial services operating businesses into one platform
by transferring our 50% membership interest in Berkadia and our LAM seed investments into Jefferies Group. Revenues
related to the net assets transferred were $6.7 million, $49.6 million and $26.5 million for the eleven months ended
November 30, 2018 and the twelve months ended December 31, 2017 and 2016, respectively. Income from continuing
operations before income taxes related to the net assets transferred were $47.7 million, $118.4 million and $109.4 million
for the eleven months ended November 30, 2018 and the twelve months ended December 31, 2017 and 2016, respectively.
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The following provides a summary of net revenues by source (in thousands):
Eleven
Months
Ended
Twelve
Months
Ended
November 30, December 31, December 31,
2016
2017
2018
____________
____________
_____________
Vitesse Energy Finance and JETX Energy . . . . . . . . . . . . . . . . . . . $ 169,667 $ 45,225 $ 53,549
Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 357,513 504,508 415,752
LAM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,447) 74,990 (75,508)
FXCM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,616 23,160 (54,634)
Vehicle Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64,969 60,187 50,152
Spectrum Brands/HRG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (412,493) 64,774 93,200
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 379,006 103,336 139,293
______________
Total net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 571,831 $876,180 $621,804
______________
______________
_______________ _______________
_______________ _______________
_______________ _______________
Twelve
Months
Ended
Oil and gas revenues for 2018 increased due to Vitesse Energy Finance’s acquisition of additional non- operated Bakken
assets in the second quarter of 2018 as well as an increase in oil prices in 2018 compared to 2017. Vitesse Energy Finance
and JETX Energy net revenues also include net unrealized gains (losses) of $29.1 million, $1.8 million and $(11.8)
million related to derivatives during the eleven months ended November 30, 2018 and the twelve months ended December
31, 2017 and 2016, respectively. As discussed further in Note 5 to our consolidated financial statements, Vitesse Energy
Finance uses swaps and call and put options in order to reduce exposure to future oil price fluctuations. JETX Energy
revenues during the eleven months ended November 30, 2018 and the twelve months ended December 31, 2017 and
2016 were impacted by $12.1 million, $(20.1) million and $9.6 million, respectively, of unrealized gains (losses) on a
trading asset which is held at fair value.
Net revenues for manufacturing for the twelve months ended December 31, 2017 include the gain on the sale of Conwed
of $178.2 million. In January 2017, we sold 100% of Conwed to Schweitzer- Mauduit International, Inc., (NYSE: SWM)
for $295 million in cash plus potential earn- out payments in 2019, 2020 and 2021 totaling up to $40 million in cash to
the extent the results of Conwed’s subsidiary, Filtrexx International, exceed certain performance thresholds. Excluding
the gain on the sale of Conwed, net revenues for manufacturing increased in 2018 as compared to 2017, due primarily
to an increase in sales at Idaho Timber. Net manufacturing revenues in 2017 as compared to 2016 increased due to the
gain on the sale of Conwed, partially offset by the absence of Conwed revenues through the majority of 2017.
The decrease in LAM net revenues in 2018 as compared to 2017 primarily reflects lower principal transactions revenue
due to two strategies negatively impacted by exceptional volatility during the first quarter of 2018. The year- over- year
increase in 2017 LAM net revenues as compared to 2016 primarily reflects better returns on investments.
As more fully discussed in Note 5 to our consolidated financial statements, on September 1, 2016, we amended the
terms of our loan and associated rights related to FXCM. Among other changes, the amendments gave Jefferies a 50%
voting interest in FXCM and we gained the ability to significantly influence FXCM through our seats on the board. As
a result of the amendment, we have accounted for our equity interest in FXCM under the equity method of accounting
since September 1, 2016. Net revenues include gains of $18.6 million and $23.2 million during the eleven months ended
November 30, 2018 and twelve months ended December 31, 2017, respectively, from our FXCM term loan and a loss
of $(54.6) million during the twelve months ended December 31, 2016 from our FXCM term loan and related rights.
This includes the component related to interest income, which is recorded within Principal transactions revenues.
Spectrum Brands/HRG net revenues reflect changes in the value of our investment. We classify Spectrum Brands/HRG
as a trading asset for which the fair value option was elected and we reflect mark- to- market adjustments through Principal
transactions revenue.
Other revenues for the eleven months ended November 30, 2018 reflect the gain on sale of our equity interests in Garcadia
and our associated real estate of $221.7 million. Other net revenues for the eleven months ended November 30, 2018
and the twelve months ended December 31, 2017 and 2016, respectively, also include a $70.9 million, $6.1 million and
$65.6 million increase in the fair value of WeWork. Net revenues for the twelve months ended December 31, 2017
include a $19.7 million realized security gain from an investment in a non- public security.
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The following provides a summary of total expenses by source (in thousands):
Eleven
Months
Ended
Twelve
Months
Ended
November 30, December 31, December 31,
2016
2017
2018
____________
____________
_____________
Vitesse Energy Finance and JETX Energy . . . . . . . . . . . . . . . . . . . $116,017 $ 71,258 $144,429
Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 321,851 296,491 375,990
LAM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74,029 44,844 32,318
Vehicle Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65,461 68,444 69,074
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41,008 91,869 69,403
______________
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $618,366 $572,906 $691,214
______________
______________
_______________ _______________
_______________ _______________
_______________ _______________
Twelve
Months
Ended
Total expenses for Vitesse Energy Finance and JETX Energy in 2018 increased compared to 2017, primarily due to
Vitesse Energy Finance’s acquisition of additional non- operated Bakken assets in the second quarter of 2018. Selling,
general and other expenses in 2016 include impairment charges of $63.8 million recorded by JETX Energy. The
impairment charge primarily related to decisions made by JETX Energy in the third quarter of 2016 to curtail
development of both its southern acreage in the East Eagle Ford and its Houston County acreage. A $55.0 million
impairment charge was recorded for the difference between the carrying value of that acreage and the estimated net
realizable value. The 2016 impairment also included the write- down of certain JETX Energy leases that would not
benefit its business going forward.
The increase in total expenses for manufacturing in 2018 as compared to 2017 primarily relates to an increase in cost of
sales associated with an increase in sales at Idaho Timber. The decrease in manufacturing expenses for 2017 as compared
to 2016 is primarily due to the sale of Conwed in the first quarter of 2017.
Total expenses for LAM were impacted by the growth of our business in 2018 and 2017 as compared to the prior years.
Other expenses for 2017 reflect the write- down of a note receivable of $20.0 million related to the prior sale of a
subsidiary. The decrease in other expenses in 2018 also reflects the deconsolidation of a real estate investment in 2017.
The following provides a summary of Income (loss) related to associated companies (in thousands):
Eleven
Months
Ended
Twelve
Months
Ended
November 30, December 31, December 31,
2016
2017
2018
____________
____________
_____________
National Beef . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $110,049 $ – $ –
Berkadia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,092 93,801 94,201
FXCM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (83,174) (177,644) 1,919
Garcadia Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,646 48,198 52,266
Linkem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (20,534) (32,561) (22,867)
HomeFed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,332) 7,725 23,893
Golden Queen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (51,990) (7,733) (3,021)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,266 (6,687) 8,207
______________
Total income (loss) related to associated companies . . . . . . . . . $ 57,023 $ (74,901) $154,598
______________
______________
_______________ _______________
_______________ _______________
_______________ _______________
Twelve
Months
Ended
Income (loss) related to associated companies primarily includes our investments in National Beef, subsequent to June 5,
2018 and the Garcadia Companies, prior to their sale in August 2018. Income (loss) related to associated companies
during the eleven months ended November 30, 2018 includes a $47.9 million impairment loss related to our equity
investment in Golden Queen in the third quarter of 2018. As discussed further in Note 11, Golden Queen completed an
updated mine plan and financial projections in the third quarter of 2018 reflecting lower grades of gold as well as a
decrease in the market price of gold. As a result of lower projected cash flows, the estimated fair value of our equity
interest in Golden Queen was lower than our carrying value by $47.9 million and an impairment of $47.9 million was
recorded in the third quarter of 2018.
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Income (loss) related to associated companies during the eleven months ended November 30, 2018 and the twelve
months ended December 31, 2017, respectively, includes a $62.1 million and $130.2 million impairment loss related to
our equity investment in FXCM. As discussed further in Note 11, in the fourth quarter of 2018, we updated expectations
for FXCM based on recent revised regulations of the European Securities Market Authority and dampened operating
results. Based on the decline in projections and the adverse effects of the European regulations, we evaluated in the
fourth quarter whether our equity method investment was fully recoverable. Our estimate of fair value was based on a
discounted cash flow analysis. The estimated fair value of our equity interest in FXCM was lower than our carrying
value by $62.1 million and an impairment of $62.1 million was recorded in the fourth quarter of 2018.
In the first quarter of 2017, Global Brokerage Holdings and FXCM’s U.S. subsidiary, Forex Capital Markets LLC
(“FXCM U.S.”) settled complaints filed by the NFA and CFTC against FXCM U.S. and certain of its principals relating
to matters that occurred between 2010 and 2014. As part of the settlements, FXCM U.S. withdrew from business and
sold FXCM U.S.’s customer accounts. FXCM also implemented a restructuring plan that included the termination of
approximately 22% of its global workforce. Based on the above actions, we evaluated in the first quarter of 2017 whether
our equity method investment was fully recoverable. Our estimate of fair value was based on a discounted cash flow and
comparable public company analysis. The result of our analysis indicated that the estimated fair value of our equity
interest in FXCM was lower than our carrying value by $130.2 million and an impairment of $130.2 million was recorded
in the first quarter of 2017.
A summary of results for Merchant Banking by source is as follows (in thousands):
Eleven
Months
Ended
Twelve
Months
Ended
November 30, December 31, December 31,
2016
2017
2018
____________
____________
_____________
Vitesse Energy Finance and JETX Energy . . . . . . . . . . . . . . . . . . . $ 53,650 $ (26,033) $ (90,880)
Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,662 208,017 39,762
LAM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (79,476) 30,146 (107,826)
FXCM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,616 23,160 (54,634)
Vehicle Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (492) (8,257) (18,922)
Spectrum Brands/HRG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (412,493) 64,774 93,200
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 337,998 11,467 69,890
Income (loss) before income taxes and income (loss)
_______________ _______________ _______________
Twelve
Months
Ended
related to associated companies . . . . . . . . . . . . . . . . . . . . . . (46,535) 303,274 (69,410)
Income (loss) related to associated companies . . . . . . . . . . . . . . . . 57,023 (74,901) 154,598
Income from continuing operations before income taxes . . . . . $ 10,488 $228,373 $ 85,188
_______________ _______________ _______________
_______________ _______________ _______________
_______________ _______________ _______________
Other results for the eleven months ended November 30, 2018 reflect the gain on sale of our equity interests in Garcadia
and our associated real estate of $221.7 million. Other results for the eleven months ended November 30, 2018 and the
twelve months ended December 31, 2017 and 2016, respectively, also include a $70.9 million, $6.1 million and $65.6
million increase in the fair value of WeWork.
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Corporate
A summary of results of operations for Corporate is as follows (in thousands):
Eleven
Months
Ended
Twelve
Months
Ended
November 30, December 31, December 31,
2016
2017
2018
____________
____________
_____________
Net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 22,300 $ 6,306 $ 2,689
_____________
Expenses:
Compensation and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,222 46,655 35,015
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . 3,169 3,470 3,619
Selling, general and other expenses . . . . . . . . . . . . . . . . . . . . . . 35,049 34,983 36,399
_____________
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88,440 85,108 75,033
_____________
Loss from continuing operations before income taxes . . . . . $(66,140) $(78,802) $(72,344)
_____________
_____________
_____________ ______________
_____________ ______________
_____________ ______________
_____________ ______________
_____________ ______________
Twelve
Months
Ended
Net revenues primarily include realized and unrealized securities gains and interest income for investments held at the
holding company. For the eleven months ended November 30, 2018 and the twelve months ended December 31, 2017
and 2016, Compensation and benefits expense includes share- based compensation expense of $21.4 million, $20.9
million and $9.7 million, respectively.
Parent Company Interest
Parent company interest totaled $54.1 million, $58.9 million and $58.9 million for the eleven months ended November 30,
2018 and the twelve months ended December 31, 2017 and 2016, respectively.
Income Taxes
On December 22, 2017, the Tax Act was enacted. The Tax Act is one of the most comprehensive changes in the U.S.
corporate income tax since 1986 and certain provisions are complex in their application. We recorded a discrete tax
expense of $450.5 million as a provisional estimate of the impact of the Tax Act during the twelve months ended
December 31, 2017. This provisional estimate primarily consisted of a $415.0 million expense related to the revaluation
of our deferred tax asset and a $35.5 million expense related to the deemed repatriation of foreign earnings. During the
eleven months ended November 30, 2018, we adjusted the provisional estimate by approximately $8.3 million, bringing
the total amount to date to $458.8 million. This consists of a $420.7 million expense related to the revaluation of our
deferred tax asset and a $38.1 million expense related to the deemed repatriation of foreign earnings. Additionally,
income tax expense for the eleven months ended November 30, 2018 has been impacted by certain tax planning actions
taken with respect to our non- U.S. subsidiaries as a result of the Tax Act. The provisional accounting charge may change
until the accounting analysis is finalized, which will occur in the first quarter of fiscal 2019, as permitted by Staff
Accounting Bulletin No. 118 (“SAB 118”), which was issued by the SEC on December 22, 2017. See Note 21 to our
consolidated financial statements for further details on the Tax Act and SAB 118.
For the eleven months ended November 30, 2018, our provision for income taxes from continuing operations was $19.0
million, representing an effective tax rate of 6.4%. Our 2018 provision was reduced by a $48.1 million benefit resulting
from a reversal of our valuation allowance with respect to certain federal and state NOLs, which we believe are more
likely than not to be utilized before they expire. This benefit reduced our effective tax rate by approximately 16.2%.
For the twelve months ended December 31, 2017, our provision for income taxes from continuing operations was $642.3
million, representing an effective tax rate of about 106%. Our 2017 provision was impacted by a non- cash $450.5 million
charge related to the impact of tax reform. This charge increased our effective rate by 74%.
For the twelve months ended December 31, 2016, our provision for income taxes from continuing operations was $25.8
million, on a pre- tax loss from continuing operations of $12.6 million. Our 2016 provision was increased by a $24.9
million charge related to previously issued stock awards.
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Discontinued Operations
On June 5, 2018, we sold 48% of National Beef to Marfrig for $907.7 million in cash, reducing our ownership in National
Beef to 31%. We account for our remaining interest under the equity method of accounting. The sale of National Beef
meets the accounting criteria to be classified as a discontinued operation as the sale represents a strategic shift in our
operations and financial results. As such, we classified the results of National Beef prior to June 5, 2018 as a discontinued
operation and it is reported in Income from discontinued operations, net of income tax provision in the Consolidated
Statements of Operations. In addition, we recognized a pre- tax gain as a result of the transaction of $873.5 million
($643.9 million after- tax) for the eleven months ended November 30, 2018, which has been recognized as Gain on
disposal of discontinued operations, net of income tax provision in our Consolidated Statements of Operations.
A summary of results of discontinued operations for National Beef is as follows (in thousands):
Period
Ended
June 4,
2018 (1)
________
Twelve
Months
Ended
Twelve
Months
Ended
December 31, December 31,
2017
____________
2016
___________
Revenues:
Beef processing services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,137,611 $7,353,663 $7,021,902
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131 339 166
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,329 4,946 5,175
________________ __________________ _________________
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,142,071 7,358,948 7,027,243
________________ __________________ _________________
Expenses:
Compensation and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,414 39,884 39,271
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,884,983 6,764,055 6,513,768
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,316 6,657 12,946
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . 43,959 98,515 94,482
Selling, general and other expenses . . . . . . . . . . . . . . . . . . . . . . 14,291 42,525 37,754
________________ __________________ _________________
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,964,963 6,951,636 6,698,221
________________ __________________ _________________
Income from discontinued operations before
income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177,108 407,312 329,022
Income tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47,045 118,681 96,336
________________ __________________ _________________
Income from discontinued operations, net of income
tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 130,063 $ 288,631 $ 232,686
________________ __________________ _________________
________________ __________________ _________________
(1) The operations of National Beef from January 1, 2018 through June 4, 2018, are included in discontinued
operations for our eleven months ended November 30, 2018.
National Beef’s profitability is dependent, in large part, on the spread between its cost for live cattle, the primary raw
material for its business, and the value received from selling boxed beef and other products, coupled with its overall
volume. National Beef operates in a large and liquid commodity market and it does not have much influence over the
price it pays for cattle or the selling price it receives for the products it produces. National Beef’s profitability typically
fluctuates seasonally, with relatively higher margins in the spring and summer months and during times of ample cattle
availability. National Beef’s fiscal year consisted of 52 or 53 weeks, ending on the last Saturday in December. National
Beef’s fiscal year 2017 consisted of 52 weeks and its fiscal year 2016 consisted of 53 weeks.
Throughout 2018, demand for beef and cattle supply remained strong, supporting favorable margin conditions.
Revenues in 2017 increased 5% in comparison to 2016, primarily due to an increase in the number of cattle processed.
Cost of sales increased by 4% in 2017 as compared to 2016. The increase is also due to an increase in the number of
cattle processed. The combined effects of increased margin per head and an increase in volume led to higher profitability
in 2017 as compared to 2016.
Lower average debt balances in 2017 led to a 49% decline in interest expense in 2017 as compared to 2016.
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For further information, see Note 28 to our consolidated financial statements.
Selected Statement of Financial Condition Data
In addition to preparing our Consolidated Statements of Financial Condition in accordance with accounting principles
generally accepted in the United States of America (“GAAP”), we also review the tangible capital associated with each of
our businesses and investments, which is a non- GAAP presentation and may not be comparable to similar non- GAAP
presentations used by other companies. We believe that this information is useful to investors as it allows them to view our
businesses and investments through the eyes of management while facilitating a comparison across historical periods. We
define tangible capital as Total Jefferies Financial Group Inc. shareholders’ equity less Intangible assets, net and goodwill.
As a result of the transactions and our current operating strategy, we have made changes to reflect the way we currently
manage our business, and have reclassified the December 31, 2017 balances to conform to current year presentation.
The tables below reconcile tangible capital to our GAAP balance sheet (in thousands):
November 30, 2018
_______________________________________________________________________
Jefferies Merchant Consolidation
Group Banking Corporate Adjustments Total
______________ ________________ _________________ _____________________ ________
Assets
Cash and cash equivalents . . . . . . . . . . . $ 5,145,886 $ 56,810 $ 56,113 $ – $ 5,258,809
Cash and securities segregated and
on deposit for regulatory purposes
or deposited with clearing and
depository organizations . . . . . . . . . . . 707,960 – – – 707,960
Financial instruments owned . . . . . . . . . 16,399,526 1,063,730 1,409,886 – 18,873,142
Loans to and investments in
associated companies . . . . . . . . . . . . . 997,524 1,419,808 – – 2,417,332
Securities borrowed . . . . . . . . . . . . . . . . 6,538,212 – – – 6,538,212
Securities purchased under
agreements to resell . . . . . . . . . . . . . . 2,785,758 – – – 2,785,758
Receivables . . . . . . . . . . . . . . . . . . . . . . . 5,563,157 721,405 2,839 – 6,287,401
Intangible assets, net and goodwill . . . . . 1,880,849 9,282 – – 1,890,131
Deferred tax asset, net . . . . . . . . . . . . . . 243,240 – 269,549 – 512,789
Other assets . . . . . . . . . . . . . . . . . . . . . . . 962,872 919,449 99,650 (122,410) 1,859,561
___________________
___________________
Total Assets . . . . . . . . . . . . . . . . . . . . 41,224,984 4,190,484 1,838,037 (122,410) 47,131,095
___________________
___________________
Liabilities
Long- term debt (1) . . . . . . . . . . . . . . . . . 6,546,283 81,164 990,116 – 7,617,563
Other liabilities . . . . . . . . . . . . . . . . . . . . 28,440,086 747,990 223,830 (122,410) 29,289,496
___________________
___________________
Total liabilities . . . . . . . . . . . . . . . . . 34,986,369 829,154 1,213,946 (122,410) 36,907,059
___________________
___________________
Redeemable noncontrolling interests . . . – 19,779 – – 19,779
Mandatorily redeemable convertible
preferred shares . . . . . . . . . . . . . . . . . – – 125,000 – 125,000
Noncontrolling interests . . . . . . . . . . . . . 1,911 16,480 – – 18,391
___________________
___________________
Total Jefferies Financial Group
Inc. shareholders’ equity . . . . . . . . . $ 6,236,704 $3,325,071 $ 499,091 $ – $10,060,866
___________________
___________________
___________________
___________________
Reconciliation to Tangible Capital
Total Jefferies Financial Group Inc.
shareholders’ equity . . . . . . . . . . . . . . $ 6,236,704 $3,325,071 $ 499,091 $ – $10,060,866
Less: Intangible assets, net and
goodwill . . . . . . . . . . . . . . . . . . . . . . . . . (1,880,849) (9,282) – – (1,890,131)
___________________
___________________
Tangible Capital, a non- GAAP
measure . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,355,855 $3,315,789 $ 499,091 $ – $ 8,170,735
___________________
___________________
___________________
___________________
_________________ _________________ ________________
_________________ _________________ ________________
_________________ _________________ ________________
_________________ _________________ ________________
_________________ _________________ ________________
_________________ _________________ ________________
_________________ _________________ ________________
_________________ _________________ ________________
_________________ _________________ ________________
_________________ _________________ ________________
(1) Long- term debt within Merchant Banking of $81.2 million at November 30, 2018, primarily includes $77.8
million for Vitesse Energy Finance.
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December 31, 2017
___________________________________________________________________________
Jefferies National Merchant Consolidation
Group Beef Banking Corporate Adjustments Total
______________ ____________ ______________ ______________ _______________________ _______
Assets
Cash and cash equivalents . . . . . . . $ 5,164,492 $ 18,516 $ 55,815 $ 36,657 $ – $ 5,275,480
Cash and securities segregated and
on deposit for regulatory purposes
or deposited with clearing and
depository organizations . . . . . . . 578,014 – – – – 578,014
Financial instruments owned . . . . . 14,193,352 2,880 1,974,930 628,075 – 16,799,237
Loans to and investments in
associated companies . . . . . . . . . 682,790 – 1,384,039 – – 2,066,829
Securities borrowed . . . . . . . . . . . . 7,721,803 – – – – 7,721,803
Securities purchased under
agreements to resell . . . . . . . . . . 3,689,559 – – – – 3,689,559
Receivables . . . . . . . . . . . . . . . . . . . 4,459,827 201,675 754,470 3,043 – 5,419,015
Intangible assets, net and goodwill . 1,899,093 554,541 9,546 – – 2,463,180
Deferred tax asset, net . . . . . . . . . . 212,954 – – 530,857 – 743,811
Other assets . . . . . . . . . . . . . . . . . . . 973,848 682,927 724,730 100,996 (70,321) 2,412,180
_______________________ _____________________ _____________________ ____________________ _________________ _______________________
Total Assets . . . . . . . . . . . . . . . . 39,575,732 1,460,539 4,903,530 1,299,628 (70,321) 47,169,108
_______________________ _____________________ _____________________ ____________________ _________________ _______________________
Liabilities
Long- term debt (1) . . . . . . . . . . . . . 6,416,844 199,221 280,697 989,021 – 7,885,783
Other liabilities . . . . . . . . . . . . . . . . 27,514,235 332,111 706,430 110,298 (70,321) 28,592,753
_______________________ _____________________ _____________________ ____________________ _________________ _______________________
Total liabilities . . . . . . . . . . . . . . 33,931,079 531,332 987,127 1,099,319 (70,321) 36,478,536
_______________________ _____________________ _____________________ ____________________ _________________ _______________________
Redeemable noncontrolling interests – 412,128 14,465 – – 426,593
Mandatorily redeemable convertible
preferred shares . . . . . . . . . . . . . – – – 125,000 – 125,000
Noncontrolling interests . . . . . . . . . 737 – 32,285 – – 33,022
_______________________ _____________________ _____________________ ____________________ _________________ _______________________
Total Jefferies Financial Group
Inc. shareholders’ equity . . . . . $ 5,643,916 $ 517,079 $3,869,653 $ 75,309 $ – $10,105,957
_______________________ _____________________ _____________________ ____________________ _________________ _______________________
_______________________ _____________________ _____________________ ____________________ _________________ _______________________
Reconciliation to Tangible Capital
Total Jefferies Financial Group Inc.
shareholders’ equity . . . . . . . . . . $ 5,643,916 $ 517,079 $ 3,869,653 $ 75,309 $ – $10,105,957
Less: Intangible assets, net and
goodwill . . . . . . . . . . . . . . . . . . . . (1,899,093) (554,541) (9,546) – – (2,463,180)
_______________________ _____________________ _____________________ ____________________ _________________ _______________________
Tangible Capital, a non- GAAP
measure . . . . . . . . . . . . . . . . . . . . $ 3,744,823 $ (37,462) $ 3,860,107 $ 75,309 $ – $ 7,642,777
_______________________ _____________________ _____________________ ____________________ _________________ _______________________
_______________________ _____________________ _____________________ ____________________ _________________ _______________________
(1) Long- term debt within Merchant Banking of $280.7 million at December 31, 2017, includes $53.4 million for
our real estate associated with the Garcadia investment, $39.8 million for Vitesse Energy Finance, $170.5 million
for Foursight Capital and $17.0 million for Chrome Capital.
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The table below presents our tangible capital by significant business and investment (in thousands):
Tangible Capital as of
________________________________________
November 30, December 31,
2018 2017
Jefferies Group (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,355,855 $3,744,823
Merchant Banking:
___________________ _________________
National Beef . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 653,630 (37,462)
Oil and gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 640,773 416,621
Spectrum Brands . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 374,221 789,870
HomeFed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 337,542 310,264
WeWork . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 254,400 183,495
Linkem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165,157 192,136
FXCM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148,181 231,656
Idaho Timber . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78,190 81,542
LAM (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . – 571,264
Berkadia (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . – 210,594
Garcadia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . – 199,541
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 663,695 673,124
Total Merchant Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,315,789 3,822,645
Corporate liquidity and other assets, net of Corporate liabilities including
long- term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 499,091 75,309
Total Tangible Capital (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,170,735 $7,642,777
_________________
_________________
_________________
_________________
_________________
_________________
_________________
_________________
_________________
_________________
(1) In the fourth quarter of 2018, we amalgamated all our primary financial services operating businesses into one
platform by transferring our 50% membership interest in Berkadia and our LAM seed investments into Jefferies
Group.
(2) Tangible Capital, a non- GAAP measure, is defined as Jefferies Financial Group Inc. shareholders’ equity less
Intangible assets, net and goodwill. See reconciliation of Tangible Capital to Jefferies Financial Group Inc.
shareholders’ equity in the tables above.
Liquidity and Capital Resources
Corporate Liquidity
At the corporate level our assets principally consist of the stock or membership interests of our businesses and
investments, cash and cash equivalents and other noncontrolling investments in debt and equity securities. Our principal
sources of funds are distributions from subsidiaries, proceeds from divestitures of existing businesses and investments,
repayment of subsidiary advances, available cash resources, liquid investments, funds distributed from subsidiaries as
tax sharing payments, public and private capital market transactions, and management and other fees. Our cash
requirements consist primarily of the payment of interest on our debt, dividends and corporate cash overhead expenses,
as well as acquisitions on new businesses when determined to be in the best interest of our shareholders.
During the eleven months ended November 30, 2018, we received $713.8 million of distributions from our existing
subsidiary businesses, including $441.7 million from Jefferies Group. We also received $1,584.9 million from divestitures
and repayments of advances, primarily from the sales of 48% of National Beef and 100% of our equity interests in
Garcadia and our associated real estate. Proceeds from the sale of 48% of National Beef and total distributions received
from National Beef for the eleven months ended November 30, 2018 were $1,207.7 million.
Our cash resources and investments that are easily convertible into cash within a relatively short period of time total
$1,631.0 million at November 30, 2018, and are primarily comprised of cash, short- term bonds and notes of the U.S.
Government and its agencies, and other publicly traded debt and equity securities. These are classified on our Statement
of Financial Condition as cash and cash equivalents, trading assets and available for sale securities.
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Our short- term recurring cash requirements, including the payment of interest on our debt, dividends and corporate cash
overhead expenses, approximate $289 million on an annual basis. Dividends paid during the eleven months ended
November 30, 2018 of $151.8 million include quarterly dividends of $0.10 per share for each of the first two quarters
and $0.125 per share for each of the last two quarters. The payment of dividends is subject to the discretion of the Board
of Directors and depends upon general business conditions, legal and contractual restrictions on the payment of dividends
and other factors that the Board of Directors may deem to be relevant. Our recurring cash requirements typically do not
include significant amounts for tax payments, as we have NOLs and other tax attributes which offset federal tax liabilities.
During the eleven months ended November 30, 2018, we used about $1.3 billion of our NOLs to offset taxable income,
and we have about $1.1 billion remaining NOLs as of November 30, 2018.
Our primary long- term cash requirement is to make principal payments on the parent company’s long- term debt ($1.0
billion principal outstanding as of November 30, 2018), of which $750.0 million is due in 2023 and $250.0 million in
2043. We continue to use our available liquidity to make acquisitions of new businesses and other investments, additional
contributions to existing businesses and repurchases of our outstanding common shares. The timing of these events is
influenced by many factors and therefore cannot be predicted.
In April 2018, Vitesse Energy Finance acquired non- operated Bakken assets from a portfolio company of a private
equity fund for $190.0 million in cash, of which approximately $144.0 million was funded as equity by Jefferies
and the balance funded by Vitesse Energy Finance’s credit line. The assets purchased include interests in mineral
rights and leasehold acreage in oil and gas drilling spacing units expected to be developed and working interests in
cash flowing producing wells.
In May 2018, we expanded our asset management efforts by forming a strategic relationship with Weiss and invested
$250.0 million in Weiss’ strategy. We own a profit share in the firm for the first year and a revenue share thereafter.
In June 2018, we completed the sale of 48% of National Beef to Marfrig for approximately $907.7 million in cash,
reducing our ownership in National Beef to 31%.
In August 2018, we sold 100% of our equity interests in Garcadia and our associated real estate to our former partners,
the Garff family for $417.2 million in cash.
In the fourth quarter of 2018, we transferred our LAM seed investments, as well as our interest in Berkadia, to Jefferies
Group. These transfers were accomplished as a capital contribution to Jefferies Group of approximately $598.2 million
and an internal transfer of cash from Jefferies Group of $76.0 million to Jefferies.
In April 2018, the Board of Directors approved an increase to our existing share repurchase program, bringing total
common shares authorized for repurchase to 25,000,000. In July 2018, the Board of Directors approved another increase
to our share repurchase program, authorizing the repurchase of an additional 25,000,000 common shares. During the
eleven months ended November 30, 2018, we purchased a total of 50,000,000 of our common shares for $1,143.0 million
at an average price per share of $22.86 under these authorizations. As of November 30, 2018, no common shares remained
authorized for repurchase. In January 2019, the Board of Directors approved an additional $500.0 million share
repurchase authorization.
At November 30, 2018, we had outstanding 307,515,472 common shares and 20,657,000 share- based awards that do
not require the holder to pay any exercise price (potentially an aggregate of 328,172,472 outstanding common shares if
all awards become outstanding common shares). The 20,657,000 share- based awards include the target number of shares
under the senior executive award plan, which is more fully discussed in Note 17.
In February 2009, the Board of Directors authorized the purchase of our outstanding debt securities through cash
purchases in open market transactions, privately negotiated transactions or otherwise. Such repurchases, if any, depend
upon prevailing market conditions, our liquidity requirements and other factors; such purchases may be commenced or
suspended at any time without notice.
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Concentration, Liquidity and Leverage Targets
From time to time in the past, we have accessed public and private credit markets and raised capital in underwritten
bond financings. The funds raised have been used by us for general corporate purposes, including for our existing
businesses and new investment opportunities. In addition, the ratings of Jefferies are a factor considered by rating agencies
that rate the debt of our subsidiary companies, including Jefferies Group, whose access to external financing is important
to its day to day operations. Ratings issued by bond rating agencies, subject to change at any time, are as follows:
Rating Outlook
__________ ____________
Moody’s Investors Service . . . . . . . . . . . . . . . . . . . . . . . . . Ba1 Positive
Standard and Poor’s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . BBB- Stable
Fitch Ratings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . BBB Stable
We target specific concentration, leverage and liquidity principles, expressed in the form of certain ratios and percentages,
although there is no legal requirement to do so.
Concentration Target: As a diversification measure, we limit cash investments such that our single largest investment
does not exceed 20% of equity excluding Jefferies Group, and that our next largest investment does not exceed 10% of
equity excluding Jefferies Group, in each case measured at the time the investment was made. On this basis, Spectrum
Brands is our largest investment excluding Jefferies Group and Vitesse Energy Finance is our next largest investment
excluding Jefferies Group. National Beef is no longer considered our largest investment because we have received back
cash in excess of our cumulative investments. There were no investments made during the year that approached 10% of
equity excluding Jefferies Group.
Liquidity Target: We hold a liquidity reserve calculated as a minimum of twenty- four months of holding company
expenses (excluding non- cash components), parent company interest, and dividends. Maturities of parent company debt
within the upcoming year are also included in the target; however, our next maturity is during 2023 so there is no current
inclusion.
November 30,
2018
_______________
Liquidity reserve (in thousands):
Minimum reserve under liquidity target . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 577,090
Actual liquidity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,630,977
Leverage Target: We target a maximum parent debt to stressed equity ratio of .50, with stressed equity defined as equity
(excluding Jefferies Group) assuming the loss of our two largest investments.
November 30,
2018
_______________
Leverage target (dollars in thousands):
Total Jefferies Financial Group Inc. shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . $10,060,866
(6,236,704)
__________
3,824,162
Less, investment in Jefferies Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity excluding Jefferies Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less, our two largest investments:
National Beef . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vitesse Energy Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in a stressed scenario . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less, net deferred tax asset excluding Jefferies Group’s amount . . . . . . . . . . . . . . . . .
(653,630)
(532,824)
__________
2,637,708
(269,549)
__________
Equity in a stressed scenario less net deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,368,159
__________
__________
990,116
__________
__________
Parent company debt (see Note 15 to our consolidated financial statements) . . . . . . . . . $
Ratio of parent company debt to stressed equity:
Maximum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actual, equity in a stressed scenario . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actual, equity in a stressed scenario excluding net deferred tax asset . . . . . . . . . . . . .
0.50
0.38
0.42
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Consolidated Statements of Cash Flows
As discussed above, we have historically relied on our available liquidity to meet short- term and long- term needs, and
to make acquisitions of new businesses and investments. Except as otherwise disclosed herein, our operating businesses
do not generally require significant funds to support their operating activities. The mix of our operating businesses and
investments can change frequently as a result of acquisitions or divestitures, the timing of which is impossible to predict
but which often have a significant impact on our Consolidated Statements of Cash Flows in any one period. Further, the
timing and amounts of distributions from investments in associated companies may be outside our control. As a result,
reported cash flows from operating, investing and financing activities do not generally follow any particular pattern or
trend, and reported results in the most recent period should not be expected to recur in any subsequent period.
Net cash of $691.1 million, $788.3 million and $572.4 million, respectively, was provided by operating activities during
the eleven months ended November 30, 2018 and the twelve months ended December 31, 2017 and 2016.
•
Jefferies Group generated funds of $429.7 million and $481.9 million during 2018 and 2017, respectively,
and used funds of $124.3 million during 2016. Included in these amounts are distributions received from
associated companies of $66.1 million, $21.0 million and $38.2 million during 2018, 2017 and 2016,
respectively.
• Within Merchant Banking, cash of $41.5 million was generated during 2018 and cash of $124.6 million and
$50.0 million was used during 2017 and 2016, respectively, related to investments in the LAM platform.
Additionally, during 2016, cash of $427.0 million was generated from our trading portfolio related to our
LAM platform. Cash of $23.4 million and $97.6 million was used to make additional investments in our
trading portfolio during 2018 and 2017, respectively. Manufacturing generated funds of $40.6 million, $15.7
million and $35.4 million in 2018, 2017 and 2016, respectively. Distributions from associated companies
include $41.0 million (through its transfer to Jefferies Group on October 1, 2018), $66.7 million and $99.9
million during 2018, 2017 and 2016, respectively, from Berkadia; $24.4 million during 2018 from National
Beef; and $28.3 million, $46.9 million and $51.4 million during 2018, 2017 and 2016, respectively, from
Garcadia. Net losses related to real estate, property and equipment, and other assets include impairment
charges of $65.7 million in 2016, primarily related to JETX Energy, and the write down of a note receivable
of $20.0 million in 2017 related to the sale of a subsidiary in 2012.
• Net cash provided by operating activities of discontinued operations reflects funds generated by National
Beef of $164.7 million, $553.8 million and $484.8 million during 2018, 2017 and 2016, respectively.
Net cash of $142.4 million was provided by investing activities during the eleven months ended November 30, 2018,
and $54.6 million and $636.2 million, respectively, was used for investing activities during the twelve months ended
December 31, 2017 and 2016.
• Acquisitions of property, equipment and leasehold improvements, and other assets related to Jefferies Group
include $71.4 million, $72.7 million and $103.3 million in 2018, 2017 and 2016, respectively. Jefferies
Group made loans to and investments in associated companies of $1,929.6 million during 2018, $3,161.6
million during 2017 and $538.2 million during 2016. Jefferies Group received capital distributions and loan
repayments from its associated companies of $1,873.0 million during 2018, $3,069.0 million during 2017
and $689.2 million during 2016. Additionally, Jefferies Group received proceeds of $173.1 million during
2017 from the sale of its investment in Jefferies LoanCore.
• Within Merchant Banking, acquisitions of property, equipment and leasehold improvements, and other assets
primarily reflect activity in our oil and gas production and development businesses. They totaled $253.9
million, $48.7 million and $153.1 million in 2018, 2017 and 2016, respectively. Proceeds from sale of
subsidiaries and proceeds from sale of associated companies during 2018 primarily relate to the sale of our
equity interests in Garcadia and our associated real estate. Proceeds from sale of subsidiaries during 2017
relate to the sale of Conwed. Loans to and investments in associated companies include $13.5 million to
Golden Queen during 2018; $31.9 million to HomeFed, $32.0 million to Linkem and $62.8 million to real
estate projects, of which $35.9 million was contributed by noncontrolling interests, during 2017; and $33.3
million to Linkem, $22.5 million to Garcadia and $153.5 million to real estate projects, of which $90.7
million was contributed by noncontrolling interests, during 2016. We received capital distributions and loan
repayments from associated companies of $24.3 million from National Beef, $2.6 million from Golden
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Queen, $56.3 million from real estate projects and $0.6 million from Garcadia during 2018; $7.9 million
from Garcadia and $25.6 million from real estate projects during 2017; and $10.2 million from Garcadia
during 2016.
• Net cash provided by (used for) investing activities of discontinued operations includes the net proceeds
from sale of National Beef of $898.9 million during 2018 and acquisitions of property, equipment and
leasehold improvements, and other assets related to National Beef of $33.7 million during 2018, $70.4
million during 2017 and $62.0 million during 2016.
Net cash of $575.8 million was used for financing activities during the eleven months ended November 30, 2018, and
net cash of $434.8 million and $230.9 million was provided by financing activities during the twelve months ended
December 31, 2017 and 2016, respectively.
•
Issuance of debt includes $2,450.7 million during 2018, $1,335.4 million during 2017 and $299.8 million
during 2016 related to Jefferies Group. Repayment of debt includes $2,173.3 million during 2018, $524.1
million during 2017 and $373.2 million during 2016 related to Jefferies Group. Net change in bank overdrafts
of $10.3 million in 2018, $(5.7) million in 2017 and $(46.5) million in 2016 related to Jefferies Group. Net
change in other secured financings include proceeds of $159.4 million during 2018 and payments of $33.5
million and $7.3 million, respectively, during 2017 and 2016, related to Jefferies Group.
• Within Merchant Banking, issuance of debt includes $304.0 million in 2018, $285.3 million in 2017 and
$720.3 million in 2016. Their repayment of debt includes $505.0 million in 2018, $324.2 million in 2017
and $425.6 million in 2016. Net change in other secured financings include proceeds of $343.7 million,
$34.7 million and $124.0 million during 2018, 2017 and 2016, respectively, related to Foursight Capital.
Contributions from noncontrolling interests include $39.4 million during 2017 and $144.8 million during
2016 and distributions to noncontrolling interests include $12.0 million during 2017 and $18.0 million during
2016, related to real estate projects.
• Purchases of common shares for treasury relate to shares purchased in the open market and shares received
from participants in our stock compensation plans.
• Net cash provided by (used for) financing activities of discontinued operations includes the issuance of debt
by National Beef of $366.1 million during 2018 and $474.9 million during 2017 of borrowings under its
bank credit facility and repayment of debt by National Beef of $175.1 million in 2018, $552.8 million in
2017 and $163.7 million in 2016.
As shown below, at November 30, 2018, our contractual obligations totaled $12,543.1 million.
Expected Maturity Date
__________________________________________________________________________________________________________________
2021 2023
and and After
Contractual Obligations Total 2019 2020 2022 2024 2024
_________________________________________ ________ _________ _________ _________ _________ _________
(In millions)
Long- term debt . . . . . . . . . . . . . . . . . . . $ 7,670.3 $ 690.2 $ 565.5 $ 967.5 $1,480.6 $3,966.5
Estimated interest expense on debt . . . . 3,565.3 385.9 349.6 593.7 453.4 1,782.7
Operating leases, net of sublease income 732.9 65.5 56.6 119.1 116.2 375.5
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 574.6 148.7 101.8 135.8 77.4 110.9
___________________ ________________ ________________ ________________ ________________ ________________
Total Contractual Obligations . . . . . . $12,543.1 $1,290.3 $1,073.5 $1,816.1 $2,127.6 $6,235.6
___________________ ________________ ________________ ________________ ________________ ________________
___________________ ________________ ________________ ________________ ________________ ________________
Amounts related to our U.S. pension obligations ($52.3 million) are not included in the above table as the timing of
payments is uncertain; however, we do expect to make $7.5 million of contributions to these plans in 2019. For further
information, see Note 19 in our consolidated financial statements. In addition, the above amounts do not include liabilities
for unrecognized tax benefits as the timing of payments, if any, is uncertain. Such amounts aggregated $251.4 million
at November 30, 2018; for more information, see Note 21 in our consolidated financial statements.
Our U.S. pension obligations relate to frozen defined benefit pension plans, principally the defined benefit plan of WilTel
Communications Group, LLC (“WilTel”), our former telecommunications subsidiary. When we sold WilTel in 2005, its
defined benefit pension plan was not transferred in connection with the sale. At November 30, 2018, we had recorded
a liability of $45.8 million in our Consolidated Statement of Financial Condition for WilTel’s unfunded defined benefit
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pension plan obligation. This amount represents the difference between the present value of amounts owed to former
employees of WilTel (referred to as the projected benefit obligation) and the market value of plan assets set aside in
segregated trust accounts. Since the benefits in this plan have been frozen, future changes to the unfunded benefit
obligation are expected to principally result from benefit payments, changes in the market value of plan assets, differences
between actuarial assumptions and actual experience and interest rates.
Calculations of pension expense and projected benefit obligations are prepared by actuaries based on assumptions
provided by management. These assumptions are reviewed on an annual basis, including assumptions about discount
rates, interest credit rates and expected long- term rates of return on plan assets. The timing of expected future benefit
payments was used in conjunction with the Citigroup Pension Discount Curve to develop a discount rate for the WilTel
plan that is representative of the high quality corporate bond market. Holding all other assumptions constant, a 0.25%
change in the discount rate would affect pension expense in 2019 by $0.3 million and the benefit obligation by $5.1
million, of which $3.8 million relates to the WilTel plan.
The deferred losses in accumulated other comprehensive income (loss) have not yet been recognized as components of
net periodic pension cost in the Consolidated Statements of Operations ($49.7 million at November 30, 2018). These
deferred amounts primarily result from differences between the actual and assumed return on plan assets and changes
in actuarial assumptions, including changes in discount rates and changes in interest credit rates. They are amortized to
expense if they exceed 10% of the greater of the projected benefit obligation or the market value of plan assets as of the
beginning of the year. The estimated net loss that will be amortized from accumulated other comprehensive income
(loss) into pension expense in 2019 is $1.9 million.
The assumed long- term rates of return on plan assets are based on the investment objectives of the plans, which are
more fully discussed in Note 19 in our consolidated financial statements.
Jefferies Group Liquidity
General
The Chief Financial Officer and Global Treasurer of Jefferies Group are responsible for developing and implementing
liquidity, funding and capital management strategies for Jefferies Group’s businesses. These policies are determined by
the nature and needs of day to day business operations, business opportunities, regulatory obligations and liquidity
requirements.
The actual levels of capital, total assets, and financial leverage are a function of a number of factors, including asset
composition, business initiatives and opportunities, regulatory requirements and cost and availability of both long- term
and short- term funding. Jefferies Group has historically maintained a balance sheet consisting of a large portion of total
assets in cash and liquid marketable securities, arising principally from traditional securities brokerage and trading
activity. The liquid nature of these assets provides flexibility in financing and managing Jefferies Group’s business.
Jefferies Group maintains modest leverage to support its investment grade ratings. The growth of its balance sheet is
supported by its equity and Jefferies Group has quantitative metrics in place to monitor leverage and double leverage.
Jefferies Group capital plan is robust, in order to sustain its operating model through stressed conditions. Jefferies Group
maintains adequate financial resources to support business activities in both normal and stressed market conditions,
including a buffer in excess of regulatory, or other internal or external, requirements. Jefferies Group’s access to funding
and liquidity is stable and efficient to ensure that there is sufficient liquidity to meet its financial obligations in normal
and stressed market conditions.
A business unit level balance sheet and cash capital analysis is prepared and reviewed with senior management on a
weekly basis. As a part of this balance sheet review process, capital is allocated to all assets and gross balance sheet
limits are adjusted, as necessary. This process ensures that the allocation of capital and costs of capital are incorporated
into business decisions. The goals of this process are to protect Jefferies Group’s platform, enable the businesses to
remain competitive, maintain the ability to manage capital proactively and hold businesses accountable for both balance
sheet and capital usage.
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Jefferies Group actively monitors and evaluates its financial condition and the composition of its assets and liabilities.
The overall securities inventory is continually monitored by Jefferies Group, including the inventory turnover rate, which
confirms the liquidity of overall assets. Substantially all of Jefferies Group’s financial instruments are valued on a daily
basis and Jefferies Group monitors and employs balance sheet limits for its various businesses.
At November 30, 2018, our Consolidated Statement of Financial Condition includes Jefferies Group’s Level 3 trading
assets that are approximately 2% of total trading assets.
Securities financing assets and liabilities include financing for financial instruments trading activity, matched book
transactions and mortgage finance transactions. Matched book transactions accommodate customers, as well as obtain
securities for the settlement and financing of inventory positions.
The following table presents Jefferies Group’s period end balance, average balance and maximum balance at any month
end within the periods presented for Securities purchased under agreements to resell and Securities sold under agreements
to repurchase (in millions):
2018 2017
_____ _____
Securities purchased under agreements to resell:
Period end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,786 $ 3,690
Month end average . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,232 6,195
Maximum month end . . . . . . . . . . . . . . . . . . . . . . . . . . 7,593 7,814
Securities sold under agreements to repurchase:
Period end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,643 $ 8,661
Month end average . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,704 11,273
Maximum month end . . . . . . . . . . . . . . . . . . . . . . . . . . 15,579 13,679
Fluctuations in the balance of Jefferies Group’s repurchase agreements from period to period and intraperiod are
dependent on business activity in those periods. Additionally, the fluctuations in the balances of Jefferies Group’s
securities purchased under agreements to resell are influenced in any given period by its clients’ balances and its clients’
desires to execute collateralized financing arrangements via the repurchase market or via other financing
products. Average balances and period end balances will fluctuate based on market and liquidity conditions and Jefferies
Group considers the fluctuations intraperiod to be typical for the repurchase market.
Liquidity Management
The key objectives of Jefferies Group’s liquidity management framework are to support the successful execution of its
business strategies while ensuring sufficient liquidity through the business cycle and during periods of financial distress.
The liquidity management policies are designed to mitigate the potential risk that adequate financing may not be
accessible to service financial obligations without material franchise or business impact.
The principal elements of Jefferies Group’s liquidity management framework are the Contingency Funding Plan, the
Cash Capital Policy and the assessment of Maximum Liquidity Outflow.
Contingency Funding Plan. Jefferies Group’s Contingency Funding Plan is based on a model of a potential liquidity
contraction over a one year time period. This incorporates potential cash outflows during a liquidity stress event, including,
but not limited to, the following:
• Repayment of all unsecured debt maturing within one year and no incremental unsecured debt issuance;
• Maturity rolloff of outstanding letters of credit with no further issuance and replacement with cash collateral;
• Higher margin requirements than currently exist on assets on securities financing activity, including
repurchase agreements;
• Liquidity outflows related to possible credit downgrade;
• Lower availability of secured funding;
• Client cash withdrawals;
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• The anticipated funding of outstanding investment and loan commitments; and
• Certain accrued expenses and other liabilities and fixed costs.
Cash Capital Policy. A cash capital model is maintained that measures long- term funding sources against
requirements. Sources of cash capital include equity and the noncurrent portion of long- term borrowings. Uses of cash
capital include the following:
•
Illiquid assets such as equipment, goodwill, net intangible assets, exchange memberships, deferred tax assets
and certain investments;
• A portion of securities inventory that is not expected to be financed on a secured basis in a credit stressed
environment (i.e., margin requirements); and
• Drawdowns of unfunded commitments.
To ensure that Jefferies Group does not need to liquidate inventory in the event of a funding crisis, Jefferies Group seeks
to maintain surplus cash capital, which is reflected in the leverage ratios Jefferies Group maintains. Jefferies Group’s
total long- term capital of $11.8 billion at November 30, 2018 exceeded its cash capital requirements.
Maximum Liquidity Outflow. Jefferies Group’s businesses are diverse, and liquidity needs are determined by many
factors, including market movements, collateral requirements and client commitments, all of which can change
dramatically in a difficult funding environment. During a liquidity crisis, credit- sensitive funding, including unsecured
debt and some types of secured financing agreements, may be unavailable, and the terms (e.g., interest rates, collateral
provisions and tenor) or availability of other types of secured financing may change. As a result of Jefferies Group’s
policy to ensure it has sufficient funds to cover estimates of what may be needed in a liquidity crisis, Jefferies Group
holds more cash and unencumbered securities and has greater long- term debt balances than the businesses would
otherwise require. As part of this estimation process, Jefferies Group calculates a Maximum Liquidity Outflow that
could be experienced in a liquidity crisis. Maximum Liquidity Outflow is based on a scenario that includes both a market-
wide stress and firm- specific stress.
Based on the sources and uses of liquidity calculated under the Maximum Liquidity Outflow scenarios, Jefferies Group
determines, based on its calculated surplus or deficit, additional long- term funding that may be needed versus funding
through the repurchase financing market and considers any adjustments that may be necessary to Jefferies Group’s
inventory balances and cash holdings. At November 30, 2018, Jefferies Group had sufficient excess liquidity to meet all
contingent cash outflows detailed in the Maximum Liquidity Outflow. Jefferies Group regularly refines its model to
reflect changes in market or economic conditions and the firm’s business mix.
Sources of Liquidity
Within Jefferies Group, the following are financial instruments that are cash and cash equivalents or are deemed by
Jefferies Group’s management to be generally readily convertible into cash, marginable or accessible for liquidity purposes
within a relatively short period of time, as reflected in our Consolidated Statements of Financial Condition (in thousands):
Average Balance
November 30, Fourth Quarter December 31,
2018 (1)
___________ ____________
2017
__________
2018
Cash and cash equivalents:
Cash in banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,333,476 $2,367,239 $2,244,207
Money market investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,812,410 2,023,884 2,920,285
_________ _________ _________
Total cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . 5,145,886 4,391,123 5,164,492
_________ _________ _________
Other sources of liquidity:
Debt securities owned and securities purchased under
agreements to resell (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 958,539 966,541 1,031,252
Other (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 499,576 531,030 513,293
_________ _________ _________
Total other sources. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,458,115 1,497,571 1,544,545
_________ _________ _________
Total cash and cash equivalents and other liquidity sources . . $6,604,001 $5,888,694 $6,709,037
_________ _________ _________
_________ _________ _________
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(1) Average balances are calculated based on weekly balances.
(2) Consists of high quality sovereign government securities and reverse repurchase agreements collateralized by
U.S. government securities and other high quality sovereign government securities; deposits with a central bank
within the European Economic Area, Canada, Australia, Japan, Switzerland or the U.S.; and securities issued
by a designated multilateral development bank and reverse repurchase agreements with underlying collateral
comprised of these securities.
(3) Other includes unencumbered inventory representing an estimate of the amount of additional secured financing
that could be reasonably expected to be obtained from financial instruments owned that are currently not pledged
after considering reasonable financing haircuts.
In addition to the cash balances and liquidity pool presented above, the majority of trading assets and liabilities are
actively traded and readily marketable. At November 30, 2018, repurchase financing can be readily obtained for
approximately 74.4% of Jefferies Group’s inventory at haircuts of 10% or less, which reflects the liquidity of the
inventory. In addition, as a matter of Jefferies Group’s policy, all of these assets have internal capital assessed, which is
in addition to the funding haircuts provided in the securities finance markets. Additionally, certain of Jefferies Group’s
trading assets primarily consisting of bank loans, consumer loans and investments are predominantly funded by Jefferies
Group’s long- term capital. Under Jefferies Group’s cash capital policy, capital allocation levels are modeled that are
more stringent than the haircuts used in the market for secured funding; and surplus capital is maintained at these more
stringent levels. Jefferies Group continually assesses the liquidity of its inventory based on the level at which Jefferies
Group could obtain financing in the market place for a given asset. Assets are considered to be liquid if financing can
be obtained in the repurchase market or the securities lending market at collateral haircut levels of 10% or less.
The following summarizes Jefferies Group’s trading assets by asset class that are considered to be of a liquid nature and
the amount of such assets that have not been pledged as collateral as reflected in the Consolidated Statements of Financial
Condition (in thousands):
November 30, 2018 December 31, 2017
____________________________________________________ ____________________________________________________
Liquid Unencumbered Liquid Unencumbered
Financial Liquid Financial Financial Liquid Financial
Instruments Instruments (2) Instruments Instruments (2)
____________________ ___________________________ __________________ _________________________
Corporate equity securities . . . . . . . . . . . . . . . . . . . . . $ 1,907,064 $ 317,189 $ 1,718,617 $ 272,380
Corporate debt securities . . . . . . . . . . . . . . . . . . . . . . . 1,775,721 104,685 2,475,291 57,290
U.S. Government, agency and municipal securities . . 2,648,843 294,030 1,954,697 185,481
Other sovereign obligations . . . . . . . . . . . . . . . . . . . . . 2,626,212 840,578 2,050,942 996,421
Agency mortgage- backed securities (1) . . . . . . . . . . . 2,972,638 – 1,742,977 –
Loans and other receivables . . . . . . . . . . . . . . . . . . . . 272,201 – 243,664 –
__________ _________ __________ _________
$12,202,679 $1,556,482 $10,186,188 $1,511,572
__________ _________ __________ _________
__________ _________ __________ _________
(1) Consists solely of agency mortgage- backed securities issued by Freddie Mac, Fannie Mae and Ginnie Mae. These
securities include pass- through securities, securities backed by adjustable rate mortgages, collateralized mortgage
obligations, commercial mortgage- backed securities and interest- and principal- only securities.
(2) Unencumbered liquid balances represent assets that can be sold or used as collateral for a loan, but have not been.
In addition to being able to be readily financed at modest haircut levels, it is estimated that each of the individual securities
within each asset class above could be sold into the market and converted into cash within three business days under
normal market conditions, assuming that the entire portfolio of a given asset class was not simultaneously
liquidated. There are no restrictions on the unencumbered liquid securities, nor have they been pledged as collateral.
Sources of Funding
Secured Financing
Readily available secured funding is used to finance Jefferies Group’s inventory of financial instruments. Jefferies Group’s
ability to support increases in total assets is largely a function of the ability to obtain short and intermediate- term secured
funding, primarily through securities financing transactions. Repurchase or reverse repurchase agreements (collectively
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“repos”), respectively, are used to finance a portion of long inventory and cover a portion of short inventory through
pledging and borrowing securities. Approximately 69.5% of Jefferies Group’s cash and noncash repurchase financing
activities use collateral that is considered eligible collateral by central clearing corporations. Central clearing corporations
are situated between participating members who borrow cash and lend securities (or vice versa); accordingly, repo
participants contract with the central clearing corporation and not one another individually. Therefore, counterparty
credit risk is borne by the central clearing corporation which mitigates the risk through initial margin demands and
variation margin calls from repo participants. The comparatively large proportion of Jefferies Group’s total repo activity
that is eligible for central clearing reflects the high quality and liquid composition of its trading inventory. For those
asset classes not eligible for central clearing house financing, Jefferies Group seeks to execute its bi- lateral financings
on an extended term basis and the tenor of Jefferies Group’s repurchase and reverse repurchase agreements generally
exceeds the expected holding period of the assets Jefferies Group is financing. The weighted average maturity of cash
and noncash repurchase agreements for non- clearing corporation eligible funded inventory is approximately three months
at November 30, 2018.
Jefferies Group’s ability to finance its inventory via central clearinghouses and bi- lateral arrangements is augmented by
Jefferies Group’s ability to draw bank loans on an uncommitted basis under its various banking arrangements. At
November 30, 2018, short- term borrowings, which must be repaid within one year or less and include bank loans and
overdrafts, borrowings under revolving credit facilities and structured notes totaled $387.5 million. Interest under the
bank lines is generally at a spread over the federal funds rate. Letters of credit are used in the normal course of business
mostly to satisfy various collateral requirements in favor of exchanges in lieu of depositing cash or securities. Average
daily short- term borrowings outstanding for Jefferies Group were $472.6 million and $482.4 million for 2018 and 2017,
respectively.
Jefferies Group’s short- term borrowings include an Intraday Credit Facility, whereby the Bank of New York Mellon has
agreed to make revolving intraday credit advances for an aggregate committed amount of $150.0 million. The Intraday
Credit Facility contains financial covenants, which includes a minimum regulatory net capital requirement for its U.S.
broker- dealer. Interest is based on the higher of the Federal funds effective rate plus 0.5% or the prime rate. At
November 30, 2018, Jefferies Group was in compliance with all debt covenants under the Intraday Credit Facility.
In addition to the above financing arrangements, Jefferies Group issues notes backed by eligible collateral under a master
repurchase agreement, which provides an additional financing source for its inventory (“repurchase agreement financing
program”). The notes issued under the program are presented within Other secured financings in the Consolidated
Statement of Financial Condition. At November 30, 2018, the outstanding notes were $881.5 million, bear interest at a
spread over London Interbank Offered Rate (“LIBOR”) and mature from April 2019 to September 2019.
Long- Term Debt
Jefferies Group’s long- term debt reflected in the Consolidated Statement of Financial Condition at November 30, 2018
is $6.5 billion. Jefferies Group’s long- term debt has a weighted average maturity of approximately 8.6 years. Jefferies
Group’s next scheduled maturity is the $680.8 million principal amount of 8.5% Senior Notes that mature in July 2019.
Jefferies Group’s long- term debt ratings are as follows:
Rating Outlook
______ _______
Moody’s Investors Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Baa3 Stable
Standard and Poor’s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . BBB- Stable
Fitch Ratings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . BBB Stable
Jefferies Group’s access to external financing to finance its day to day operations, as well as the cost of that financing,
is dependent upon various factors, including its debt ratings. Jefferies Group’s current debt ratings are dependent upon
many factors, including industry dynamics, operating and economic environment, operating results, operating margins,
earnings trend and volatility, balance sheet composition, liquidity and liquidity management, capital structure, overall
risk management, business diversification and market share and competitive position in the markets in which it
operates. Deteriorations in any of these factors could impact Jefferies Group’s credit ratings. While certain aspects of a
credit rating downgrade are quantifiable pursuant to contractual provisions, the impact on its business and trading results
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in future periods is inherently uncertain and depends on a number of factors, including the magnitude of the downgrade,
the behavior of individual clients and future mitigating action taken by Jefferies Group.
In connection with certain OTC derivative contract arrangements and certain other trading arrangements, Jefferies Group
may be required to provide additional collateral to counterparties, exchanges and clearing organizations in the event of
a credit rating downgrade. At November 30, 2018, the amount of additional collateral that could be called by
counterparties, exchanges and clearing organizations under the terms of such agreements in the event of a downgrade
of Jefferies Group’s long- term credit rating below investment grade was $55.8 million. For certain foreign clearing
organization’s credit rating is only one of several factors employed in determining collateral that could be called. The
above represents management’s best estimate for additional collateral to be called in the event of credit rating
downgrade. The impact of additional collateral requirements is considered in Jefferies Group’s Contingency Funding
Plan and calculation of Maximum Liquidity Outflow, as described above.
Ratings issued by credit rating agencies are subject to change at any time.
Net Capital
Jefferies Group operates a broker- dealer registered with the SEC and member firms of FINRA. Jefferies LLC is subject
to the SEC Uniform Net Capital Rule (“Rule 15c3-1”), which requires the maintenance of minimum net capital and has
elected to calculate minimum capital requirements using the alternative method permitted by Rule 15c3-1 in calculating
net capital. Jefferies LLC, as a dually- registered U.S. broker- dealer and FCM, is also subject to Rule 1.17 of the CFTC,
which sets forth minimum financial requirements. The minimum net capital requirement in determining excess net
capital for a dually- registered U.S. broker- dealer and FCM is equal to the greater of the requirement under Rule 15c3-1
or CFTC Rule 1.17. Jefferies LLC’s net capital and excess net capital at November 30, 2018 were $1,739.4 million and
$1,636.0 million, respectively. FINRA is the designated examining authority for Jefferies Group’s U.S. broker- dealer
and the NFA is the designated self- regulatory organization for Jefferies LLC as an FCM.
Certain other U.S. and non- U.S. subsidiaries of Jefferies Group are subject to capital adequacy requirements as prescribed
by the regulatory authorities in their respective jurisdictions, including Jefferies International Limited which is subject
to the regulatory supervision and requirements of the Financial Conduct Authority in the United Kingdom. The Dodd-
Frank Act was signed into law on July 21, 2010. The Dodd- Frank Act contains provisions that require the registration of
all swap dealers, major swap participants, security- based swap dealers, and/or major security- based swap
participants. While entities that register under these provisions will be subject to regulatory capital requirements, these
regulatory capital requirements have not yet been finalized. Jefferies Group expects that these provisions will result in
modifications to the regulatory capital requirements of some of its entities, and will result in some of its other entities
becoming subject to regulatory capital requirements for the first time, including Jefferies Financial Services, Inc., which
registered as a swap dealer with the CFTC during January 2013 and Jefferies Financial Products LLC, which registered
during August 2014. The regulatory capital requirements referred to above may restrict Jefferies Group’s ability to
withdraw capital from its regulated subsidiaries.
On March 29, 2017, the United Kingdom notified the European Council and triggered a two- year period to negotiate its
withdrawal from the European Union on March 29, 2019 (“Brexit”), absent any extensions or changes to this time
schedule. While, there is ongoing uncertainty as to the terms and any potential transition periods related to Brexit,
Jefferies Group has taken steps to ensure its ability to provide services to its European clients without interruption. As
such, Jefferies Group has established a wholly- owned subsidiary of its U.K. broker- dealer in Germany, which has been
approved as an authorized MiFID investment firm by the German regulator, and which will enable Jefferies Group to
conduct business across all of its European investment banking, fixed income and equity platforms. Jefferies Group’s
plans contemplate providing sufficient capital pursuant to the regulatory requirements for the planned operations as well
pursuant to requirements of relevant clearing organizations.
Some of our other consolidated subsidiaries also have credit agreements which may restrict the payment of cash
dividends, or the ability to make loans or advances to the parent company.
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Off- Balance Sheet Arrangements
As shown below, at November 30, 2018, our commitments and guarantees, substantially all of which related to Jefferies
Group, totaled $26,695.5 million.
Expected Maturity Date
_________________________________________________
2021 2023
and and After
Commitments and Guarantees Total 2019 2020 2022 2024 2024
____________________________________________________ ________ _________ _________ _________ _________ _________
(In millions)
Equity commitments . . . . . . . . . . . . . . . $ 356.0 $ 322.4 $ 21.8 $ 1.3 $ – $ 10.5
Loan commitments . . . . . . . . . . . . . . . . 315.0 250.0 7.5 54.0 3.5 –
Underwriting commitments . . . . . . . . . . 377.5 377.5 – – – –
Forward starting reverse repos . . . . . . . . 4,262.7 4,262.7 – – – –
Forward starting repos . . . . . . . . . . . . . . 2,931.8 2,931.8 – – – –
Other unfunded commitments . . . . . . . . 269.1 194.8 – 69.4 4.9 –
Derivative contracts (1):
Non- credit related . . . . . . . . . . . . . . . 17,984.0 12,024.2 2,372.3 2,976.1 281.1 330.3
Credit related . . . . . . . . . . . . . . . . . . . 145.2 – 32.4 – 112.8 –
Standby letters of credit . . . . . . . . . . . . . 54.2 53.1 – – 1.1 –
___________________ ___________________ _________________ ________________ _____________ _____________
Total Commitments and Guarantees . . $26,695.5 $20,416.5 $2,434.0 $3,100.8 $403.4 $340.8
___________________ ___________________ _________________ ________________ _____________ _____________
___________________ ___________________ _________________ ________________ _____________ _____________
(1) Certain of Jefferies Group’s derivative contracts meet the definition of a guarantee and are therefore included
in the above table. For additional information on commitments, see Note 24 in our consolidated financial
statements.
We have agreed to reimburse Berkshire Hathaway for up to one- half of any losses incurred under a $1.5 billion surety
policy securing outstanding commercial paper issued by an affiliate of Berkadia. As of November 30, 2018, the aggregate
amount of commercial paper outstanding was $1.47 billion. This commitment is not included in the table above as the
timing of payments, if any, is uncertain.
In the normal course of business Jefferies Group and certain other subsidiaries engage in other off- balance sheet
arrangements, including derivative contracts. Neither derivatives’ notional amounts nor underlying instrument values
are reflected as assets or liabilities in the Consolidated Statements of Financial Condition. Rather, the fair values of
derivative contracts are reported in the Consolidated Statements of Financial Condition as Trading assets – Derivative
contracts or Trading liabilities – Derivative contracts as applicable. Derivative contracts are reflected net of cash paid or
received pursuant to credit support agreements and are reported on a net by counterparty basis when a legal right of
offset exists under an enforceable master netting agreement. For additional information about our accounting policies
and our derivative activities see Notes 2, 5 and 6 in our consolidated financial statements.
We are routinely involved with variable interest entities (“VIEs”) in the normal course of business. At November 30,
2018, we did not have any commitments to purchase assets from our VIEs. For additional information regarding VIEs,
see Notes 8 and 10 in our consolidated financial statements.
Critical Accounting Estimates
The preparation of financial statements in accordance with GAAP requires us to make estimates and assumptions about
future events that affect the amounts reported in the financial statements and accompanying notes. Actual results could
significantly differ from those estimates. We believe that the following discussion addresses our most critical accounting
estimates, which are those that are important to the presentation of our financial condition and results of operations and
require our most difficult, subjective and complex judgments.
Fair Value of Financial Instruments – Trading assets and Trading liabilities are recorded at fair value, either as
required by accounting pronouncements or through the fair value option election. Gains and losses on trading assets
and
in Principal
transactions. Available for sale securities are reflected at fair value, with unrealized gains and losses reflected as a
in our Consolidated Statements of Operations
liabilities are recognized
trading
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separate component of equity, net of taxes. The cost of securities sold is based on average cost. Fair value is the
amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date (the exit price).
In determining fair value, we maximize the use of observable inputs and minimize the use of unobservable inputs by
requiring that observable inputs be used when available. Observable inputs are inputs that market participants would
use in pricing the asset or liability based on market data obtained from independent sources. Unobservable inputs reflect
our assumptions that market participants would use in pricing the asset or liability developed based on the best information
available in the circumstances. We apply a hierarchy to categorize our fair value measurements broken down into three
levels based on the transparency of inputs as follows:
Level 1: Quoted prices are available in active markets for identical assets or liabilities as of the reported date.
Valuation adjustments and block discounts are not applied to Level 1 instruments.
Level 2: Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly
observable as of the reported date. The nature of these financial instruments includes cash instruments for which
quoted prices are available but traded less frequently, derivative instruments fair values for which have been derived
using model inputs that are directly observable in the market, or can be derived principally from or corroborated
by observable market data, and instruments that are fair valued using other financial instruments, the parameters
of which can be directly observed.
Level 3: Instruments that have little to no pricing observability as of the reported date. These financial instruments
are measured using management’s best estimate of fair value, where the inputs into the determination of fair value
require significant management judgment or estimation.
Fair value is a market based measure; therefore, when market observable inputs are not available, our judgment is applied
to reflect those judgments that a market participant would use in valuing the same asset or liability. The availability of
observable inputs can vary for different products. We use prices and inputs that are current as of the measurement date
even in periods of market disruption or illiquidity. The valuation of financial instruments classified in Level 3 of the fair
value hierarchy involves the greatest amount of management judgment.
Jefferies Group’s Independent Price Verification Group, independent of its trading function, plays an important role in
determining that financial instruments are appropriately valued and that fair value measurements are reliable. This is
particularly important where prices or valuations that require inputs are less observable. In the event that observable
inputs are not available, the control processes are designed to assure that the valuation approach utilized is appropriate
and consistently applied and that the assumptions are reasonable. Where a pricing model is used to determine fair value,
these control processes include reviews of the pricing model’s theoretical soundness and appropriateness by risk
management personnel with relevant expertise who are independent from the trading desks. In addition, recently executed
comparable transactions and other observable market data are considered for purposes of validating assumptions
underlying the model.
For further information on the fair value definition, Level 1, Level 2, Level 3 and related valuation techniques, see Notes
2 and 5 in our consolidated financial statements.
Income Taxes – We record a valuation allowance to reduce our net deferred tax asset to the amount that is more likely than
not to be realized. If in the future we determine that it is more likely than not that we will be able to realize our net deferred
tax asset in excess of our recorded amount, an adjustment to increase the net deferred tax asset would increase income in
such period. If in the future we were to determine that we would not be able to realize all or part of its recorded net deferred
tax asset, an adjustment to decrease the net deferred tax asset would be charged to income in such period. We are required
to consider all available evidence, both positive and negative, and to weigh the evidence when determining whether a
valuation allowance is required and the amount of such valuation allowance. Generally, greater weight is required to be
placed on objectively verifiable evidence when making this assessment, in particular on recent historical operating results.
Our estimate of future taxable income considers all available evidence, both positive and negative, about our operating
businesses and investments, includes an aggregation of individual projections for each significant operating business
and investment, estimated apportionment factors for state and local taxing jurisdictions and includes all future years that
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we estimate we will have available NOLs. As discussed further in Note 21, Federal NOLs begin to expire in 2025. We
believe that our estimate of future taxable income is reasonable but inherently uncertain, and if our current or future
operations and investments generate taxable income different than the projected amounts, further adjustments to the
valuation allowance are possible.
We also record reserves for unrecognized tax benefits based on our assessment of the probability of successfully
sustaining tax filing positions. Management exercises significant judgment when assessing the probability of successfully
sustaining tax filing positions, and in determining whether a contingent tax liability should be recorded and if so
estimating the amount. If our tax filing positions are successfully challenged, payments could be required that are in
excess of reserved amounts or we may be required to reduce the carrying amount of our net deferred tax asset, either of
which could be significant to our Consolidated Statement of Financial Condition or results of operations.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Act.
The Tax Act made broad and complex changes to the U.S. tax code that impacts many areas of taxation, including, but
not limited to, (1) reduction of the U.S. federal corporate tax rate from 35% to 21%; (2) elimination of the corporate
alternative minimum tax; (3) the introduction of the base erosion anti- abuse tax, a new minimum tax; (4) a general
elimination of U.S. federal income taxes on dividends from foreign subsidiaries; (5) a new provision designed to tax global
intangible low- taxed income; (6) a new limitation on deductible interest expense; (7) the repeal of the domestic production
activity deduction; (8) limitations on the deductibility of certain executive compensation; (9) limitations on the use of
foreign tax credits to reduce U.S. income tax liability; (10) limitations on NOLs generated after December 31, 2017, to
80% of taxable income; (11) requiring a one- time transition tax on certain unrepatriated earnings of foreign subsidiaries
that is payable over eight years; and (12) bonus depreciation that will allow for full expensing of qualified property.
On December 22, 2017, the SEC staff issued SAB 118, which provides guidance on accounting for the tax effects of the
Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment
date for companies to complete the accounting under Accounting Standards Codification 740, Income Taxes (“ASC
740”). While the initial estimated impact of the Tax Act was calculated using all available information, we anticipate
modifications based on the procedures set forth under SAB 118. This process is applied at each reporting period to
account for and qualitatively disclose: (1) the effects of the change in tax law for which accounting is complete;
(2) provisional amounts (or adjustments to provisional amounts) for the effects of the tax law where accounting is not
complete, but that a reasonable estimate has been determined; and (3) where a reasonable estimate cannot yet be made,
taxes are reflected in accordance with the law prior to the enactment of the Tax Act. Because of a November 30 year end,
our measurement period will extend into the first quarter of 2019.
Due to the complex nature of the Tax Act, we have not completed our accounting for the income tax effects of certain
elements of the Tax Act. If we were able to make reasonable estimates of the effects of certain elements for which our
analysis is not yet complete, we recorded a provisional estimate in the financial statements. If we were not yet able to
make reasonable estimates of the impact of certain elements, we have not recorded any adjustments related to those
elements and have continued accounting for them in accordance with ASC 740 on the basis of the tax laws in effect
before the Tax Act. The ultimate impact of the Tax Act may differ from this estimate, possibly materially, due to refinement
of our calculations based on updated information, changes in interpretations and assumptions, and guidance that may
be issued and actions we may take in response to the Tax Act. We note that the Tax Act is complex and we continue to
assess the impact that various provisions will have on our business. Since the Tax Act was passed late in the fourth
quarter of 2017, and ongoing guidance and accounting interpretation are expected, we consider the accounting for the
deferred tax asset remeasurements, the transition tax, and other items to be incomplete due to the forthcoming guidance
and our ongoing analysis of final year end data and tax positions. In connection with our initial analysis, we recorded a
discrete tax expense of $450.5 million as a provisional estimate of the impact of the Tax Act during 2017. This provisional
estimate primarily consisted of a $415.0 million expense related to the revaluation of our deferred tax asset and a $35.5
million expense related to the deemed repatriation of foreign earnings. During the eleven months ended November 30,
2018, we revised our prior estimate and recorded a $8.3 million increase in our tax expense related to the Tax Act.
Impairment of Long- Lived Assets – We evaluate our long- lived assets for impairment whenever events or changes in
circumstances indicate, in management’s judgment, that the carrying value of such assets may not be recoverable. When
testing for impairment, we group our long- lived assets with other assets and liabilities at the lowest level for which
identifiable cash flows are largely independent of the cash flows of other assets and liabilities (or asset group). The
determination of whether an asset group is recoverable is based on management’s estimate of undiscounted future cash
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flows directly attributable to the asset group as compared to its carrying value. If the carrying amount of the asset group
is greater than the undiscounted cash flows, an impairment loss would be recognized for the amount by which the
carrying amount of the asset group exceeds its estimated fair value.
We recorded impairment charges related to long- lived assets of $71.1 million in 2016. $56.3 million of the 2016 charge
related to write- downs of JETX Energy’s unproved oil and gas properties and $7.5 million related to the write- down of
JETX Energy’s assets held for sale to fair value. In the third quarter of 2016, JETX Energy curtailed development of its
southern acreage in the East Eagle Ford and its Houston County acreage. As a result, an impairment was recorded for
the difference between the carrying value and the estimated net realizable value of the acreage.
Impairment of Equity Method Investments – We evaluate equity method investments for impairment when operating
losses or other factors may indicate a decrease in value which is other than temporary. We consider a variety of factors
including economic conditions nationally and in their geographic areas of operation, adverse changes in the industry in
which they operate, declines in business prospects, deterioration in earnings, increasing costs of operations and other
relevant factors specific to the investee. Whenever we believe conditions or events indicate that one of these investments
might be significantly impaired, we obtain from such investee updated cash flow projections and impairment analyses
of the investee assets. We use this information and, together with discussions with the investee’s management, evaluate
if the book value of its investment exceeds its fair value, and if so and the situation is deemed other than temporary,
record an impairment charge.
As described further in Note 11, in the third quarter of 2018 we engaged an independent valuation firm to assist
management in estimating the fair value of our equity investment in Golden Queen. Our estimate of fair value was based
on a discounted cash flow analysis and is categorized within Level 3 of the fair value hierarchy. The discounted cash
flow valuation model used inputs including management’s projections of future Golden Queen cash flows and a discount
rate of 12%. The estimated fair value of our equity investment in Golden Queen was $62.3 million, which was $47.9
million lower than our prior carrying value at the end of the second quarter 2018. As a result, an impairment charge of
$47.9 million was recorded in Income (loss) related to associated companies in the third quarter of 2018.
During 2017, we recorded an impairment charge of $130.2 million related to the write- down to fair value of our equity
investment in FXCM. We engaged an independent valuation firm to assist management in estimating the fair value of our
equity interest in FXCM in the first quarter of 2017. Our estimate of fair value was based on a discounted cash flow and
comparable public company analysis. We concluded based on the regulatory actions, FXCM’s restructuring plan, investor
perception and declines in the trading price of Global Brokerage’s common shares and convertible debt, that the decline
in fair value of our equity interest was other than temporary. As such, we impaired our equity investment in FXCM.
During 2018, we recorded an additional impairment charge of $62.1 million related to the equity component of our
investment in FXCM, which is based on updated expectations that have been impacted by the recently revised regulations
of the European Securities Market Authority and dampened operating results. Based on the updated projections, we
evaluated in the fourth quarter of 2018 whether our equity method investment was fully recoverable. We engaged an
independent valuation firm to assist management in estimating the fair value of FXCM. Our estimate of fair value was
based on a discounted cash flow analysis. The result of our analysis indicated that the estimated fair value of our equity
interest in FXCM was lower than our carrying value by $62.1 million. We concluded that based on the decline in projections
and the adverse effects of the European regulations, that the decline in fair value of our equity interest was other than
temporary. As a result, we impaired our equity investment in FXCM in the fourth quarter of 2018 by $62.1 million.
Goodwill – We allocate the acquisition cost of consolidated businesses to the specific tangible and intangible assets
acquired and liabilities assumed based upon their fair values. Significant judgments and estimates are often made by
management to determine these values, and may include the use of appraisals, consideration of market quotes for similar
transactions, use of discounted cash flow techniques or consideration of other information we believe to be relevant. Any
excess acquisition cost over the fair values of the net assets acquired is recorded as goodwill, which is not amortized to
expense. Substantially all of our goodwill was recognized in connection with the Jefferies Group acquisition.
At least annually, and more frequently if warranted, we assess whether goodwill has been impaired at the reporting unit
level. In testing for goodwill impairment, we have the option to first assess qualitative factors to determine whether the
existence of events or circumstances lead to a determination that it is more likely than not that the fair value of a reporting
unit is less than its carrying amount. If, after assessing the totality of events and circumstances, we conclude that it is
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not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-
step impairment test is not necessary. If we conclude otherwise, we are required to perform the two- step quantitative
impairment test. In the first step, the fair value of each reporting unit is compared with its carrying value, including
goodwill and allocated intangible assets. If the fair value is in excess of the carrying value, the goodwill for the reporting
unit is considered not to be impaired. If the fair value is less than the carrying value then a second step is performed in
order to measure the amount of the impairment loss, if any, which is based on comparing the implied fair value of the
reporting unit’s goodwill to the carrying value.
The fair values are based on valuation techniques that we believe market participants would use, although the valuation
process requires significant judgment and often involves the use of significant estimates and assumptions. The
methodologies we utilize in estimating fair value include price- to- earnings and price- to- book multiples of comparable
public companies and/or projected cash flows. In addition, as the fair values determined under a market approach
represent a noncontrolling interest, we applied a control premium to arrive at the estimated fair value of our reporting
units on a controlling basis. The estimates and assumptions used in determining fair value could have a significant effect
on whether or not an impairment charge is recorded and the magnitude of such a charge. Adverse market or economic
events could result in impairment charges in future periods.
An independent valuation specialist was engaged to assist with the valuation process relating to Jefferies Group for our
annual goodwill impairment test as of August 1, 2018. The results of this test indicated the fair value of Jefferies Group
was in excess of the carrying value. However, the valuation methodology is sensitive to comparable company multiples
and management’s forecasts of future profitability, which comes with a level of uncertainty regarding U.S. and global
economic conditions, trading volumes and equity and debt capital market transaction levels. The fair value of our
reporting units, including Jefferies Group, is also impacted by our overall market capitalization. If the future were to
differ adversely from these assumptions or there was a sustained decline in our market capitalization, the estimated fair
value of Jefferies Group may decline and result in an impairment.
Intangible Assets – Intangible assets deemed to have finite lives are generally amortized on a straight- line basis over
their estimated useful lives, where the useful life is the period over which the asset is expected to contribute directly, or
indirectly, to our future cash flows. Intangible assets are reviewed for impairment on an interim basis when certain events
or circumstances exist. If future undiscounted cash flows are estimated to be less than the carrying amounts of the asset
groups used to generate those cash flows in subsequent reporting periods, particularly for those with large investments
in amortizable intangible assets, impairment charges would have to be recorded.
An intangible asset with an indefinite useful life is not amortized but assessed for impairment annually, or more frequently,
when certain events or circumstances exist indicating an assessment for impairment is necessary. Impairment exists
when the carrying amount exceeds its fair value. Fair value is determined using valuation techniques consistent with
what a market participant would use. All of our indefinite- lived intangible assets were recognized in connection with
the Jefferies Group acquisition, which consists of exchange and clearing organization membership interests and
registrations. Our annual impairment testing date is as of August 1, 2018.
Contingencies – In the normal course of business, we have been named, from time to time, as a defendant in legal and
regulatory proceedings. We are also involved, from time to time, in other exams, investigations and similar reviews (both
formal and informal) by governmental and self- regulatory agencies regarding our businesses, certain of which may
result in judgments, settlements, fines, penalties or other injunctions.
We recognize a liability for a contingency when it is probable that a liability has been incurred and the amount of loss
can be reasonably estimated. If the reasonable estimate of a probable loss is a range, we accrue the most likely amount
of such loss, and if such amount is not determinable, then we accrue the minimum in the range as the loss accrual. The
determination of the outcome and loss estimates requires significant judgment on the part of management, can be highly
subjective and is subject to significant change with the passage of time as more information becomes available. Estimating
the ultimate impact of litigation matters is inherently uncertain, in particular because the ultimate outcome will rest on
events and decisions of others that may not be within our power to control. We do not believe that any of our current
litigation will have a significant adverse effect on our consolidated financial position, results of operations or liquidity;
however, if amounts paid at the resolution of litigation are in excess of recorded reserve amounts, the excess could be
significant in relation to results of operations for that period. For further information, see Note 24 in our consolidated
financial statements.
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The following includes “forward- looking statements” that involve risk and uncertainties. Actual results could differ
materially from those projected in the forward- looking statements. The discussion of risk is presented separately for
Jefferies Group and the balance of our company. Exclusive of Jefferies Group, our market risk arises principally from
interest rate risk related to our financial instruments owned and equity price risk.
As more fully discussed in Note 5 to our consolidated financial statements, at November 30, 2018, we owned
approximately 7.5 million common shares of Spectrum Brands, representing approximately 14% of Spectrum Brands
outstanding common shares, which are accounted for under the fair value option and included within Trading assets at
fair value of $371.1 million at November 30, 2018. Assuming a decline of 10% in market prices, the value of our
investment in Spectrum Brands could decrease by approximately $37.1 million. Excluding Jefferies Group and Spectrum
Brands, Trading assets at fair value include corporate equity securities with an aggregate fair value of $495.5 million at
November 30, 2018. Assuming a decline of 10% in market prices, the value of these investments could decrease by
approximately $49.6 million.
Jefferies Group
Market Risk
Market risk is defined as the risk of loss due to fluctuations in the market value of financial assets and liabilities
attributable to changes in market variables.
Jefferies Group’s market risk principally arises from interest rate risk, from exposure to changes in the yield curve, the
volatility of interest rates, and credit spreads, and from equity price risks from exposure to changes in prices and
volatilities of individual equities, equity baskets and equity indices. In addition, commodity price risk results from
exposure to the changes in prices and volatilities of individual commodities, commodity baskets and commodity indices,
and foreign exchange risk results from changes in foreign currency rates.
Market risk is present in Jefferies Group’s market making, proprietary trading, underwriting, specialist and investing
activities and is principally managed by diversifying exposures, controlling position sizes, and establishing economic
hedges in related securities or derivatives. Due to imperfections in correlations, gains and losses can occur even for
positions that are economically hedged. Position limits in trading and inventory accounts are established and monitored
on an ongoing basis. Each day, consolidated position and exposure reports are prepared and distributed to various levels
of management, which enable management to monitor inventory levels and the results of its trading businesses.
Trader Mandates
Trading is principally managed through front office trader mandates, where each trader is provided a specific mandate
in line with Jefferies Group’s product registry. Mandates set out the activities, currencies, countries and products that the
desk is permitted to trade in and set the limits applicable to the desk. Traders are responsible for knowing their trading
limits and trading in a manner consistent with their mandate. Trader mandates are reviewed annually and as part of the
new business proposal process.
Value- at- Risk
Value- at- Risk (“VaR”) is a statistical estimate of the potential loss from adverse market movements over a specified
time horizon within a specified probability (confidence level). It provides a common risk measure across financial
instruments, markets and asset classes. Within Jefferies Group, VaR is used as a measurement of market risk using a
model that simulates revenue and loss distributions on its trading portfolios by applying historical market changes to the
current portfolio. Jefferies Group calculates a one- day VaR using a one year look- back period measured at a 95%
confidence level.
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As with all measures of VaR, the estimate has inherent limitations due to the assumption that historical changes in market
conditions are representative of the future. Furthermore, the VaR model measures the risk of a current static position
over a one- day horizon and might not capture the market risk over a longer time horizon where moves may be more
extreme. Previous changes in market risk factors may not generate accurate predictions of future market movements.
While Jefferies Group believes the assumptions and inputs in its risk model are reasonable, Jefferies Group could incur
losses greater than the reported VaR. Consequently, this VaR estimate is only one of a number of tools Jefferies Group
uses in its daily risk management activities.
The following table illustrates each separate component of VaR for each component of market risk by interest rate,
equity, currency and commodity products, as well as for Jefferies Group’s overall trading positions using the past 365
days of historical data.
Daily VaR (1)
Value-at-Risk In Trading Portfolios
_______________________________
VaR at
(In millions)
November 30, 2018 Daily VaR for 2018
________________ _______________________________
Risk Categories Average High Low
______________ _______ ____ ____
Interest Rates . . . . . . . . . . . . . . . . . . . . . . . $ 5.33 $ 4.88 $ 6.82 $2.18
5.51 13.56 3.08
Equity Prices . . . . . . . . . . . . . . . . . . . . . . . .
0.12 0.24 0.02
Currency Rates . . . . . . . . . . . . . . . . . . . . . .
0.53 1.51 0.24
Commodity Prices . . . . . . . . . . . . . . . . . . .
Diversification Effect (2) . . . . . . . . . . . . . .
(3.48) N/A N/A
Firmwide . . . . . . . . . . . . . . . . . . . . . . . . . . . $11.25 $ 7.56 $14.73 $4.76
8.47
0.09
0.48
(3.12)
______
______
______
______
______
______
Daily VaR (1)
Value-at-Risk In Trading Portfolios
_______________________________
VaR at
December 31, 2017 Daily VaR for 2017
(In millions)
________________ _______________________________
Risk Categories Average High Low
______________ _______ ____ ____
Interest Rates . . . . . . . . . . . . . . . . . . . . . . . $ 3.38 $ 5.11 $ 9.59 $2.63
5.17 17.20 2.52
Equity Prices . . . . . . . . . . . . . . . . . . . . . . . .
0.22 0.65 0.06
Currency Rates . . . . . . . . . . . . . . . . . . . . . .
0.73 2.20 0.27
Commodity Prices . . . . . . . . . . . . . . . . . . .
Diversification Effect (2) . . . . . . . . . . . . . .
(3.44) N/A N/A
Firmwide . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4.95 $ 7.79 $17.55 $4.52
2.90
0.18
0.35
(1.86)
______
______
______
______
______
______
(1) For the VaR numbers reported above, a one- day time horizon, with a one year look- back period, and a 95%
confidence level were used.
(2) The diversification effect is not applicable for the maximum and minimum VaR values as the Jefferies Group’s
VaR and VaR values for the four risk categories might have occurred on different days during the year.
The aggregated VaR presented here is less than the sum of the individual components (i.e., interest rate risk, foreign
exchange rate risk, equity risk and commodity price risk) due to the benefit of diversification among the four risk
categories. Diversification benefit equals the difference between aggregated VaR and the sum of VaRs for the four risk
categories and arises because the market risk categories are not perfectly correlated. All amounts reported are for Jefferies
Group’s annual fiscal periods.
Average daily VaR decreased to $7.56 million for 2018 from $7.79 million for 2017. This change was due to slightly
lower interest rate, currency rate, and commodity price risk, partially offset by an increase in equity price risk. Equity
price risk was higher at November 30, 2018 compared with at December 31, 2017 due to the transfer to Jefferies Group
by Jefferies, of capital investments in certain separately managed accounts and funds in the fourth quarter of 2018.
Jefferies Group performs daily back- testing of its VaR model comparing realized revenue and loss with the previous
day’s VaR. Back- testing results are included in the quarterly business review pack for its Board. The primary method
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used to test the efficacy of the VaR model is to compare actual daily net revenue for those positions included in the VaR
calculation with the daily VaR estimate. This evaluation is performed at various levels of the trading portfolio, from the
overall level down to specific business lines. For the VaR model, trading related revenue is defined as principal
transactions revenues, trading related commissions, revenue from securitization activities and net interest income.
For a 95% confidence one day VaR model (i.e., no intra- day trading), assuming current changes in market value are
consistent with the historical changes used in the calculation, net trading losses would not be expected to exceed the
VaR estimates more than twelve times on an annual basis (i.e., once in every 20 days). During 2018, results of the
evaluation at the aggregate level demonstrated two days when the net trading loss exceeded the 95% one day VaR. There
were 45 days with trading losses out of a total of 252 trading days in 2018.
Other Risk Measures
Certain positions within financial instruments are not included in the VaR model because VaR is not the most appropriate
measure of risk. Accordingly, Jefferies Group’s Risk Management has additional procedures in place to assure that the
level of potential loss that would arise from market movements are within acceptable levels. Such procedures include
performing stress tests, monitoring concentration risk and tracking price target/stop loss levels. The table below presents
the potential reduction in net income associated with a 10% stress of the fair value of the positions that are not included
in the VaR model at November 30, 2018 (in thousands):
10% Sensitivity
_____________
Private investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $20,088
Corporate debt securities in default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,915
Trade claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,747
VaR also excludes the impact of changes in Jefferies Group’s own credit spreads on its structured notes for which the
fair value option was elected. The estimated credit spread risk sensitivity for each one basis point widening in Jefferies
Group’s own credit spreads on financial liabilities for which the fair value option was elected was an increase in value
of approximately $0.9 million at November 30, 2018, which is included in Accumulated other comprehensive income.
Stress Tests and Scenario Analysis
Stress tests are used to analyze the potential impact of specific events or extreme market moves on the current portfolio
both firm- wide and within business segments. Stress testing is an important part of Jefferies Group’s risk management
approach because it allows Jefferies Group to quantify its exposure to tail risks, highlight potential loss concentrations,
undertake risk/reward analysis, set risk controls and overall assess and mitigate its risk.
Stress scenarios comprise both historical market price and rate changes and hypothetical market environments, and
generally involve simultaneous changes of many risk factors. Indicative market changes in Jefferies Group’s scenarios
include, but are not limited to, a large widening of credit spreads, a substantial decline in equities markets, significant
moves in selected emerging markets, large moves in interest rates and changes in the shape of the yield curve.
Unlike VaR, which measures potential losses within a given confidence interval, stress scenarios do not have an associated
implied probability. Rather, stress testing is used to estimate the potential loss from market moves that tend to be larger
than those embedded in the VaR calculation. Stress testing complements VaR to cover for potential limitations of VaR
such as the breakdown in correlations, non- linear risks, tail risk and extreme events and capturing market moves beyond
the confidence levels assumed in the VaR calculations.
Stress testing is performed and reported at least weekly as part of Jefferies Group’s risk management process and on an
ad hoc basis in response to market events or concerns. Current stress tests provide estimated revenue and loss of the
current portfolio through a range of both historical and hypothetical events. The stress scenarios are reviewed and assessed
at least annually so that they remain relevant and up to date with market developments. Additional hypothetical scenarios
are also conducted on a sub- portfolio basis to assess the impact of any relevant idiosyncratic stress events as needed.
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Counterparty Credit Risk and Issuer Country Exposure
Counterparty Credit Risk
Credit risk is the risk of loss due to adverse changes in a counterparty’s credit worthiness or its ability or willingness to
meet its financial obligations in accordance with the terms and conditions of a financial contract. Jefferies Group is
exposed to credit risk as a trading counterparty to other broker- dealers and customers, as a direct lender and through
extending loan commitments, as a holder of securities and as a member of exchanges and clearing organizations. Credit
exposure exists across a wide- range of products, including cash and cash equivalents, loans, securities finance transactions
and OTC derivative contracts. The main sources of Jefferies Group’s credit risk are:
• Loans and lending arising in connection with Jefferies Group’s capital markets activities, which reflects its
exposure at risk on a default event with no recovery of loans. Current exposure represents loans that have
been drawn by the borrower and lending commitments that are outstanding. In addition, credit exposures on
forward settling traded loans are included within our loans and lending exposures for consistency with the
balance sheet categorization of these items.
• Securities and margin financing transactions, which reflect Jefferies Group’s credit exposure arising from
reverse repurchase agreements, repurchase agreements and securities lending agreements to the extent the
fair value of the underlying collateral differs from the contractual agreement amount and from margin
provided to customers.
• OTC derivatives, which are reported net by counterparty when a legal right of setoff exists under an
enforceable master netting agreement. OTC derivative exposure is based on a contract at fair value, net of
cash collateral received or posted under credit support agreements. In addition, credit exposures on forward
settling trades are included within Jefferies Group’s derivative credit exposures.
• Cash and cash equivalents, which includes both interest- bearing and non- interest- bearing deposits at banks.
Credit is extended to counterparties in a controlled manner and in order to generate acceptable returns, whether such
credit is granted directly or is incidental to a transaction. All extensions of credit are monitored and managed as a whole
to limit exposure to loss related to credit risk. Credit risk is managed according to the Credit Risk Policy, which sets out
the process for identifying counterparty credit risk, establishing counterparty limits, and managing and monitoring credit
limits. The policy includes Jefferies Group’s approach for:
• Client on- boarding and approving counterparty credit limits;
• Negotiating, approving and monitoring credit terms in legal and master documentation;
• Determining the analytical standards and risk parameters for ongoing management and monitoring credit
risk books;
• Actively managing daily exposure, exceptions and breaches; and
• Monitoring daily margin call activity and counterparty performance.
Counterparty credit exposure limits are granted within Jefferies Group’s credit ratings framework, as detailed in the
Credit Risk Policy. Jefferies Group’s Credit Risk Department assesses counterparty credit risk and sets credit limits at
the counterparty master agreement level. Limits must be approved by appropriate credit officers and initiated in Jefferies
Group’s credit and trading systems before trading commences. All credit exposures are reviewed against approved limits
on a daily basis.
Current counterparty credit exposures are summarized in the tables below and provided by credit quality, region and
industry. Credit exposures presented take netting and collateral into consideration by counterparty and master
agreement. Collateral taken into consideration includes both collateral received as cash as well as collateral received in
the form of securities or other arrangements. Current exposure is the loss that would be incurred on a particular set of
positions in the event of default by the counterparty, assuming no recovery. Current exposure equals the fair value of the
positions less collateral. Issuer risk is the credit risk arising from inventory positions (for example, corporate debt
securities and secondary bank loans). Issuer risk is included in Jefferies Group’s country risk exposure tables below. Of
Jefferies Group’s counterparty credit exposure at November 30, 2018, excluding cash and cash equivalents, the percentage
of exposure from investment grade counterparties decreased to 91% from 92% at December 31, 2017, with a majority
concentrated in North America.
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When comparing Jefferies Group’s credit exposure at November 30, 2018 with credit exposure at December 31, 2017,
excluding cash and cash equivalents, current exposure decreased 19% to approximately $1,093 million from $1,353
million. Counterparty credit exposure from OTC derivatives decreased 57%, primarily driven by investment grade North
American banks and broker- dealers. Exposure from securities and margin finance decreased by 8%, while exposure
from loans and lending decreased by 5%.
The amounts in the tables below are for amounts included in our Consolidated Statements of Financial Condition at
November 30, 2018 and December 31, 2017 (in millions).
Counterparty Credit Exposure by Credit Rating
Loans and
Lending
_________
Securities
and Margin
Finance
___________
Total with Cash
and Cash
November 30, 2018
Equivalents
________________
______________
AAA Range . . . . . . . . . . . . . . . . . $ – $ 3.2 $ – $ 3.2 $2,981.2 $2,984.4
45.3 4.2 94.6 111.6 206.2
AA Range . . . . . . . . . . . . . . . . . .
573.3 97.9 671.5 1,865.8 2,537.3
A Range . . . . . . . . . . . . . . . . . . . .
206.6 15.5 222.2 2.3 224.5
BBB Range . . . . . . . . . . . . . . . . .
5.5 15.7 21.2 107.5 128.7
BB or Lower . . . . . . . . . . . . . . . .
Unrated . . . . . . . . . . . . . . . . . . . .
– – 80.0 77.5 157.5
______ ______ _______ _______ _______
. . . . . . . . . . . . . . . . . . . . . . $125.5 $833.9 $133.3 $1,092.7 $5,145.9 $6,238.6
Total
______ ______ _______ _______ _______
______ ______ _______ _______ _______
45.1
0.3
0.1
–
80.0
______
______
______
Cash and Cash
Equivalents
_____________
OTC
Derivatives
__________
Total
_____
December 31, 2017
________________
AAA Range . . . . . . . . . . . . . . . . . $ – $ 6.4 $ – $ 6.4 $2,924.2 $2,930.6
61.3 3.8 112.8 158.6 271.4
AA Range . . . . . . . . . . . . . . . . . .
603.0 260.6 864.8 1,751.9 2,616.7
A Range . . . . . . . . . . . . . . . . . . . .
232.5 28.5 261.5 152.3 413.8
BBB Range . . . . . . . . . . . . . . . . .
8.1 16.7 37.3 100.6 137.9
BB or Lower . . . . . . . . . . . . . . . .
Unrated . . . . . . . . . . . . . . . . . . . .
– – 70.1 76.9 147.0
______ ______ _______ _______ _______
. . . . . . . . . . . . . . . . . . . . . . $132.0 $911.3 $309.6 $1,352.9 $5,164.5 $6,517.4
Total
______ ______ _______ _______ _______
______ ______ _______ _______ _______
47.7
1.2
0.5
12.5
70.1
______
______
______
Counterparty Credit Exposure by Region
Total with Cash
and Cash
November 30, 2018
Equivalents
________________
______________
Asia/Latin America/Other . . . . . . $ – $ 30.2 $ 0.1 $ 30.3 $ 304.0 $ 334.3
427.0 27.3 454.6 170.8 625.4
Europe . . . . . . . . . . . . . . . . . . . . .
North America . . . . . . . . . . . . . . .
376.7 105.9 607.8 4,671.1 5,278.9
______ ______ _______ _______ _______
. . . . . . . . . . . . . . . . . . . . . . $125.5 $833.9 $133.3 $1,092.7 $5,145.9 $6,238.6
Total
______ ______ _______ _______ _______
______ ______ _______ _______ _______
Securities
and Margin
Finance
___________
Cash and Cash
Equivalents
_____________
0.3
125.2
______
______
______
OTC
Derivatives
__________
Loans and
Lending
_________
Total
_____
December 31, 2017
________________
Asia/Latin America/Other . . . . . . $
Europe . . . . . . . . . . . . . . . . . . . . .
North America . . . . . . . . . . . . . . .
Total
3.0 $ 45.8 $ 0.3 $ 49.1 $ 280.7 $ 329.8
403.5 54.0 458.5 540.0 998.5
1.0
462.0 255.3 845.3 4,343.8 5,189.1
128.0
______ ______ _______ _______ _______
______
. . . . . . . . . . . . . . . . . . . . . . $132.0 $911.3 $309.6 $1,352.9 $5,164.5 $6,517.4
______
______ ______ _______ _______ _______
______ ______ _______ _______ _______
______
Counterparty Credit Exposure by Industry
Loans and
Lending
_________
Securities
and Margin
Finance
___________
Total with Cash
and Cash
November 30, 2018
Equivalents
________________
______________
Asset Managers . . . . . . . . . . . . . . $ – $ 0.6 $ – $ 0.6 $2,812.4 $2,813.0
619.6 118.9 738.9 2,333.5 3,072.4
Banks, Broker- dealers . . . . . . . . .
– – – – –
Commodities . . . . . . . . . . . . . . . .
– 7.2 100.1 – 100.1
Corporates . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . .
213.7 7.2 253.1 – 253.1
______ ______ _______ _______ _______
. . . . . . . . . . . . . . . . . . . . . . $125.5 $833.9 $133.3 $1,092.7 $5,145.9 $6,238.6
Total
______ ______ _______ _______ _______
______ ______ _______ _______ _______
0.4
–
92.9
32.2
______
______
______
Cash and Cash
Equivalents
_____________
OTC
Derivatives
__________
Total
_____
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Loans and
Lending
________
Securities
and Margin
Finance
_________
Total with Cash
and Cash
December 31, 2017
Equivalents
________________
____________
Asset Managers . . . . . . . . . . . . . . $ – $ 15.9 $ 7.1 $ 23.0 $2,920.3 $2,943.3
620.8 282.6 905.1 2,244.2 3,149.3
Banks, Broker- dealers . . . . . . . . .
– – – – –
Commodities . . . . . . . . . . . . . . . .
Corporates . . . . . . . . . . . . . . . . . .
– 14.7 102.2 – 102.2
274.6 5.2 322.6 – 322.6
Other . . . . . . . . . . . . . . . . . . . . . .
______ ______ _______ _______ _______
. . . . . . . . . . . . . . . . . . . . . . $132.0 $911.3 $309.6 $1,352.9 $5,164.5 $6,517.4
Total
______ ______ _______ _______ _______
______ ______ _______ _______ _______
1.7
–
87.5
42.8
______
______
______
Cash and Cash
Equivalents
____________
OTC
Derivatives
__________
Total
_____
For additional information regarding credit exposure to OTC derivative contracts, see Note 6 in the consolidated financial
statements.
Jefferies Group’s Country Risk Exposure
Country risk is the risk that events or developments that occur in the general environment of a country or countries due
to economic, political, social, regulatory, legal or other factors, will affect the ability of obligors of the country to honor
their obligations. Jefferies Group defines the country of risk as the country of jurisdiction or domicile of the obligor,
and monitors country risk resulting from both trading positions and counterparty exposure.
The following tables reflect Jefferies Group’s top exposures to the sovereign governments, corporations and financial
institutions in those non- U.S. countries in which Jefferies Group has a net long issuer and counterparty exposure,
as reflected in our Consolidated Statements of Financial Condition at November 30, 2018 and December 31, 2017
(in millions):
November 30, 2018
________________________________________________________________________________________________________________________________________________________________
Issuer and
Issuer Risk Counterparty Risk Counterparty Risk
____________________________________ _____________________________________ ____________________
Including
Cash
Derivative Loans and Cash Cash
Notional and Margin OTC and Cash and Cash
and Cash
Exposure Lending Finance Derivatives Equivalents Equivalents Equivalents
_________ _______ _________ ___________ ___________ __________ _________
$ –
Fair Value of Fair Value of
Long Debt
Short Debt
Securities
Securities
___________ ___________
Net Securities Excluding
$273.1
$ 1.0
$ –
(6.7)
$ –
$ –
$
Finland . . . . . . . .
Japan . . . . . . . . . .
Italy . . . . . . . . . . .
United Kingdom .
Belgium . . . . . . . .
Netherlands . . . . .
Germany . . . . . . .
Switzerland . . . . .
Hong Kong . . . . .
Singapore . . . . . .
Total . . . . . . . . . .
$ 279.8
97.7
1,778.1
311.6
65.4
317.4
175.4
100.5
13.8
21.1
_______
$3,160.8
_______
_______
$ 274.1
(92.8) 8.0 – 11.3 – 136.9 24.2 161.1
(1,267.5) (354.5) – 0.2 0.1 – 156.4 156.4
(168.2) (30.3) 0.3 63.1 18.5 (56.4) 195.0 138.6
(39.8) 2.8 – – – 107.3 28.4 135.7
(316.1) 70.4 – 39.5 – – 111.2 111.2
(384.8) 129.4 – 89.7 1.3 93.3 11.0 104.3
(50.1) 5.7 – 37.7 2.7 3.8 96.5 100.3
(39.7) 3.5 – 0.5 – 84.9 (21.9) 63.0
(1.4) 1.0 – 0.1 – 31.2 20.8 52.0
________ ________ ____ ______ ______ ______ _______ _______
$(2,367.1)
$1,296.7
________ ________ ____ ______ ______ ______ _______ _______
________ ________ ____ ______ ______ ______ _______ _______
$(164.0) $ 0.3
$242.1
$402.0
$894.7
$22.6
December 31, 2017
________________________________________________________________________________________________________________________________________________________________
Issuer and
Issuer Risk Counterparty Risk Counterparty Risk
____________________________________ _____________________________________ ____________________
Including
Derivative Loans and Cash Cash
Cash
and Cash
Notional and Margin OTC and Cash and Cash
Exposure Lending Finance Derivatives Equivalents Equivalents Equivalents
_________ _______ _________ __________ __________ _________ _________
$ 98.2
Net Securities Excluding
$181.9
$ 78.9
Fair Value of Fair Value of
Short Debt
Long Debt
Securities
Securities
__________
__________
$ 493.3
$ (396.2)
634.6
217.9
100.1
205.3
315.9
31.0
23.0
50.5
36.0
_______
$2,107.6
_______
_______
Germany . . . . . . .
United Kingdom .
Spain . . . . . . . . . .
Japan . . . . . . . . . .
Canada . . . . . . . . .
Netherlands . . . . .
Switzerland . . . . .
Hong Kong . . . . .
Australia . . . . . . .
Singapore . . . . . .
Total . . . . . . . . . .
$ –
$ 2.1
$ 276.3
$ 458.2
(394.4) (72.1) 0.7 97.8 26.9 45.0 293.5 338.5
(181.3) 7.5 – – – 151.6 44.1 195.7
(81.3) 4.1 – 25.8 – 136.3 48.7 185.0
(164.7) (128.5) – 17.3 222.8 7.4 152.2 159.6
(210.9) 0.9 – 44.1 2.2 – 152.2 152.2
(16.9) (1.1) – 54.3 3.3 4.5 70.6 75.1
(25.1) – – 1.0 – 58.7 (1.1) 57.6
(14.0) 0.3 – 15.0 0.3 4.7 52.1 56.8
(4.2) – – – – 24.7 31.8 56.5
________ ________ ____ ______ ______ ______ _________ _______
$(1,489.0)
$1,735.2
________ ________ ____ ______ _______ ______ _________ _______
________ ________ ____ ______ _______ ______ _________ _______
$1,120.4
$ (90.7)
$334.2
$257.6
$614.8
$ 0.7
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Jefferies Group has no material exposure to countries where either sovereign or non- sovereign sectors pose potential
default risk as the result of liquidity concerns.
Other than our trading portfolio, our financial instrument portfolio is primarily classified as available for sale, and
consequently, is recorded at fair value with unrealized gains and losses reflected in equity. The available for sale portfolio
at November 30, 2018 is comprised of fixed income securities which are primarily rated “investment grade” or are U.S.
governmental agency issued or U.S. Government- Sponsored Enterprises. The estimated weighted average remaining
life of these fixed income securities was approximately 1.2 years at November 30, 2018. Our fixed income securities,
like all fixed income instruments, are subject to interest rate risk and will fall in value if market interest rates increase. At
December 31, 2017, fixed income securities comprised approximately 88% of the total portfolio and had an estimated
weighted average remaining life of approximately 0.5 years.
The following table provides information about our financial instruments used for purposes other than trading that are
primarily sensitive to changes in interest rates.
For additional information see Note 9 to our consolidated financial statements.
Expected Maturity Date
________________________________________________________________________________________________________________________________________________________
2019 2020 2021 2022 2023 Thereafter Total Fair Value
_______ _______ _______ _______ _______ ________________ _______ _______________
(Dollars in thousands)
Rate Sensitive Assets:
Available for Sale Fixed Income Securities:
U.S. Government . . . . . . . . . . . . . . . . . . . . .
Weighted- Average Interest Rate . . . . .
Residential mortgage- backed:
Rated Investment Grade . . . . . . . . . . . . .
Weighted- Average Interest Rate . . . . .
Commercial mortgage- backed:
Rated Investment Grade . . . . . . . . . . . . .
Weighted- Average Interest Rate . . . . .
Other asset- backed:
Rated Investment Grade . . . . . . . . . . . . .
Weighted- Average Interest Rate . . . . .
Rated Less Than Investment
$13,382 $119,784 $ 210,518 $ 210,518
2.68%
$ 4,835 $ –
3.52%
$1,072,856
0.55%
$ 16,337
4.19%
$ 23,914
2.58%
$ 15,642 $ 15,642
$ 92,116 $ 92,116
$ 1,072,856 $ 1,072,856
$10,807
4.52%
$ 4,194
3.66%
$15,279
2.68%
$46,679
4.20%
$20,467
2.63%
$24,906
3.55%
$17,692
2.67%
$ –
2.69%
$ –
$ –
$ –
$ –
$ –
$ –
$ –
$ –
$ –
Grade/Not Rated . . . . . . . . . . . . . . . . .
Weighted- Average Interest Rate . . . . .
$ –
$16,680
5.37%
$ 2,074
6.39%
$ –
$ –
$ –
$ 18,754 $ 18,754
We are also subject to interest rate risk on our long- term fixed interest rate debt. Generally, the fair market value of debt
securities with a fixed interest rate will increase as interest rates fall, and the fair market value will decrease as interest
rates rise. The following table represents principal cash flows by expected maturity dates and the related weighted-
average interest rate on those maturities for our consolidated long- term debt obligations. For the variable rate borrowings,
the weighted- average interest rates are based on the rates in effect at the reporting date. Our market risk with respect to
foreign currency exposure on our long- term debt is also shown below. For additional information, see Note 15 to our
consolidated financial statements.
Expected Maturity Date
________________________________________________________________________________________________________________________________________________________
2019 2020 2021 2022 2023 Thereafter Total Fair Value
_______ _______ _______ _______ _______ ________________ _______ _______________
(Dollars in thousands)
Rate Sensitive Liabilities:
Fixed Interest Rate Borrowings . . . . . . . . . . . .
Weighted- Average Interest Rate . . . . . . . . .
Variable Interest Rate Borrowings . . . . . . . . . .
Weighted- Average Interest Rate . . . . . . . . .
Borrowings with Foreign Currency Exposure .
Weighted- Average Interest Rate . . . . . . . . .
$750,000
6.88% 3.05% 5.49% 5.34%
$185,000
3.94%
$ –
$ 161,733 $ 737,412 $ 725,676
2.95%
$ 684,528
8.49%
$ –
$ 5,655
$565,500
0.68% 2.38%
$28,000 $1,350,000 $3,856,434 $ 6,668,962 $6,524,459
$ 4,524 $ –
2.25%
$ 264,000 $ 262,538
$ 79,000 $ –
4.85%
$ –
$ –
$ –
63
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Item 8. Financial Statements and Supplementary Data.
Financial Statements and supplementary data required by this Item 8 are set forth at the pages indicated in Item 15(a)
below.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of disclosure controls and procedures
The Company’s management evaluated, with the participation of the Company’s principal executive and principal
financial officers, the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of November 30,
2018. Based on their evaluation, the Company’s principal executive and principal financial officers concluded that the
Company’s disclosure controls and procedures were effective as of November 30, 2018.
Changes in internal control over financial reporting
There has been no change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) that occurred during the Company’s fiscal quarter ended November 30, 2018, that
has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial
reporting as defined in Rules 13a-15(f) or 15d-15(f) promulgated under the Exchange Act. Internal control over financial
reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles
and includes those policies and procedures that:
• Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions
and disposition of the assets of the Company;
• Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures
of the Company are being made only in accordance with authorizations of management and directors of the
Company; and
• Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of the Company’s assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of
November 30, 2018. In making this assessment, the Company’s management used the criteria set forth in Internal
Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in 2013.
64
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Based on our assessment and those criteria, management concluded that, as of November 30, 2018, the Company’s
internal control over financial reporting was effective.
The effectiveness of the Company’s internal control over financial reporting as of November 30, 2018 has been audited
by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which appears
herein in Item 8.
Item 9B. Other Information.
None.
PART III
Item 10. Directors, Executive Officers of the Registrant and Corporate Governance.
Information with respect to this item will be contained in the Proxy Statement for the 2019 Annual Meeting of
Shareholders, which is incorporated herein by reference.
We have a Code of Business Practices, which is applicable to all directors, officers and employees, and is available on
our website. We intend to post amendments to or waivers from our Code of Business Practices on our website as required
by applicable law.
Item 11. Executive Compensation.
Information with respect to this item will be contained in the Proxy Statement for the 2019 Annual Meeting of
Shareholders, which is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder
Matters.
Information with respect to this item will be contained in the Proxy Statement for the 2019 Annual Meeting of
Shareholders, which is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Information with respect to this item will be contained in the Proxy Statement for the 2019 Annual Meeting of
Shareholders, which is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services.
Information with respect to this item will be contained in the Proxy Statement for the 2019 Annual Meeting of
Shareholders, which is incorporated herein by reference.
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PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a)(1) Financial Statements.
Reports of Independent Registered Public Accounting Firms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
Financial Statements:
Consolidated Statements of Financial Condition at November 30, 2018 and December 31, 2017 . . . F-4
Consolidated Statements of Operations for the eleven months ended November 30, 2018
and the twelve months ended December 31, 2017 and 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Comprehensive Income (Loss) for the eleven months ended
November 30, 2018 and the twelve months ended December 31, 2017 and 2016 . . . . . . . . . . . . F-7
Consolidated Statements of Cash Flows for the eleven months ended November 30, 2018
and the twelve months ended December 31, 2017 and 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-8
Consolidated Statements of Changes in Equity for the eleven months ended November 30, 2018
and the twelve months ended December 31, 2017 and 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-11
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-13
(2) Financial Statement Schedules.
Schedule I - Condensed Financial Information of Jefferies Financial Group Inc. (Parent Company Only)
at November 30, 2018 and December 31, 2017 and for the eleven months ended November 30, 2018 and
the twelve months ended December 31, 2017 and 2016.
(3) See Exhibit Index below for a complete list of Exhibits to this report.
(b) Exhibits.
All documents referenced below were filed pursuant to the Securities Exchange Act of 1934 by the
Company, file number 1-5721, unless otherwise indicated.
(c) Financial Statement Schedules.
Jefferies Finance LLC financial statements as of November 30, 2018 and 2017, and for the years ended
November 30, 2018, 2017 and 2016.
Item 16. Form 10-K Summary.
None.
Exhibit Index
3.1 Restated Certificate of Incorporation of Jefferies Financial Group Inc. (filed as Exhibit 3.1 to the
Company’s Form 10-Q filed on August 1, 2018).*
3.2 Amended and Restated By- Laws of Jefferies Financial Group Inc. (effective May 23, 2018) (filed as
Exhibit 3.2 to the Company’s Form 10-Q filed on August 1, 2018).*
4.1
The Company undertakes to furnish the Securities and Exchange Commission, upon written request, a
copy of all instruments with respect to long- term debt not filed herewith.
10.31 1999 Stock Option Plan as Amended and Restated (filed as Exhibit 99.1 to the Company’s Registration
Statement on Form S-8 (No. 333-169377)).* +
10.32 Form of Grant Letter for the 1999 Stock Option Plan (filed as Exhibit 10.3 to the Company’s Current
Report on Form 8-K filed on February 24, 2012 (the “February 24, 2012 8-K”)).* +
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10.33 Leucadia National Corporation 2003 Incentive Compensation Plan (filed as Appendix I to the Company’s
Proxy Statement dated June 27, 2013 (the “2013 Proxy Statement”)).* +
10.34 Form of Restricted Stock Units Agreement (filed as Exhibit 10.1 to the Company’s Current Report on
Form 8-K dated July 31, 2013).* +
10.35 Form of Restricted Stock Agreement (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-
K dated July 31, 2013).* +
10.36 Leucadia National Corporation 1999 Directors’ Stock Compensation Plan (filed as Appendix II to the
2013 Proxy Statement).* +
10.37 Amended and Restated Shareholders Agreement dated as of June 30, 2003 among the Company, Ian M.
Cumming and Joseph S. Steinberg (filed as Exhibit 10.5 to the 2003 10-K).* +
10.38 Amendment No. 1, dated as of May 16, 2006, to the Amended and Restated Shareholders Agreement
dated as of June 30, 2003, by and among Ian M. Cumming, Joseph S. Steinberg and the Company (filed
as Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June
30, 2006).* +
10.39 Services Agreement, dated as of January 1, 2004, between the Company and Joseph S. Steinberg (filed
as Exhibit 10.38 to the 2005 10-K).* +
10.40 Compensation Information Concerning Non- Employee Directors (incorporated by reference to page 17
of the Company’s Proxy Statement dated April 18, 2017).* +
10.41 First Amended and Restated Limited Liability Company Agreement of National Beef Packing Company,
dated as of December 30, 2011 (filed as Exhibit 10.1 to the December 30, 2011 8-K).*
10.42 Third Amended and Restated Limited Liability Company Agreement of National Beef Packing Company,
LLC, a Delaware limited liability company, dated as of June 5, 2018, by and among the Company,
Jefferies Financial Group Inc. (f/k/a Leucadia National Corporation), NBM US Holdings, Inc., a Delaware
corporation, U.S. Premium Beef, LLC, a Delaware limited liability company, NBPCo Holdings, LLC, a
South Dakota limited liability company and TMK Holdings, LLC, a Missouri limited liability company
(filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on June 11, 2018).
10.43 Purchase and Sale Agreement, dated as of April 9, 2018, by and among NBM US Holdings, Inc., a
Delaware corporation, Marfrig Global Foods S.A., a Brazilian corporation (sociedade por ações),
Leucadia National Corporation, a New York corporation, NBPCo Holdings, LLC, a South Dakota limited
liability company, Leucadia, in its capacity as the Sellers’ Representative, and National Beef Packing
Company, LLC, a Delaware limited liability company (filed as Exhibit 10.1 to the Company’s Current
Report on Form 8-K filed on April 10, 2018).
10.44 Amendment to Purchase and Sale Agreement, dated as of June 5, 2018, by and among NBM US
Holdings, Inc., a Delaware corporation, Marfrig Global Foods S.A., a Brazilian corporation (sociedade
por ações), Jefferies Financial Group Inc. (f/k/a Leucadia National Corporation), a New York corporation,
NBPCo Holdings, LLC, a South Dakota limited liability company and National Beef Packing Company,
LLC, a Delaware limited liability company (filed as Exhibit 10.1 to the Company’s Current Report on
Form 8-K filed on June 11, 2018).
10.45 Summary of executive bonus compensation for Mr. Sharp and Ms. Gendron for fiscal year 2018 (filed
in the Company’s Current Report on Form 8-K dated February 16, 2018).*+
10.46 Summary of executive compensation for Richard B. Handler and Brian P. Friedman (filed in the
Company’s Current Report on Form 8-K dated December 28, 2017).* +
10.47 Summary of executive compensation for Richard B. Handler and Brian P. Friedman (filed in the
Company’s Current Report on Form 8-K dated December 22, 2016).* +
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10.48 Summary of executive compensation for Richard B. Handler and Brian P. Friedman (filed in the
Company’s Current Report on Form 8-K dated February 19, 2016).* +
10.49 Agreement of Terms dated as of December 31, 2011 between Leucadia National Corporation and
Berkshire Hathaway Inc. (filed as Exhibit 10.1 to the February 24, 2012 8-K).*
10.50 Stockholders Agreement, dated as of March 28, 2014, by and between HomeFed Corporation and
Leucadia National Corporation (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K
dated April 3, 2014).*
10.51 Letter of Intent between Leucadia National Corporation and Garff Ventures, LLC, Garff Ventures II,
LLC, Garff Ventures Auto, LLC, Garff Ventures Auto II, LLC and Garff Enterprises, Inc. (filed as Exhibit
10.2 to the Company’s Current Report on Form 8-K filed on April 10, 2018).
21
Subsidiaries of the registrant.
23.1 Consent of Deloitte & Touche LLP. with respect to the incorporation by reference into the Company’s
Registration Statements on Form S-8 (No. 333-185318) and Form S-3ASR (No. 333-214759).
23.2 Consent of PricewaterhouseCoopers LLP with respect to the incorporation by reference into the
Company’s Registration Statements on Form S-8 (No. 333-185318) and Form S-3ASR (No. 333-214759).
23.3 Consent of Deloitte & Touche LLP, with respect to the incorporation by reference into the Registration
No. 333-185318 on Form S-8, and No. 333-214759 on Form S-3ASR.
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes- Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes- Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes- Oxley Act of 2002.**
32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes- Oxley Act of 2002.**
101
Financial statements from the Annual Report on Form 10-K of Jefferies Financial Group Inc. for the
eleven months ended November 30, 2018, formatted in Extensible Business Reporting Language
(XBRL): (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of
Operations, (iii) the Consolidated Statements of Comprehensive Income (Loss), (iv) the Consolidated
Statements of Cash Flows, (v) the Consolidated Statements of Changes in Equity, (vi) the Notes to
Consolidated Financial Statements and (vii) the Financial Statement Schedule.
____________________________
+ Management/Employment Contract or Compensatory Plan or Arrangement.
* Incorporated by reference.
** Furnished herewith pursuant to item 601(b) (32) of Regulation S- K.
68
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
JEFFERIES FINANCIAL GROUP INC.
Date: January 28, 2019 By: /s/ John M. Dalton
Name: John M. Dalton
Title: Vice President and Controller
_________________________________________________________________________________
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities indicated, on the date set forth below.
Date Signature Title
________ _________________ ________
January 28, 2019 By: /s/ Joseph S. Steinberg Chairman of the Board
____________________________
Joseph S. Steinberg
January 28, 2019 By: /s/ Richard B. Handler Chief Executive Officer and Director
____________________________
Richard B. Handler (Principal Executive Officer)
January 28, 2019 By: /s/ Brian P. Friedman President and Director
____________________________
Brian P. Friedman
January 28, 2019 By: /s/ Teresa S. Gendron Vice President and Chief Financial Officer
____________________________
Teresa S. Gendron (Principal Financial Officer)
January 28, 2019 By: /s/ John M. Dalton Vice President and Controller
____________________________
John M. Dalton (Principal Accounting Officer)
January 28, 2019 By: /s/ Linda L. Adamany Director
____________________________
Linda L. Adamany
January 28, 2019 By: /s/ Barry J. Alperin Director
____________________________
Barry J. Alperin
January 28, 2019 By: /s/ Robert D. Beyer Director
____________________________
Robert D. Beyer
January 28, 2019 By: /s/ Francisco L. Borges Director
____________________________
Francisco L. Borges
January 28, 2019 By: /s/ W. Patrick Campbell Director
____________________________
W. Patrick Campbell
January 28, 2019 By: /s/ MaryAnne Gilmartin Director
____________________________
MaryAnne Gilmartin
January 28, 2019 By: /s/ Robert E. Joyal Director
____________________________
Robert E. Joyal
January 28, 2019 By: /s/ Jacob M. Katz Director
____________________________
Jacob M. Katz
January 28, 2019 By: /s/ Jeffrey C. Keil Director
____________________________
Jeffrey C. Keil
January 28, 2019 By: /s/ Michael T. O’Kane Director
____________________________
Michael T. O’Kane
January 28, 2019 By: /s/ Stuart H. Reese Director
____________________________
Stuart H. Reese
69
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Jefferies Financial Group Inc. (formerly Leucadia National
Corporation):
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of financial condition of Jefferies Financial Group Inc.
(formerly Leucadia National Corporation) and subsidiaries (the “Company”) as of November 30, 2018 and December 31,
2017, the related consolidated statements of operations, comprehensive income (loss), cash flows and changes in equity,
for the eleven months ended November 30, 2018 and the twelve months ended December 31, 2017, and the related notes
and the schedules listed in the Index at Item 15(a)2 (collectively referred to as the “financial statements”). In our opinion,
the financial statements present fairly, in all material respects, the financial position of the Company as of November
30, 2018 and December 31, 2017, and the results of its operations and its cash flows for the eleven months ended
November 30, 2018 and the twelve months ended December 31, 2017, in conformity with accounting principles generally
accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the Company’s internal control over financial reporting as of November 30, 2018, based on criteria
established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations
of the Treadway Commission and our report dated January 28, 2019, expressed an unqualified opinion on the Company’s
internal control over financial reporting.
Emphasis of Matter
As discussed in Note 1 and Note 3 to the financial statements, the Company changed its fiscal year end from December
31 to November 30 in 2018.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the
PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement,
whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement
of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide
a reasonable basis for our opinion.
/s/ Deloitte & Touche LLP
New York, New York
January 28, 2019
We have served as the Company’s auditor since 2017.
F-1
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Jefferies Financial Group Inc. (formerly Leucadia National
Corporation):
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Jefferies Financial Group Inc. (formerly Leucadia National
Corporation) and subsidiaries (the “Company”) as of November 30, 2018, based on criteria established in Internal
Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of November 30, 2018, based on criteria established in Internal Control – Integrated Framework
(2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the consolidated financial statements and financial statement schedules as of and for the eleven months
ended November 30, 2018 of the Company and our report dated January 28, 2019, expressed an unqualified opinion on
those financial statements and included an emphasis-of-matter paragraph regarding the Company changing its fiscal
year end from December 31 to November 30 in 2018.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s
Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s
internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and
the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance
with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could
have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
/s/ Deloitte & Touche LLP
New York, New York
January 28, 2019
F-2
92472_01_Leucadia_AR_10K.qxp 2/6/19 7:29 PM Page F-3
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Jefferies Financial Group Inc.
In our opinion, the consolidated statements of operations, comprehensive income (loss), changes in equity and cash
flows for the year ended December 31, 2016 present fairly, in all material respects, the results of operations and cash
flows of Jefferies Financial Group Inc. (formerly known as Leucadia National Corporation) and its subsidiaries for the
year ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement schedule for the year ended December 31, 2016 present
fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements and financial statement schedules are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial statements and financial statement schedules
based on our audit. We conducted our audit of these financial statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 27, 2017, except for the change in the manner in which the Company accounts for restricted cash in the
statement of cash flows discussed in Note 4, the effects of discontinued operations discussed in Note 28, and the change
in composition of reportable segments discussed in Note 29 to the consolidated financial statements, as to which the
date is January 28, 2019
F-3
92472_01_Leucadia_AR_10K.qxp 2/6/19 7:29 PM Page F-4
Jefferies Financial Group Inc. and Subsidiaries
Consolidated Statements of Financial Condition
November 30, 2018 and December 31, 2017
(Dollars in thousands, except par value)
November 30, December 31,
2018 2017
_________________ ________________
Assets
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,258,809 $ 5,275,480
Cash and securities segregated and on deposit for regulatory purposes or deposited
with clearing and depository organizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 707,960 578,014
Financial instruments owned, including securities pledged of $13,059,802
and $10,842,051:
Trading assets, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,463,256 16,082,676
Available for sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,409,886 716,561
___________________ ___________________
Total financial instruments owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,873,142 16,799,237
Loans to and investments in associated companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,417,332 2,066,829
Securities borrowed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,538,212 7,721,803
Securities purchased under agreements to resell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,785,758 3,689,559
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,287,401 5,419,015
Intangible assets, net and goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,890,131 2,463,180
Deferred tax asset, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 512,789 743,811
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,859,561 2,412,180
___________________ ___________________
Total assets (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $47,131,095 $47,169,108
___________________ ___________________
___________________ ___________________
Liabilities
Short- term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 387,492 $ 436,215
Trading liabilities, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,478,946 8,454,965
Securities loaned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,838,688 2,843,911
Securities sold under agreements to repurchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,643,069 8,660,511
Other secured financings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,534,271 1,029,485
Payables, expense accruals and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,407,030 7,167,666
Long- term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,617,563 7,885,783
___________________ ___________________
Total liabilities (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,907,059 36,478,536
___________________ ___________________
Commitments and contingencies
Mezzanine Equity
Redeemable noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,779 426,593
Mandatorily redeemable convertible preferred shares . . . . . . . . . . . . . . . . . . . . . . . . . . 125,000 125,000
Equity
Common shares, par value $1 per share, authorized 600,000,000 shares; 307,515,472
and 356,227,038 shares issued and outstanding, after deducting 109,460,774 and
60,165,980 shares held in treasury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 307,515 356,227
Additional paid- in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,854,847 4,676,038
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 288,286 372,724
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,610,218 4,700,968
___________________ ___________________
Total Jefferies Financial Group Inc. shareholders’ equity . . . . . . . . . . . . . . . . . . . 10,060,866 10,105,957
___________________ ___________________
Noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,391 33,022
___________________ ___________________
Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,079,257 10,138,979
___________________ ___________________
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $47,131,095 $47,169,108
___________________ ___________________
___________________ ___________________
(1) Total assets include assets related to variable interest entities of $704.4 million and $382.9 million at November
30, 2018 and December 31, 2017, respectively, and Total liabilities include liabilities related to variable interest
entities of $1,535.8 million and $1,031.0 million at November 30, 2018 and December 31, 2017, respectively.
See Note 10 for additional information related to variable interest entities.
The accompanying notes are an integral part of these consolidated financial statements.
F-4
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Jefferies Financial Group Inc. and Subsidiaries
Consolidated Statements of Operations
For the eleven months ended November 30, 2018 and the twelve months ended December 31, 2017 and 2016
(In thousands, except per share amounts)
Eleven Months Twelve Months Twelve Months
Ended Ended Ended
November 30, December 31, December 31,
2018 2017 2016
_________________ _________________
__________________
Revenues:
Commissions and other fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 634,271 $ 593,257 $ 611,574
Principal transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 232,224 923,418 534,784
Investment banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,904,870 1,764,285 1,193,973
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,294,325 993,198 926,089
Manufacturing revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 357,427 326,197 412,826
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 586,611 448,551 168,765
___________________ ___________________ ___________________
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,009,728 5,048,906 3,848,011
Interest expense of Jefferies Group . . . . . . . . . . . . . . . . . . . . . . . . . 1,245,694 971,461 812,637
___________________ ___________________ ___________________
Net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,764,034 4,077,445 3,035,374
___________________ ___________________ ___________________
Expenses:
Compensation and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,862,782 1,950,935 1,688,325
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 307,071 280,952 337,039
Floor brokerage and clearing fees . . . . . . . . . . . . . . . . . . . . . . . . . . 184,210 174,506 167,205
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89,249 101,202 95,757
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120,317 110,395 117,111
Selling, general and other expenses . . . . . . . . . . . . . . . . . . . . . . . . . 961,328 778,052 797,127
___________________ ___________________ ___________________
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,524,957 3,396,042 3,202,564
___________________ ___________________ ___________________
Income (loss) from continuing operations before income
taxes and income (loss) related to associated companies . . . . . 239,077 681,403 (167,190)
Income (loss) related to associated companies . . . . . . . . . . . . . . . . . . . 57,023 (74,901) 154,598
___________________ ___________________ ___________________
Income (loss) from continuing operations before income taxes . . 296,100 606,502 (12,592)
Income tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,008 642,286 25,773
___________________ ___________________ ___________________
Income (loss) from continuing operations . . . . . . . . . . . . . . . . . . 277,092 (35,784) (38,365)
Income from discontinued operations, net of income tax provision
of $47,045, $118,681 and $96,336 . . . . . . . . . . . . . . . . . . . . . . . . . . 130,063 288,631 232,686
Gain on disposal of discontinued operations, net of income tax
provision of $229,553, $0 and $0 . . . . . . . . . . . . . . . . . . . . . . . . . . . 643,921 – –
___________________ ___________________ ___________________
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,051,076 252,847 194,321
Net loss attributable to the noncontrolling interests . . . . . . . . . . . . . . . 12,975 3,455 1,426
Net income attributable to the redeemable noncontrolling interests . . (37,263) (84,576) (65,746)
Preferred stock dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,470) (4,375) (4,063)
___________________ ___________________ ___________________
Net income attributable to Jefferies Financial Group Inc.
common shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,022,318 $ 167,351 $ 125,938
___________________ ___________________ ___________________
___________________ ___________________ ___________________
(continued)
The accompanying notes are an integral part of these consolidated financial statements.
F-5
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Jefferies Financial Group Inc. and Subsidiaries
Consolidated Statements of Operations, continued
For the eleven months ended November 30, 2018 and the twelve months ended December 31, 2017 and 2016
(In thousands, except per share amounts)
Eleven Months Twelve Months Twelve Months
Ended Ended Ended
November 30, December 31, December 31,
2018 2017 2016
_________________ _________________
__________________
Basic earnings (loss) per common share attributable
to Jefferies Financial Group Inc. common shareholders:
Income (loss) from continuing operations . . . . . . . . . . . . . . . . . . . . $0.82 $(0.10) $(0.10)
Income from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . 0.27 0.55 0.44
Gain on disposal of discontinued operations . . . . . . . . . . . . . . . . . . 1.84 – –
__________
_
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2.93 $ 0.45 $ 0.34
_
__________
__________
_
Diluted earnings (loss) per common share attributable to
Jefferies Financial Group Inc. common shareholders:
__________ _
__________ _
__________ _
________ _
________ _
________ _
Income (loss) from continuing operations . . . . . . . . . . . . . . . . . . . . $0.81 $(0.10) $(0.10)
Income from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . 0.26 0.55 0.44
Gain on disposal of discontinued operations . . . . . . . . . . . . . . . . . . 1.83 – –
__________
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2.90 $ 0.45 $ 0.34
__________
__________
_
_
_
Amounts attributable to Jefferies Financial Group Inc.
common shareholders:
__________ _
__________ _
__________ _
________ _
________ _
________ _
Income (loss) from continuing operations, net of taxes . . . . . . . . . . $ 285,475 $ (36,003) $ (37,937)
Income from discontinued operations, net of taxes . . . . . . . . . . . . . 92,922 203,354 163,875
Gain on disposal of discontinued operations, net of taxes . . . . . . . . 643,921 – –
_______________
___________________ ________________
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,022,318 $167,351 $125,938
___________________ ________________
_______________
_______________
___________________ ________________
The accompanying notes are an integral part of these consolidated financial statements.
F-6
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Jefferies Financial Group Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
For the eleven months ended November 30, 2018 and the twelve months ended December 31, 2017 and 2016
(In thousands)
Eleven Months Twelve Months Twelve Months
Ended Ended Ended
November 30, December 31, December 31,
2018 2017 2016
_________________ _________________
__________________
_______________
_____________
_____________
_____________
_____________
_____________
__________________ __
__________________ __
__________________ __
__________________ __
__________________ __
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,051,076 $252,847 $ 194,321
_______________
Other comprehensive income (loss):
Net unrealized holding gains (losses) on investments arising
during the period, net of income tax provision (benefit) of
$(551), $3,450 and $2,262 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,560) 5,923 3,900
Less: reclassification adjustment for net (gains) losses included in
net income, net of income tax provision (benefit) of $37,
$124 and $2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (109) (212) (4)
_______________
Net change in unrealized holding gains (losses) on investments,
net of income tax provision (benefit) of $(588), $3,326
and $2,260 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,669) 5,711 3,896
_______________
Net unrealized foreign exchange gains (losses) arising during
the period, net of income tax provision (benefit) of $(11,089),
$14,616 and $(3,530) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (71,543) 78,493 (121,581)
Less: reclassification adjustment for foreign exchange (gains)
losses included in net income, net of income tax provision
(benefit) of $(16), $1,086 and $0 . . . . . . . . . . . . . . . . . . . . . . . . . . (20,459) 5,310 –
Net change in unrealized foreign exchange gains (losses), net of
income tax provision (benefit) of $(11,073), $13,530 and $(3,530) . . (92,002) 83,803 (121,581)
_______________
Net unrealized gains (losses) on instrument specific credit risk
arising during the period, net of income tax provision (benefit)
of $9,289, $(13,215) and $(4,251) . . . . . . . . . . . . . . . . . . . . . . . . . 29,620 (21,394) (6,494)
Less: reclassification adjustment for instrument specific credit risk
(gains) losses included in net income, net of income tax provision
(benefit) of $311, $0 and $0 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (916) – –
_____________
Net change in unrealized instrument specific credit risk gains
(losses), net of income tax provision (benefit) of $8,978,
$(13,215) and $(4,251) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,704 (21,394) (6,494)
_______________
Net unrealized gains (losses) on cash flow hedges arising during
the period, net of income tax provision (benefit) of $552,
$(593) and $0 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,608 (936) –
Less: reclassification adjustment for cash flow hedges (gains) losses
included in net income, net of income tax provision (benefit)
of $0, $0 and $0 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . – – –
Net change in unrealized cash flow hedges gains (losses),
net of income tax provision (benefit) of $552, $(593) and $0 . . . . 1,608 (936) –
Net pension gains (losses) arising during the period, net of income
tax provision (benefit) of $(297), $2,018 and $(2,516) . . . . . . . . . (844) 3,526 (5,451)
Less: reclassification adjustment for pension (gains) losses included
in net income, net of income tax provision (benefit) of $(697),
$(2,042) and $(700) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,349 517 1,534
_______________
Net change in pension liability benefits, net of income tax provision
(benefit) of $400, $4,060 and $(1,816) . . . . . . . . . . . . . . . . . . . . . . 6,505 4,043 (3,917)
_______________
Other comprehensive income (loss), net of income taxes . . . . . . . . . . . . (56,854) 71,227 (128,096)
_______________
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 994,222 324,074 66,225
Comprehensive loss attributable to the noncontrolling interests . . . . . . 12,975 3,455 1,426
Comprehensive income attributable to the redeemable
noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (37,263) (84,576) (65,746)
Preferred stock dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,470) (4,375) (4,063)
_______________
Comprehensive income (loss) attributable to Jefferies Financial
Group Inc. common shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 965,464 $238,578 $ (2,158)
_______________
_______________
__________________ __
__________________ __
_____________
_____________
__________________ __
__________________ __
__________________ __
__________________ __
__________________ __
__________________ __
__________________ __
__________________ __
_____________
_____________
_____________
_____________
_____________
_____________
_____________
_______________
_______________
_______________
The accompanying notes are an integral part of these consolidated financial statements.
F-7
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Jefferies Financial Group Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the eleven months ended November 30, 2018 and the twelve months ended December 31, 2017 and 2016
(In thousands)
194,321
252,847 $
Eleven Months Twelve Months Twelve Months
Ended Ended Ended
November 30, December 31, December 31,
2018 2017 2016
__________________ _________________ _________________
Net cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,051,076 $
Adjustments to reconcile net income to net cash provided
by operations:
Pre- tax income from discontinued operations, including gain
on disposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,050,582) (407,312) (329,022)
Deferred income tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236,406 712,055 118,631
Depreciation and amortization of property, equipment and
leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105,156 92,918 94,887
Other amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (37,749) (28,159) (23,274)
Share- based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48,249 48,384 33,597
Provision for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,223 36,452 24,341
Net securities (gains) losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 939 (23,028) (29,542)
Income related to associated companies . . . . . . . . . . . . . . . . . . . . . (130,685) (34,494) (171,782)
Distributions from associated companies . . . . . . . . . . . . . . . . . . . . 162,988 143,286 191,455
Net losses related to property and equipment, and other assets . . . 32,461 32,814 83,010
Gain on sale of subsidiaries and associated companies . . . . . . . . . (221,712) (179,605) –
Net change in:
Securities deposited with clearing and depository organizations . . . 64,911 163 (99,893)
Trading assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,451,472) (648,703) 2,763,558
Securities borrowed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,137,134 50,660 (805,779)
Securities purchased under agreements to resell . . . . . . . . . . . . 807,619 234,740 (112,777)
Receivables from brokers, dealers and clearing organizations . . (602,950) (555,109) (488,623)
Receivables from customers of securities operations . . . . . . . . . (465,960) (732,344) 340,690
Other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,864 (216,189) (186,631)
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,484 (8,102) (232,925)
Trading liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,142,878 (25,765) 1,726,582
Securities loaned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (964,137) 381 (122,946)
Securities sold under agreements to repurchase . . . . . . . . . . . . . 36,956 1,838,793 (3,144,433)
Payables to brokers, dealers and clearing organizations . . . . . . . 250,603 (1,079,516) 569,246
Payables to customers of securities operations . . . . . . . . . . . . . . 512,760 366,721 (483,188)
Trade payables, expense accruals and other liabilities . . . . . . . . (112,488) 365,385 240,025
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (125,519) (2,810) (61,900)
___________________ ___________________
_
Net cash provided by operating activities – continuing operations . . 526,453 234,463 87,628
Net cash provided by operating activities – discontinued operations 164,650 553,831 484,786
___________________ ___________________
_
Net cash provided by operating activities . . . . . . . . . . . . . . . . $ 691,103 $ 788,294 $ 572,414
___________________ ___________________
_
(continued)
__________________
__________________
__________________
The accompanying notes are an integral part of these consolidated financial statements.
F-8
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Jefferies Financial Group Inc. and Subsidiaries
Consolidated Statements of Cash Flows, continued
For the eleven months ended November 30, 2018 and the twelve months ended December 31, 2017 and 2016
(In thousands)
___________________
Eleven Months Twelve Months Twelve Months
Ended Ended Ended
November 30, December 31, December 31,
2018 2017 2016
_________________ _________________
__________________
Net cash flows from investing activities:
Acquisitions of property, equipment and leasehold improvements,
and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (325,666) $ (123,027) $ (256,668)
Proceeds from disposals of property and equipment, and other assets 14,052 28,042 46,675
Proceeds from sale of subsidiaries, net of expenses and cash
of operations sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000 289,767 –
Proceeds from sale of associated companies . . . . . . . . . . . . . . . . . . . 379,074 173,105 –
Acquisitions, net of cash acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . – – (9,673)
Purchases of and advances on notes, loans and other receivables . . . (351,831) (49,325) (342,281)
Collections on notes, loans and other receivables . . . . . . . . . . . . . . . . 216,426 272,439 121,825
Loans to and investments in associated companies . . . . . . . . . . . . . . (1,956,983) (3,305,791) (763,528)
Capital distributions and loan repayment from associated companies 1,973,739 3,106,423 703,108
Deconsolidation of subsidiary entities . . . . . . . . . . . . . . . . . . . . . . . . – (21,129) (326)
Purchases of investments (other than short- term) . . . . . . . . . . . . . . . . (3,423,191) (1,146,595) (739,298)
Proceeds from maturities of investments . . . . . . . . . . . . . . . . . . . . . . 1,084,277 344,223 162,393
Proceeds from sales of investments . . . . . . . . . . . . . . . . . . . . . . . . . . 1,571,507 443,300 483,360
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130 1,339 4,420
___________________ ___________________
Net cash provided by (used for) investing activities –
continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (718,466) 12,771 (589,993)
Net cash provided by (used for) investing activities –
discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 860,909 (67,405) (46,222)
___________________ ___________________
Net cash provided by (used for) investing activities . . . . . . . . . . 142,443 (54,634) (636,215)
___________________ ___________________
Net cash flows from financing activities:
Issuance of debt, net of issuance costs . . . . . . . . . . . . . . . . . . . . . . . . 2,754,665 1,620,691 1,020,050
Other changes in short- term borrowings, net . . . . . . . . . . . . . . . . . . . – 23,324 204,882
Repayment of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,678,323) (848,350) (798,865)
Net change in other secured financings . . . . . . . . . . . . . . . . . . . . . . . 503,043 1,248 116,702
Net change in bank overdrafts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,290 (5,650) (46,536)
Issuance of common shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,611 1,501 1,062
Net contributions from (distributions to) redeemable
noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 455 (185) 812
Distributions to noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . . (7,408) (12,031) (18,544)
Contributions from noncontrolling interests . . . . . . . . . . . . . . . . . . . . 113 40,072 154,522
Purchase of common shares for treasury . . . . . . . . . . . . . . . . . . . . . . (1,130,854) (100,477) (95,020)
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (151,758) (117,407) (91,296)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 (1) 488
___________________ ___________________
Net cash provided by (used for) financing activities –
continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (696,165) 602,735 448,257
Net cash provided by (used for) financing activities –
discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120,322 (167,934) (217,351)
___________________ ___________________ ___________________
Net cash provided by (used for) financing activities . . . . . . . . . (575,843) 434,801 230,906
___________________ ___________________ ___________________
Effect of foreign exchange rate changes on cash . . . . . . . . . . . . . . . . (19,546) 12,067 (27,498)
___________________ ___________________ ___________________
Change in cash classified as assets held for sale . . . . . . . . . . . . . . . . – (3,136) (5,206)
___________________ ___________________ ___________________
Net increase in cash, cash equivalents and restricted cash . . . . . . . 238,157 1,177,392 134,401
Cash, cash equivalents and restricted cash at beginning of period . . . 5,774,505 4,597,113 4,462,712
___________________ ___________________ ___________________
Cash, cash equivalents and restricted cash at end of period . . . . . . . . $ 6,012,662 $ 5,774,505 $4,597,113
___________________ ___________________ ___________________
___________________ ___________________ ___________________
(continued)
___________________
___________________
___________________
The accompanying notes are an integral part of these consolidated financial statements.
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Jefferies Financial Group Inc. and Subsidiaries
Consolidated Statements of Cash Flows, continued
For the eleven months ended November 30, 2018 and the twelve months ended December 31, 2017 and 2016
(In thousands)
The following presents our cash, cash equivalents and restricted cash by category within the Consolidated Statements
of Financial Condition to the total of the same amounts in the Consolidated Statements of Cash Flows above (in
thousands):
November 30, December 31, December 31,
2018 2017 2016
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,258,809 $5,275,480 $3,807,558
Cash and securities segregated and on deposit for regulatory
purposes or deposited with clearing and depository organizations . . 673,141 478,284 757,444
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,712 20,741 32,111
___________________ ___________________ ___________________
Total cash, cash equivalents and restricted cash . . . . . . . . . . . . . . . . . $6,012,662 $5,774,505 $4,597,113
___________________ ___________________ ___________________
___________________ ___________________ ___________________
_________________
_________________ _________________
The accompanying notes are an integral part of these consolidated financial statements.
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Jefferies Financial Group Inc. and Subsidiaries
Consolidated Statements of Changes in Equity
For the eleven months ended November 30, 2018 and the twelve months ended December 31, 2017 and 2016
(In thousands, except par value and per share amounts)
Jefferies Financial Group Inc. Common Shareholders
______________________________________________________
Common Accumulated
Shares Additional Other
$1 Par Paid-In Comprehensive Retained Noncontrolling
Value Capital Income (Loss) Earnings Subtotal Interests Total
____
__________ _____________ __________________ __________ __
_______ __________________ __
Balance, January 1, 2016 . . . . . . $362,617 $4,986,819 $ 438,793 $4,612,982 $10,401,211 $ 64,679 $10,465,890
Net income . . . . . . . . . . . . . . . . . . . 125,938 125,938 (1,426) 124,512
Other comprehensive loss,
net of taxes . . . . . . . . . . . . . . . . . (128,096) (128,096) (128,096)
Contributions from noncontrolling
interests . . . . . . . . . . . . . . . . . . . . – 154,522 154,522
Distributions to noncontrolling
interests . . . . . . . . . . . . . . . . . . . . – (18,544) (18,544)
Deconsolidation of asset
management entities . . . . . . . . . . – (9,709) (9,709)
Change in interest in consolidated
subsidiary . . . . . . . . . . . . . . . . . . (261) (261) 261 –
Reclassification to redeemable
noncontrolling interest . . . . . . . . – (14,234) (14,234)
Share- based compensation expense 33,597 33,597 33,597
Change in fair value of redeemable
noncontrolling interests . . . . . . . (115,963) (115,963) (115,963)
Purchase of common shares
for treasury . . . . . . . . . . . . . . . . . (5,434) (89,586) (95,020) (95,020)
Dividends ($.25 per common share) (93,529) (93,529) (93,529)
Other . . . . . . . . . . . . . . . . . . . . . . . . 2,242 (2,019) 223 223
________________ ___________________ _________________ ____________________ _______________________ ___________________ _______________________
Balance, December 31, 2016 . . . 359,425 4,812,587 310,697 4,645,391 10,128,100 175,549 10,303,649
Net income . . . . . . . . . . . . . . . . . . . 167,351 167,351 (3,455) 163,896
Other comprehensive income,
net of taxes . . . . . . . . . . . . . . . . . 71,227 71,227 71,227
Reclassification of tax effects from
accumulated other comprehensive
income . . . . . . . . . . . . . . . . . . . . . (9,200) 9,200 – –
Contributions from noncontrolling
interests . . . . . . . . . . . . . . . . . . . . – 40,072 40,072
Distributions to noncontrolling
interests . . . . . . . . . . . . . . . . . . . . – (12,031) (12,031)
Deconsolidation of real estate entity – (167,163) (167,163)
Share- based compensation expense 48,384 48,384 48,384
Change in fair value of redeemable
noncontrolling interests . . . . . . . (94,937) (94,937) (94,937)
Purchase of common shares
for treasury . . . . . . . . . . . . . . . . . (4,024) (96,453) (100,477) (100,477)
Dividends ($.325 per common share) (120,974) (120,974) (120,974)
Other . . . . . . . . . . . . . . . . . . . . . . . . 826 6,457 7,283 50 7,333
________________ ___________________ _________________ ____________________ _______________________ ___________________ _______________________
Balance, December 31, 2017 . . . . $ 356,227 $4,676,038 $ 372,724 $ 4,700,968 $10,105,957 $ 33,022 $ 10,138,979
________________ ___________________ _________________ ____________________ _______________________ ___________________ _______________________
(continued)
The accompanying notes are an integral part of these consolidated financial statements.
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Jefferies Financial Group Inc. and Subsidiaries
Consolidated Statements of Changes in Equity, continued
For the eleven months ended November 30, 2018 and the twelve months ended December 31, 2017 and 2016
(In thousands, except par value and per share amounts)
Jefferies Financial Group Inc. Common Shareholders
______________________________________________________
Common Accumulated
Shares Additional Other
$1 Par Paid-In Comprehensive Retained Noncontrolling
Value Capital Income (Loss) Earnings Subtotal Interests Total
____
__________ ____________ __________________ __________ _________
__________________ __
Balance, December 31, 2017 . . . $356,227 $ 4,676,038 $372,724 $4,700,968 $10,105,957 $ 33,022 $10,138,979
Cumulative effect of the adoption
of accounting standards . . . . . . . (27,584) 45,396
17,812 17,812
________________ ___________________ _________________ ____________________ _______________________ ___________________ _______________________
Balance, January 1, 2018,
as adjusted . . . . . . . . . . . . . . . . . 356,227 4,676,038 345,140 4,746,364 10,123,769 33,022 10,156,791
Net income . . . . . . . . . . . . . . . . . . . 1,022,318 1,022,318 (12,975) 1,009,343
Other comprehensive loss,
net of taxes . . . . . . . . . . . . . . . . . (56,854) (56,854) (56,854)
Contributions from noncontrolling
interests . . . . . . . . . . . . . . . . . . . . – 113 113
Reversal of cumulative National
Beef redeemable noncontrolling
interests fair value adjustments
prior to deconsolidation . . . . . . . 237,669 237,669 237,669
Distributions to noncontrolling
interests . . . . . . . . . . . . . . . . . . . . – (7,408) (7,408)
Consolidation of asset
management entity . . . . . . . . . . . – 8,316 8,316
Change in interest in consolidated
subsidiary . . . . . . . . . . . . . . . . . . 2,677 2,677 (2,677) –
Share- based compensation expense 48,249 48,249 48,249
Change in fair value of redeemable
noncontrolling interests . . . . . . . (26,551) (26,551) (26,551)
Exercise of options to purchase
common shares . . . . . . . . . . . . . . 109 2,376 2,485 2,485
Purchase of common shares
for treasury . . . . . . . . . . . . . . . . . (50,223) (1,098,199) (1,148,422) (1,148,422)
Dividends ($.45 per common share) (158,464) (158,464) (158,464)
Other . . . . . . . . . . . . . . . . . . . . . . . . 1,402 12,588 13,990 13,990
________________ ___________________ _________________ ____________________ _______________________ ___________________ _______________________
Balance, November 30, 2018 . . . $307,515 $ 3,854,847 $288,286 $5,610,218 $10,060,866 $ 18,391 $10,079,257
________________ ___________________ _________________ ____________________ _______________________ ___________________ _______________________
________________ ___________________ _________________ ____________________ _______________________ ___________________ _______________________
The accompanying notes are an integral part of these consolidated financial statements.
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Jefferies Financial Group Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Operations
Jefferies Financial Group Inc. (“Jefferies” or the “Company”), formerly known as Leucadia National Corporation, is
a diversified financial services company engaged in investment banking and capital markets, asset management and
direct investing. Jefferies Group LLC (“Jefferies Group”), our largest subsidiary, is the largest independent full- service
global investment banking firm headquartered in the U.S.
In the fourth quarter of 2018, we changed our fiscal year end from a calendar year basis to a fiscal year ending on
November 30, consistent with the fiscal year of Jefferies Group. Our 2018 fiscal year consists of the eleven month
transition period beginning January 1, 2018 through November 30, 2018. Financial statements for 2017 and 2016
continue to be presented on the basis of our previous calendar year end.
In March 2013, Jefferies Group became an indirect wholly- owned subsidiary of Jefferies, yet retains a separate credit
rating and continues to be a separate U.S. Securities and Exchange Commission (“SEC”) reporting company. Through
Jefferies Group, we own 50% of Jefferies Finance LLC (“Jefferies Finance”), Jefferies Group’s joint venture with
Massachusetts Mutual Life Insurance Company. Jefferies Finance is a commercial finance company whose primary
focus is the origination and syndication of senior secured debt of middle market and growth companies in the form of
term and revolving loans. Jefferies Group has a November 30 year end. Prior to the fourth quarter of 2018, because
our fiscal year end was December 31, we reflected Jefferies Group in our consolidated financial statements utilizing a
one month lag. In connection with our change in fiscal year end to November 30, we eliminated the one month lag
utilized to reflect Jefferies Group results beginning with the fourth quarter of 2018. Therefore, our results for the eleven
months ended November 30, 2018, include twelve month results for Jefferies Group and eleven months for the
remainder of our results.
Jefferies Group operates in two business segments: Capital Markets and Asset Management. Capital Markets includes
investment banking, sales and trading and other related services. Investment banking provides capital markets and
financial advisory services to clients across most industry sectors in the Americas, Europe and Asia. Sales and trading
businesses operate across the spectrum of equities, fixed income and foreign exchange products. Related services
include, among other things, prime brokerage and equity finance, research and strategy, corporate lending and real
estate finance, as well as other principal and corporate investing activities.
Asset Management provides investment management services to investors in the U.S. and overseas and makes capital
investments in managed funds and accounts. Leucadia Asset Management (“LAM”) supports and develops focused
alternative asset management businesses led by distinct management teams. We are patiently developing this business
over time, and changes in the platforms and structure should be expected. During the second quarter of 2018, we took
steps to expand our asset management efforts including the formation of a strategic relationship with Weiss Multi-
Strategy Advisers LLC (“Weiss”) and we invested $250.0 million in Weiss’ strategy. We will own a profit share in the
firm for the first year, and a revenue share thereafter. In addition, we entered into an agreement with Schonfeld Strategic
Advisors LLC (“Schonfeld”) to merge the business of Folger Hill Asset Management with Schonfeld’s fundamental
equities business, under the Schonfeld brand. In connection with the transaction with Schonfeld, LAM agreed to make
a $250.0 million investment in the combined strategy and will receive a revenue share in the combined ongoing
fundamental equity business. The transaction with Schonfeld closed on January 1, 2019. In the fourth quarter of 2018,
we transferred our LAM seed investments, as well as our interest in Berkadia Commercial Mortgage Holding LLC
(“Berkadia”), to Jefferies Group. These transfers were accomplished as a capital contribution to Jefferies Group of
approximately $598.2 million and an internal transfer of cash from Jefferies Group of $76.0 million to Jefferies.
Berkadia, Jefferies Group’s 50-50 equity method joint venture with Berkshire Hathaway Inc., is a U.S. commercial real
estate finance company providing capital solutions, investment sales advisory and mortgage servicing for multifamily
and commercial properties.
Merchant Banking is where we leverage opportunities to make unique long- term direct investments. Our current
Merchant Banking businesses and investments include National Beef Packing Company (“National Beef ”) (beef
processing), Spectrum Brands Holdings, Inc. (“Spectrum Brands”) (consumer products), Linkem (fixed wireless
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Notes to Consolidated Financial Statements, continued
Note 1. Nature of Operations, continued
broadband services in Italy), Vitesse Energy, LLC (“Vitesse Energy Finance”) and JETX Energy LLC (“JETX Energy”)
(oil and gas production and development), WeWork (global network of workspaces), HomeFed Corporation
(“HomeFed”) (real estate), Idaho Timber (manufacturing), FXCM Group, LLC (“FXCM”) (provider of online foreign
exchange trading services), Foursight Capital (vehicle finance) and Golden Queen Mining Company, LLC (“Golden
Queen”) (gold and silver mining). Our Merchant Banking businesses and investments also included LAM (asset
management) and Berkadia (commercial mortgage banking, investment sales and servicing), prior to their transfer to
Jefferies Group in the fourth quarter of 2018 and Garcadia (automobile dealerships), prior to its sale in August 2018.
The structure of each of our investments was tailored to the unique opportunity each transaction presented. Our
investments may be reflected in our consolidated results as consolidated subsidiaries, equity investments, securities or
in other ways, depending on the structure of our specific holdings.
We own 31% of National Beef, one of the largest beef processing companies in the U.S. On June 5, 2018, we completed
the sale of 48% of National Beef to Marfrig Global Foods S.A. (“Marfrig”) for $907.7 million in cash, reducing our
ownership in National Beef from 79% to 31%. The pre- tax gain recognized as a result of this transaction was $873.5
million for the eleven months ended November 30, 2018. During 2018, prior to the closing, we received an additional
$229.4 million in distributions of recent profits plus a true- up to the debt amount set in the enterprise valuation
associated with the sale. As of the closing of the sale on June 5, 2018, we deconsolidated our investment in National
Beef and account for our remaining 31% interest in National Beef under the equity method of accounting. We have
classified the results of National Beef prior to June 5, 2018 as discontinued operations in the Consolidated Statements
of Operations. See Note 28 for more information.
We own approximately 14% of Spectrum Brands, a publicly traded global consumer products company on the NYSE
(NYSE: SPB), and we reflect this investment at fair value based on quoted market prices. On July 13, 2018, HRG
Group, Inc. (“HRG”) merged into its 62% owned subsidiary, Spectrum Brands. Our approximately 23% interest in
HRG thereby converted into approximately 14% of Spectrum Brands outstanding shares.
We own approximately 42% of the common shares of Linkem, as well as convertible preferred shares which, if
converted, would increase our ownership to approximately 54% of Linkem’s common equity at November 30,
2018. Linkem provides residential broadband services in Italy using LTE technologies deployed over the 3.5 GHz
spectrum band. Linkem is accounted for under the equity method.
Vitesse Energy Finance is our 97% owned consolidated subsidiary that acquires and invests in non- operated working
interests and royalties predominantly in the Bakken Shale oil field in North Dakota. In April 2018, Vitesse Energy
Finance acquired non- operated Bakken assets from a portfolio company of a private equity fund for $190.0 million in
cash, of which approximately $144.0 million was funded as equity by Jefferies and the balance funded by Vitesse
Energy Finance’s credit line. JETX Energy is our 98% owned consolidated subsidiary that currently has non- operated
working interests and acreage in east Texas.
We invested $9.0 million in 2013 in WeWork, which creates collaborative office communities. Currently we own less
than 1% of the company. Our interest in WeWork is reflected in Trading assets in our financial statements at fair value.
We own an approximate 70% equity interest of HomeFed, which owns and develops residential and mixed use real
estate properties. We account for our interest under the equity method. HomeFed is a public company traded on the
NASD OTC Bulletin Board.
Idaho Timber is our consolidated subsidiary engaged in the manufacture and distribution of various wood products.
Our investment in FXCM and associated companies consist of a senior secured term loan due in the first quarter of
2019, ($67.6 million principal outstanding at November 30, 2018); a 50% voting interest in FXCM and up to 75% of
all distributions.
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Notes to Consolidated Financial Statements, continued
Note 1. Nature of Operations, continued
Golden Queen owns the Soledad Mountain project, a gold and silver mining project in Kern County, California. Our
effective ownership of Golden Queen is approximately 38% and is accounted for under the equity method.
Garcadia was an equity method joint venture that owned and operated automobile dealerships. During the third quarter
of 2018, we sold our equity interests in Garcadia and our associated real estate to our former partners, the Garff family,
for $417.2 million in cash. The pre- tax gain recognized as a result of this transaction, $221.7 million during the third
quarter of 2018, is classified as Other revenue.
Note 2. Significant Accounting Policies
The preparation of these financial statements in accordance with accounting principles generally accepted in the United
States of America (“GAAP”) requires us to make estimates and assumptions that affect the reported amounts in the
financial statements and disclosures of contingent assets and liabilities. On an on- going basis, we evaluate all of these
estimates and assumptions. The most important of these estimates and assumptions relate to fair value measurements,
compensation and benefits, asset impairment, the ability to realize deferred tax assets, the recognition and measurement
of uncertain tax positions and contingencies. Although these and other estimates and assumptions are based on the
best available information, actual results could be different from these estimates.
Consolidation
Our policy is to consolidate all entities in which we can vote a majority of the outstanding voting stock. In addition,
we consolidate entities which meet the definition of a variable interest entity for which we are the primary
beneficiary. The primary beneficiary is the party who has the power to direct the activities of a variable interest entity
that most significantly impact the entity’s economic performance and who has an obligation to absorb losses of the
entity or a right to receive benefits from the entity that could potentially be significant to the entity. We consider special
allocations of cash flows and preferences, if any, to determine amounts allocable to noncontrolling interests. All
intercompany transactions and balances are eliminated in consolidation.
In situations where we have significant influence, but not control, of an entity that does not qualify as a variable interest
entity, we apply either the equity method of accounting or fair value accounting pursuant to the fair value option election
under GAAP. We have also formed nonconsolidated investment vehicles with third- party investors that are typically
organized as partnerships or limited liability companies. Our subsidiaries may act as general partner or managing member
for these investment vehicles and have generally provided the third- party investors with termination or “kick- out” rights.
Changes to the Consolidated Statements of Operations
Manufacturing revenues, which were previously reported within Other revenues, are now reported separately in the
Consolidated Statements of Operations.
We have reorganized the presentation of our gains and losses generated from our capital invested in asset management
funds. This was previously presented as Other revenues and is now presented within Principal transactions revenues.
For the twelve months ended December 31, 2017, this resulted in a decrease to Principal transactions revenues of $8.2
million and an increase to Other revenues of $8.2 million. For the twelve months ended December 31, 2016, this resulted
in a decrease to Principal transactions revenues of $69.0 million and an increase to Other revenues of $69.0 million.
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Notes to Consolidated Financial Statements, continued
Note 2. Significant Accounting Policies, continued
Revenue Recognition Policies
We adopted the Financial Accounting Standards Board (“FASB”) new revenue recognition standard on January 1,
2018. Revenue recognition policies under the new standard are applied prospectively in our financial statements from
January 1, 2018 forward. Reported financial information for the historical comparable periods was not revised and
continues to be reported under the accounting standards in effect during the historical periods. For investment banking
revenues and asset management fees, we separately state the accounting policies applicable in the presented eleven
and twelve month periods. There were no material changes in our other revenue recognition policies as a result of the
new standard. For further information on our adoption of the new revenue standard, see Note 4.
Investment Banking Activities
Commissions and Other Fees. All customer securities transactions are reported in the Consolidated Statements of
Financial Condition on a settlement date basis with related income reported on a trade date basis. We permit institutional
customers to allocate a portion of their gross commissions to pay for research products and other services provided by
third parties. The amounts allocated for those purposes are commonly referred to as soft dollar arrangements. These
arrangements are accounted for on an accrual basis and, as we are acting as an agent in these arrangements, netted against
commission revenues in the Consolidated Statements of Operations. In addition, we earn asset- based fees associated
with the management and supervision of assets, account services and administration related to customer accounts.
Principal Transactions. Trading assets and trading liabilities (all of which are recorded on a trade- date basis) are carried
at fair value with gains and losses reflected in Principal transactions revenues in the Consolidated Statements of
Operations, except for derivatives accounted for as hedges (see Hedge Accounting section, herein and Note 6). Fees
received on loans carried at fair value are also recorded in Principal transactions revenues.
Investment Banking – Eleven Months Ended November 30, 2018. Advisory fees from mergers and acquisitions
engagements are recognized at a point in time when the related transaction is completed. Advisory fees from
restructuring engagements are recognized over time using a time elapsed measure of progress. Expenses associated
with investment banking advisory engagements are deferred only to the extent they are explicitly reimbursable by the
client and the related revenue is recognized at a point in time. All other investment banking advisory related expenses,
including expenses incurred related to restructuring advisory engagements, are expensed as incurred. All investment
banking advisory expenses are recognized within their respective expense category in the Consolidated Statements of
Operations and any expenses reimbursed by clients are recognized as Investment banking revenues.
Underwriting and placement agent revenues are recognized at a point in time on trade- date. Costs associated with
underwriting activities are deferred until the related revenue is recognized or the engagement is otherwise concluded
and are recorded on a gross basis in Selling, general and other expenses in the Consolidated Statements of Operations.
Investment Banking – Twelve Months ended December 31, 2017 and 2016. Underwriting revenues and fees from
mergers and acquisitions, restructuring and other investment banking advisory assignments or engagements are recorded
when the services related to the underlying transactions are completed under the terms of the assignment or engagement.
Expenses associated with such assignments are deferred until reimbursed by the client, the related revenue is recognized
or the engagement is otherwise concluded. Expenses are recorded net of client reimbursements and netted against
revenues. Unreimbursed expenses with no related revenues are included in Selling, general and other expenses in our
Consolidated Statements of Operations.
Asset Management Fees – Eleven Months Ended November 30, 2018. Management and administrative fees are generally
recognized over the period that the related service is provided. Performance fee revenue is generally recognized only
at the end of the performance period to the extent that the benchmark return has been met.
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Notes to Consolidated Financial Statements, continued
Note 2. Significant Accounting Policies, continued
Asset Management Fees – Twelve Months ended December 31, 2017 and 2016. Management and administrative fees
are generally recognized over the period that the related service is provided. Performance fees are accrued (or reversed)
on a monthly basis based on measuring performance to date versus any relevant benchmark return hurdles stated in
the investment management agreement. Performance fees are not subject to adjustment once the measurement period
ends (generally annual periods) and the performance fees have been realized.
Interest Revenue and Expense. Interest expense that is deducted from Revenues to arrive at Net revenues is related to
Jefferies Group’s operations. Contractual interest on Trading assets and Trading liabilities is recognized on an accrual
basis as a component of Interest income and Interest expense. Interest flows on derivative trading transactions and
dividends are included as part of the fair valuation of these contracts and recognized in Principal transactions revenues
in the Consolidated Statements of Operations rather than as a component of interest income or expense. Interest on
short- and long- term borrowings is recorded on an accrual basis, except for those for which we have elected the fair
value option, with related interest recorded as Interest expense. Discounts/premiums arising on long- term debt are
accreted/amortized to Interest expense using the effective yield method over the remaining lives of the underlying debt
obligations. Interest revenue related to Securities borrowed and Securities purchased under agreements to resell activities
and interest expense related to Securities loaned and Securities sold under agreements to repurchase activities are
recognized on an accrual basis.
Manufacturing Revenues. Manufacturing revenues are primarily from Idaho Timber, which manufactures and distributes
an extensive range of quality wood products to markets across North America. Idaho Timber’s primary business consists
of the sale of lumber that is manufactured or remanufactured at one of its locations. Agreements with customers for
these sales specify the type, quantity and price of products to be delivered as well as the delivery date and payment
terms. The transaction price is fixed at the time of sale and revenue is generally recognized when the customer takes
control of the product.
Hedge Accounting
Jefferies Group applies hedge accounting using interest rate swaps designated as fair value hedges of changes in the
benchmark interest rate of fixed rate senior long- term debt. Jefferies Group’s interest rate swaps are included as
derivative contracts in Trading assets and Trading liabilities in the Consolidated Statements of Financial Condition.
Jefferies Group uses regression analysis to perform ongoing prospective and retrospective assessments of the
effectiveness of these hedging relationships. A hedging relationship is deemed effective if the change in fair value of
the interest rate swap and the change in the fair value of the long- term debt due to changes in the benchmark interest
rate offset within a range of 80% to 125%. The impact of valuation adjustments related to Jefferies Group own credit
spreads and counterparty credit spreads are included in the assessment of effectiveness.
For qualifying fair value hedges of benchmark interest rates, the change in the fair value of the derivative and the
change in fair value of the long- term debt provide offset of one another, and together with any resulting ineffectiveness,
are recorded in Interest expense. See Note 6 for further information.
Cash Equivalents
Cash equivalents include highly liquid investments, including money market funds and certificates of deposit, not held
for resale with original maturities of three months or less.
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Notes to Consolidated Financial Statements, continued
Note 2. Significant Accounting Policies, continued
Cash and Securities Segregated and on Deposit for Regulatory Purposes or Deposited With Clearing and
Depository Organizations
In accordance with Rule 15c3-3 of the Securities Exchange Act of 1934, Jefferies LLC, as a broker- dealer carrying
client accounts, is subject to requirements related to maintaining cash or qualified securities in a segregated reserve
account for the exclusive benefit of its clients. Certain other entities are also obligated by rules mandated by their
primary regulators to segregate or set aside cash or equivalent securities to satisfy regulations, promulgated to protect
customer assets. In addition, certain exchange and/or clearing organizations require cash and/or securities to be
deposited by us to conduct day to day activities.
Financial Instruments and Fair Value
Trading assets and Trading liabilities are recorded at fair value, either as required by accounting pronouncements or
through the fair value option election. These instruments primarily represent our trading activities and include both
cash and derivative products. Gains and losses on trading assets and trading liabilities are recognized in our Consolidated
Statements of Operations in Principal transactions revenues. Available for sale securities are reflected at fair value,
with unrealized gains and losses reflected as a separate component of equity, net of taxes. The cost of securities sold
is based on average cost. Fair value is the amount that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date (the exit price).
Fair Value Hierarchy
In determining fair value, we maximize the use of observable inputs and minimize the use of unobservable inputs by
requiring that observable inputs be used when available. Observable inputs are inputs that market participants would
use in pricing the asset or liability based on market data obtained from independent sources. Unobservable inputs
reflect our assumptions that market participants would use in pricing the asset or liability developed based on the best
information available in the circumstances. We apply a hierarchy to categorize our fair value measurements broken
down into three levels based on the transparency of inputs as follows:
Level 1: Quoted prices are available in active markets for identical assets or liabilities at the reported date.
Valuation adjustments and block discounts are not applied to Level 1 instruments.
Level 2: Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly
observable at the reported date. The nature of these financial instruments includes cash instruments for which
quoted prices are available but traded less frequently, derivative instruments fair values for which have been
derived using model inputs that are directly observable in the market, or can be derived principally from or
corroborated by observable market data, and instruments that are fair valued using other financial instruments,
the parameters of which can be directly observed.
Level 3: Instruments that have little to no pricing observability at the reported date. These financial
instruments are measured using management’s best estimate of fair value, where the inputs into the
determination of fair value require significant management judgment or estimation.
Financial instruments are valued at quoted market prices, if available. Certain financial instruments have bid and ask
prices that can be observed in the marketplace. For financial instruments whose inputs are based on bid- ask prices, the
financial instrument is valued at the point within the bid- ask range that meets our best estimate of fair value. We use
prices and inputs that are current at the measurement date. For financial instruments that do not have readily
determinable fair values using quoted market prices, the determination of fair value is based on the best available
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Notes to Consolidated Financial Statements, continued
Note 2. Significant Accounting Policies, continued
information, taking into account the types of financial instruments, current financial information, restrictions (if any)
on dispositions, fair values of underlying financial instruments and quotations for similar instruments.
The valuation of financial instruments may include the use of valuation models and other techniques. Adjustments to
valuations derived from valuation models are permitted based on management’s judgment, which takes into consideration
the features of the financial instrument such as its complexity, the market in which the financial instrument is traded
and underlying risk uncertainties about market conditions. Adjustments from the price derived from a valuation model
reflect management’s judgment that other participants in the market for the financial instrument being measured at fair
value would also consider in valuing that same financial instrument. To the extent that valuation is based on models or
inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment.
The availability of observable inputs can vary and is affected by a wide variety of factors, including, for example, the
type of financial instrument and market conditions. As the observability of prices and inputs may change for a financial
instrument from period to period, this condition may cause a transfer of an instrument among the fair value hierarchy
levels. The degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3.
Loans to and Investments in Associated Companies
Loans to and investments in associated companies include investments in private equity and other operating entities in
which we exercise significant influence over operating and capital decisions and loans issued in connection with such
investments. Loans to and investments in associated companies are accounted for using the equity method. See Note 11
for additional information regarding certain of these investments.
Under the equity method of accounting, our share of the investee’s underlying net income or loss is recorded as Income
(loss) related to associated companies, or as part of Other revenues if such investees are considered to be an extension
of our business. Income (loss) for investees for which the fair value option was elected is reported as Principal
transactions revenues.
Receivables
At November 30, 2018 and December 31, 2017, Receivables include receivables from brokers, dealers and clearing
organizations of $3,223.7 million and $2,635.2 million, respectively, and receivables from customers of securities
operations of $2,017.1 million and $1,563.8 million, respectively.
Securities Borrowed and Securities Loaned
Securities borrowed and securities loaned are carried at the amounts of cash collateral advanced and received in
connection with the transactions and accounted for as collateralized financing transactions. In connection with both
trading and brokerage activities, Jefferies Group borrows securities to cover short sales and to complete transactions
in which customers have failed to deliver securities by the required settlement date, and lend securities to other brokers
and dealers for similar purposes. When Jefferies Group borrows securities, it generally provides cash to the lender as
collateral, which is reflected in the Consolidated Statements of Financial Condition as Securities borrowed. Jefferies
Group earns interest revenues on this cash collateral. Similarly, when Jefferies Group lends securities to another party,
that party provides cash to Jefferies Group as collateral, which is reflected in the Consolidated Statements of Financial
Condition as Securities loaned. Jefferies Group pays interest expense on the cash collateral received from the party
borrowing the securities. The initial collateral advanced or received approximates or is greater than the fair value of
the securities borrowed or loaned. Jefferies Group monitors the fair value of the securities borrowed and loaned on a
daily basis and requests additional collateral or returns excess collateral, as appropriate.
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Notes to Consolidated Financial Statements, continued
Note 2. Significant Accounting Policies, continued
Securities Purchased Under Agreements to Resell and Securities Sold Under Agreements to Repurchase
Securities purchased under agreements to resell and Securities sold under agreements to repurchase (collectively
“repos”) are accounted for as collateralized financing transactions and are recorded at their contracted resale or
repurchase amount plus accrued interest. Jefferies Group earns and incurs interest over the term of the repo, which is
reflected in Interest revenue and Interest expense in the Consolidated Statements of Operations on an accrual basis.
Repos are presented in the Consolidated Statements of Financial Condition on a net- basis- by counterparty, where
permitted by GAAP. The fair value of the underlying securities is monitored daily versus the related receivable or
payable balances. Should the fair value of the underlying securities decline or increase, additional collateral is requested
or excess collateral is returned, as appropriate.
Offsetting of Derivative Financial Instruments and Securities Financing Agreements
To manage exposure to credit risk associated with derivative activities and securities financing transactions, Jefferies
Group may enter into International Swaps and Derivative Association, Inc. (“ISDA”) master netting agreements, master
securities lending agreements, master repurchase agreements or similar agreements and collateral arrangements with
counterparties. A master agreement creates a single contract under which all transactions between two counterparties
are executed allowing for trade aggregation and a single net payment obligation. Master agreements provide protection
in bankruptcy in certain circumstances and, where legally enforceable, enable receivables and payables with the same
counterparty to be settled or otherwise eliminated by applying amounts due against all or a portion of an amount due
from the counterparty or a third party. Under its ISDA master netting agreements, Jefferies Group typically also executes
credit support annexes, which provide for collateral, either in the form of cash or securities, to be posted by or paid to
a counterparty based on the fair value of the derivative receivable or payable based on the rates and parameters
established in the credit support annex.
In the event of the counterparty’s default, provisions of the master agreement permit acceleration and termination of
all outstanding transactions covered by the agreement such that a single amount is owed by, or to, the non- defaulting
party. In addition, any collateral posted can be applied to the net obligations, with any excess returned; and the
collateralized party has a right to liquidate the collateral. Any residual claim after netting is treated along with other
unsecured claims in bankruptcy court.
The conditions supporting the legal right of offset may vary from one legal jurisdiction to another and the enforceability
of master netting agreements and bankruptcy laws in certain countries or in certain industries is not free from doubt.
The right of offset is dependent both on contract law under the governing arrangement and consistency with the
bankruptcy laws of the jurisdiction where the counterparty is located. Industry legal opinions with respect to the
enforceability of certain standard provisions in respective jurisdictions are relied upon as a part of managing credit
risk. In cases where Jefferies Group has not determined an agreement to be enforceable, the related amounts are not
offset. Master netting agreements are a critical component of Jefferies Group’s risk management processes as part of
reducing counterparty credit risk and managing liquidity risk.
Jefferies Group is also a party to clearing agreements with various central clearing parties. Under these arrangements,
the central clearing counterparty facilitates settlement between counterparties based on the net payable owed or receivable
due and, with respect to daily settlement, cash is generally only required to be deposited to the extent of the net amount.
In the event of default, a net termination amount is determined based on the market values of all outstanding positions
and the clearing organization or clearing member provides for the liquidation and settlement of the net termination
amount among all counterparties to the open contracts or transactions. See Notes 6 and 7 for further information.
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Notes to Consolidated Financial Statements, continued
Note 2. Significant Accounting Policies, continued
Property, Equipment and Leasehold Improvements
Property, equipment and leasehold improvements of $351.0 million and $750.4 million at November 30, 2018 and
December 31, 2017, respectively, are stated at cost, net of accumulated depreciation and amortization, and are included
in Other assets in the Consolidated Statements of Financial Condition. The prior year amount, which was previously
reported separately, has been reclassified to be consistent with the current year presentation. Depreciation and
amortization are provided principally on the straight- line method over the estimated useful lives of the assets or, if less,
the term of the underlying lease.
Impairment of Long- Lived Assets
We evaluate our long- lived assets for impairment whenever events or changes in circumstances indicate, in
management’s judgment, that the carrying value of such assets may not be recoverable. When testing for impairment,
we group our long- lived assets with other assets and liabilities at the lowest level for which identifiable cash flows are
largely independent of the cash flows of other assets and liabilities (or asset group). The determination of whether an
asset group is recoverable is based on management’s estimate of undiscounted future cash flows directly attributable
to the asset group as compared to its carrying value. If the carrying amount of the asset group is greater than the
undiscounted cash flows, an impairment loss would be recognized for the amount by which the carrying amount of the
asset group exceeds its estimated fair value.
During the twelve months ended December 31, 2016, JETX Energy recorded impairment charges in Selling, general
and other expenses of $56.3 million related to write- downs of unproved oil and gas properties. JETX Energy assesses
its unproved oil and gas properties for impairment based on remaining lease terms, drilling results or future plans to
develop acreage and they record impairment expense for any decline in value. In the third quarter of 2016, JETX
Energy curtailed development of both its southern acreage in the East Eagle Ford and its Houston County acreage. As
a result, an impairment was recorded for the difference between the carrying value and the estimated net realizable
value of the acreage.
Substantially all of our operating businesses sell products or services that are impacted by general economic conditions
in the U.S. and to a lesser extent internationally. A worsening of current economic conditions could cause a decline in
estimated future cash flows expected to be generated by our operations and investments. If future undiscounted cash
flows are estimated to be less than the carrying amounts of the asset groups used to generate those cash flows in
subsequent reporting periods, particularly for those with large investments in intangible assets, property and equipment
and other long- lived assets (for example, Jefferies Group, manufacturing, oil and gas production and development and
certain associated company investments), impairment charges would have to be recorded.
Intangible Assets, Net and Goodwill
Intangible Assets. Intangible assets deemed to have finite lives are generally amortized on a straight- line basis over
their estimated useful lives, where the useful life is the period over which the asset is expected to contribute directly,
or indirectly, to our future cash flows. Intangible assets are reviewed for impairment on an interim basis when certain
events or circumstances exist. If future undiscounted cash flows are estimated to be less than the carrying amounts of
the asset groups used to generate those cash flows in subsequent reporting periods, particularly for those with large
investments in amortizable intangible assets, impairment charges would have to be recorded.
An intangible asset with an indefinite useful life is not amortized but assessed for impairment annually, or more frequently,
when certain events or circumstances exist indicating an assessment for impairment is necessary. Impairment exists
when the carrying amount exceeds its fair value. Fair value will be determined using valuation techniques consistent
with what a market participant would use. All of our indefinite- lived intangible assets were recognized in connection
with the Jefferies Group acquisition, and our annual impairment testing date for Jefferies Group is as of August 1.
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Notes to Consolidated Financial Statements, continued
Note 2. Significant Accounting Policies, continued
Goodwill. At acquisition, we allocate the cost of a business acquisition to the specific tangible and intangible assets
acquired and liabilities assumed based upon their fair values. Significant judgments and estimates are often made by
management to determine these values, and may include the use of appraisals, consideration of market quotes for
similar transactions, use of discounted cash flow techniques or consideration of other information we believe to be
relevant. Any excess of the cost of a business acquisition over the fair values of the net assets and liabilities acquired
is recorded as goodwill, which is not amortized to expense. Substantially all of our goodwill was recognized in
connection with the Jefferies Group acquisition.
At least annually, and more frequently if warranted, we will assess whether goodwill has been impaired. If the estimated
fair value exceeds the carrying value, goodwill at the reporting unit level is not impaired. If the estimated fair value is
less than carrying value, further analysis is necessary to determine the amount of impairment, if any, by comparing the
implied fair value of the reporting unit’s goodwill to the carrying value of the reporting unit’s goodwill. The fair values
will be based on widely accepted valuation techniques that we believe market participants would use, although the
valuation process requires significant judgment and often involves the use of significant estimates and assumptions. The
methodologies we utilize in estimating fair value include market capitalization, price- to- book multiples of comparable
exchange traded companies, multiples of merger and acquisitions of similar businesses and/or projected cash flows. The
estimates and assumptions used in determining fair value could have a significant effect on whether or not an impairment
charge is recorded and the magnitude of such a charge. Adverse market or economic events could result in impairment
charges in future periods. Our annual goodwill impairment testing date related to Jefferies Group is as of August 1.
Inventories and Cost of Sales
Manufacturing inventories are stated at the lower of cost or net realizable value, with cost principally determined under
the first- in- first- out method. Manufacturing cost of sales principally includes product and manufacturing costs, inbound
and outbound shipping costs and handling costs. Inventories are classified as Other assets in the Consolidated
Statements of Financial Condition.
Payables, expense accruals and other liabilities
At November 30, 2018 and December 31, 2017, Payables, expense accruals and other liabilities include payables to
brokers, dealers and clearing organizations of $2,465.6 million and $2,228.9 million, respectively, and payables to
customers of securities operations of $3,176.7 million and $2,664.0 million, respectively.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax bases and for tax loss
carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change
in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
The realization of deferred tax assets is assessed, and a valuation allowance is recorded to the extent that it is more likely
than not that any portion of the deferred tax asset will not be realized on the basis of its projected separate return results.
We record uncertain tax positions using a two- step process: (i) we determine whether it is more likely than not that
each tax position will be sustained on the basis of the technical merits of the position; and (ii) for those tax positions
that meet the more- likely- than- not recognition threshold, we recognize the largest amount of tax benefit that is more
than 50 percent likely to be realized upon ultimate settlement with the related tax authority.
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Notes to Consolidated Financial Statements, continued
Note 2. Significant Accounting Policies, continued
The Company uses the portfolio approach relating to the release of stranded tax effects recorded in accumulated other
comprehensive income. Under the portfolio approach, the net unrealized gains or losses recorded in accumulated other
comprehensive income would be eliminated only on the date the entire portfolio of available for sale securities is sold
or otherwise disposed of.
Share- based Compensation
Share- based awards are measured based on the fair value of the award as determined in accordance with GAAP and
recognized over the required service or vesting period. Certain executive share- based awards contain market,
performance and service conditions. Market conditions are incorporated into the grant- date fair value using a Monte
Carlo valuation model. Compensation expense for awards with market conditions is recognized over the service period
and is not reversed if the market condition is not met. Awards with performance conditions are amortized over the
service period if it is determined that it is probable that the performance condition will be achieved. The fair value of
options and warrants are estimated at the date of grant using the Black- Scholes option pricing model. We account for
forfeitures as they occur, which results in dividends and dividend equivalents originally charged against retained
earnings for forfeited shares to be reclassified to compensation expense in the period in which the forfeiture occurs.
Foreign Currency Translation
Assets and liabilities of foreign subsidiaries having non- U.S. dollar functional currencies are translated to U.S. dollars
using the currency exchange rates at the end of the relevant period. Revenues and expenses are translated at average
exchange rates during the period. The gains or losses resulting from translating foreign currency financial statements
into U.S. dollars, net of hedging gains or losses and taxes, if any, are included in other comprehensive income (loss) in
the Consolidated Statements of Comprehensive Income (Loss) and classified as Accumulated other comprehensive
income in the Consolidated Statements of Financial Condition and Consolidated Statements of Changes in Equity. Gains
or losses resulting from Jefferies Group’s foreign currency transactions are included in Principal transactions revenues
in the Consolidated Statements of Operations.
Earnings per Common Share
Basic earnings per share is computed by dividing net earnings available to common shareholders by the weighted
average number of common shares outstanding and certain other shares committed to be, but not yet issued. Net
earnings available to common shareholders represent net earnings to common shareholders reduced by the allocation
of earnings to participating securities. Losses are not allocated to participating securities. Common shares outstanding
and certain other shares committed to be, but not yet issued, include restricted stock and restricted stock units (“RSUs”)
for which no future service is required. Diluted earnings per share is computed by dividing net earnings available to
common shareholders plus dividends on dilutive mandatorily redeemable convertible preferred shares and interest on
convertible notes by the weighted average number of common shares outstanding and certain other shares committed
to be, but not yet issued, plus all dilutive common stock equivalents outstanding during the period.
Unvested share- based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether
paid or unpaid) are participating securities and, therefore, are included in the earnings allocation in computing earnings
per share under the two- class method of earnings per share. Restricted stock and RSUs granted as part of share- based
compensation contain nonforfeitable rights to dividends and dividend equivalents, respectively, and therefore, prior to
the requisite service being rendered for the right to retain the award, restricted stock and RSUs meet the definition of
a participating security. As such, we calculate basic and diluted earnings per share under the two- class method. RSUs
granted under the senior executive compensation plan are not considered participating securities as the rights to dividend
equivalents are forfeitable. See Note 17 for more information regarding the senior executive compensation plan.
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Notes to Consolidated Financial Statements, continued
Note 2. Significant Accounting Policies, continued
Securitization Activities
Jefferies Group engages in securitization activities related to corporate loans, consumer loans, commercial mortgage
loans and mortgage- backed and other asset- backed securities. Transfers of financial assets to securitization vehicles
are accounted for as sales when Jefferies Group has relinquished control over the transferred assets. The gain or loss
on sale of such financial assets depends, in part, on the previous carrying amount of the assets involved in the transfer
allocated between the assets sold and the retained interests, if any, based upon their respective fair values at the date of
sale. Jefferies Group may retain interests in the securitized financial assets as one or more tranches of the
securitization. These retained interests are included in Trading assets in the Consolidated Statements of Financial
Condition at fair value. Any changes in the fair value of such retained interests are recognized in Principal transactions
revenues in the Consolidated Statements of Operations.
When a transfer of assets does not meet the criteria of a sale, the transfer is accounted for as a secured borrowing in
Trading assets and Jefferies Group continues to recognize the assets of a secured borrowing, and recognize the
associated financing in Other secured financings in the Consolidated Statements of Financial Condition.
Another of our subsidiaries utilizes special purpose entities to securitize automobile loans receivables. These special
purpose entities are variable interest entities (“VIEs”) and our subsidiary is the primary beneficiary; the related assets
and the secured borrowings are recognized in the Consolidated Statements of Financial Condition. These secured
borrowings do not have recourse to our subsidiary’s general credit.
Contingencies
In the normal course of business, we have been named, from time to time, as a defendant in legal and regulatory
proceedings. We are also involved, from time to time, in other exams, investigations and similar reviews (both formal
and informal) by governmental and self- regulatory agencies regarding our businesses, certain of which may result in
judgments, settlements, fines, penalties or other injunctions.
We recognize a liability for a contingency when it is probable that a liability has been incurred and the amount of loss
can be reasonably estimated. If the reasonable estimate of a probable loss is a range, we accrue the most likely amount
of such loss, and if such amount is not determinable, then we accrue the minimum in the range as the loss accrual. The
determination of the outcome and loss estimates requires significant judgment on the part of management, can be
highly subjective and is subject to significant change with the passage of time as more information becomes
available. Estimating the ultimate impact of litigation matters is inherently uncertain, in particular because the ultimate
outcome will rest on events and decisions of others that may not be within our power to control. We do not believe that
any of our current litigation will have a significant adverse effect on our consolidated financial position, results of
operations or liquidity; however, if amounts paid at the resolution of litigation are in excess of recorded reserve amounts,
the excess could be significant in relation to results of operations for that period. For further information, see Note 24.
Supplemental Cash Flow Information
Eleven Months Twelve Months Twelve Months
Ended Ended Ended
November 30, December 31, December 31,
2018 2017 2016
_____________________ ______________________ ___________________
(In thousands)
Cash paid during the year for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,377,781 $1,120,191 $ 957,140
Income tax payments (refunds), net . . . . . . . . . . . . . . . . . 37,559 15,361 (13,738)
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Notes to Consolidated Financial Statements, continued
Note 2. Significant Accounting Policies, continued
During the eleven months ended November 30, 2018, we had $17.6 million in non- cash financing activities related to
purchases of common shares for treasury which settled subsequent to November 30, 2018.
During the twelve months ended December 31, 2017, non- cash investing activities related to the deconsolidation of 54
Madison include an increase in Loans to and investments in associated companies of $123.0 million, and corresponding
decreases in Total assets of $612.9 million, Total liabilities of $330.5 million and Noncontrolling interests of $167.2
million. For additional information regarding the deconsolidation of 54 Madison, see Note 11.
During the twelve months ended December 31, 2016, we had $334.5 million in non- cash investing activities related to
the transfer of the equity investment in FXCM from Trading assets to Loans to and investments in associated companies.
Note 3. Change in Year End
On October 2, 2018, our Board of Directors approved a change to our fiscal year end from a calendar year basis to a
fiscal year ending on November 30. Our 2018 fiscal year consists of the eleven month transition period beginning
January 1, 2018 through November 30, 2018. Financial statements for 2017 and 2016 continue to be presented on the
basis of our previous calendar year end.
The following is selected financial data for the eleven month transition period ending November 30, 2018, and the
comparable prior year period. Jefferies Group financial data is presented in each year based on the twelve months
ended November 30. All other results are based on the eleven months ended November 30 for both years (in thousands,
except per share amounts).
Eleven Months Ended
November 30,
__________________________________________________________
2018 2017 (Unaudited)
________ ____________________________
Net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,764,034 $4,031,333
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,524,957 3,336,359
Income (loss) related to associated companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,023 (76,864)
Income from continuing operations before income taxes . . . . . . . . . . . . . . . . . . . 296,100 618,110
Income tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,008 195,550
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 277,092 422,560
Income from discontinued operations, including gain on disposal, net of taxes . . 773,984 267,321
Net income attributable to the redeemable noncontrolling interests . . . . . . . . . . . . . (37,263) (78,506)
Net income attributable to Jefferies Financial Group Inc. common shareholders . . . . 1,022,318 610,277
Basic earnings per common share attributable to Jefferies Financial Group Inc.
common shareholders:
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0.82 $1.14
Income from discontinued operations, including gain on disposal . . . . . . . . . . 2.11 0.51
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2.93 $1.65
________
________
________
_________
_________
_________
Diluted earnings per common share attributable to Jefferies Financial Group Inc.
common shareholders:
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0.81 $1.13
Income from discontinued operations, including gain on disposal . . . . . . . . . . 2.09 0.50
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2.90 $1.63
________
________
________
_________
_________
_________
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Notes to Consolidated Financial Statements, continued
Note 4. Accounting Developments
Accounting Developments – Adopted Accounting Standards
Revenue Recognition. We adopted the new revenue standard as of January 1, 2018 and recognized an increase of $17.8
million after- tax to beginning retained earnings as the cumulative effect of adoption of accounting standards. The
increase primarily relates to the recognition of $24.3 million of revenue previously deferred from the sale of real estate
to HomeFed in 2014, offset by a decrease of $6.1 million related to Jefferies Group. For Jefferies Group, the impact of
adoption primarily related to investment banking expenses that were deferred as of December 31, 2017 under the
previously existing accounting guidance, which would have been expensed in prior periods under the new revenue
standard and investment banking revenues that were previously recognized in prior periods, which would have been
deferred as of December 31, 2017 under the new revenue standard. We elected to adopt the new guidance using a
modified retrospective approach applied to contracts that were not completed as of January 1, 2018. Accordingly, the
new revenue standard is applied prospectively in our financial statements from January 1, 2018 forward and reported
financial information for historical comparable periods is not revised and continues to be reported under the accounting
standards in effect during those historical periods.
The new revenue standard does not apply to revenue associated with financial instruments, including loans and securities
that are accounted for under other GAAP, and as a result, did not have an impact on the elements of our Consolidated
Statements of Operations most closely associated with financial instruments, including Principal transactions revenues,
Interest income and Interest expense. The new revenue standard primarily impacts Jefferies Group’s revenue recognition
and presentation accounting policies as follows:
•
Investment Banking Revenues. Advisory fees from mergers and acquisitions engagements are recognized at
a point in time when the related transaction is completed, as the performance obligation is to successfully
broker a specific transaction.
• Certain Capital Markets Revenues. Revenues associated with price stabilization activities as part of a
securities underwriting were historically recognized as part of Investment banking revenues. Under the new
revenue standard, revenues from these activities are recognized within Principal transactions revenues, as
these revenues are not considered to be within the scope of the new standard.
•
•
Investment Banking Advisory Expenses. Historically, expenses associated with investment banking advisory
assignments were deferred until reimbursed by the client, the related fee revenue is recognized or the
engagement is otherwise concluded. Under the new revenue standard, expenses are deferred only to the
extent they are explicitly reimbursable by the client and the related revenue is recognized at a point in time.
All other investment banking advisory related expenses, including expenses incurred related to restructuring
assignments, are expensed as incurred.
Investment Banking Underwriting and Advisory Expenses. Expenses have historically been recorded net of
client reimbursements and/or netted against revenues. Under the new revenue standard, all investment
banking expenses will be recognized within their respective expense category in the Consolidated Statements
of Operations and any expense reimbursements will be recognized as Investment banking revenues (i.e.,
expenses are no longer recorded net of client reimbursements and are not netted against revenues).
• Asset Management Fees. In certain asset management fee arrangements, Jefferies Group and LAM receive
performance- based fees, which vary with performance or, in certain cases, are earned when the return on
assets under management exceed certain benchmark returns or other performance targets. Historically,
performance fees have been accrued (or reversed) quarterly based on measuring performance to date versus
any relevant benchmark return hurdles stated in the investment management agreement. Under the new
revenue standard, performance fees are considered variable as they are subject to fluctuation (e.g., based on
market performance) and/or are contingent on a future event during the measurement period (e.g., exceeding
a specified benchmark index) and are recognized only to the extent it is probable that a significant reversal
in the amount of cumulative revenue recognized will not occur when the uncertainty is resolved. Accordingly,
performance fee revenue will generally be recognized only at the end of the performance period to the extent
that the benchmark return has been met.
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Notes to Consolidated Financial Statements, continued
Note 4. Accounting Developments, continued
There was no significant impact as a result of applying the new revenue standard to our consolidated financial
statements for the eleven months ended November 30, 2018, except as it relates to the presentation of Jefferies Group’s
investment banking expenses. The table below presents the impact of applying the new revenue recognition standard
to the Consolidated Statements of Operations for the eleven months ended November 30, 2018 as a result of the change
in presentation of investment banking expenses (in thousands):
Eleven Months Ended
November 30, 2018
______________________________________________
Financial
Impact of Results Prior
Adoption of to Adoption of
Revenue Revenue
Recognition Recognition
As Reported Standard Standard
_____________________ ____________________ ______________________
Revenues:
Commissions and other fees . . . . . . . . . . . . . . . . . . . . . . $ 634,271 $ – $ 634,271
Principal transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 232,224 – 232,224
Investment banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,904,870 131,789 1,773,081
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,294,325 – 1,294,325
Manufacturing revenues . . . . . . . . . . . . . . . . . . . . . . . . . 357,427 – 357,427
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 586,611 – 586,611
_________________
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,009,728 131,789 4,877,939
Interest expense of Jefferies Group . . . . . . . . . . . . . . . . . 1,245,694 – 1,245,694
_________________
Net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,764,034 131,789 3,632,245
_________________
Expenses:
Compensation and benefits . . . . . . . . . . . . . . . . . . . . . . . 1,862,782 – 1,862,782
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 307,071 – 307,071
Floor brokerage and clearing fees . . . . . . . . . . . . . . . . . . 184,210 – 184,210
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89,249 – 89,249
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . 120,317 – 120,317
Selling, general and other expenses . . . . . . . . . . . . . . . . . 961,328 131,789 829,539
_________________
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,524,957 131,789 3,393,168
_________________
Income from continuing operations before income
taxes and income (loss) related to associated
companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 239,077 $ – $ 239,077
_________________
_________________
______________ _________________
______________ _________________
______________ _________________
______________ _________________
______________ _________________
______________ _________________
______________ _________________
Financial Instruments. In January 2016, the FASB issued new guidance that affects the accounting for equity
investments, financial liabilities under the fair value option and the presentation and disclosure requirements of financial
instruments. We adopted the new guidance as of January 1, 2018 with a cumulative effect increase to opening retained
earnings of $27.6 million and a corresponding decrease to Accumulated other comprehensive income. The opening
retained earnings adjustment is to recognize the unrealized gains we had for available for sale equity securities.
Beginning in 2018, these available for sale equity securities are now reported as part of Trading assets, at fair value
within the Consolidated Statements of Financial Condition. The adoption of the guidance on financial liabilities under
the fair value option did not have a material impact on our consolidated financial statements.
Statement of Cash Flows. In August 2016, the FASB issued new guidance to reduce the diversity in practice in how
certain transactions are classified in the statement of cash flows. The guidance adds or clarifies guidance on the
classification of certain cash receipts and payments in the statement of cash flows. In November 2016, the FASB issued
new guidance on restricted cash. The guidance requires that a statement of cash flows explain the change during the
period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash
equivalents. We adopted both standards in the first quarter of 2018. Prior periods were retrospectively adjusted to
conform to the current period’s presentation. The adoption of the guidance did not have a material impact on our
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Notes to Consolidated Financial Statements, continued
Note 4. Accounting Developments, continued
Consolidated Statements of Cash Flows. Upon adoption, we recorded decreases of $284.5 million and $36.4 million,
respectively, in Net cash provided by operating activities and increases (decreases) of $(7.4) million and $3.4 million,
respectively, in Net cash used for investing activities for the twelve months ended December 31, 2017 and 2016 related
to reclassifying the changes in our restricted cash balance from operating and investing activities to the cash and cash
equivalent balances within the Consolidated Statements of Cash Flows.
Retirement Benefits. In March 2017, the FASB issued new guidance for improving the presentation of net periodic
pension costs in the statement of operations. The update also allows the service cost to be eligible for capitalization,
when applicable. We adopted this guidance in the first quarter of 2018 and the adoption did not have a material impact
on our consolidated financial statements. The adoption of this guidance resulted in the following adjustments to the
Consolidated Statements of Operations for the twelve months ended December 31, 2017 and 2016: a decrease of $3.0
million and $3.0 million, respectively, to Compensation and benefits expenses and an increase to Selling, general and
other expenses of $3.0 million and $3.0 million, respectively.
Compensation. In May 2017, the FASB issued new guidance providing clarity and reducing diversity in practice and
cost and complexity when accounting for a change to the terms or conditions of a share- based payment award. We
adopted this guidance in the first quarter of 2018 and the adoption did not have a material impact on our consolidated
financial statements.
Fair Value Measurement. In August 2018, the FASB issued new guidance to improve the effectiveness of disclosure
requirements on fair value measurement by eliminating certain disclosure requirements for fair value measurements
for all entities, requiring public entities to disclose certain new information and modifying some disclosure
requirements. We early adopted this guidance in the third quarter of 2018 and the adoption did not have a material
impact on our consolidated financial statements.
Accounting Developments – Accounting Standards to be Adopted in Future Periods
Leases. In February 2016, the FASB issued new guidance that affects the accounting and disclosure requirements for
leases. The FASB requires the recognition of all leases that are longer than one year onto the balance sheet, which will
result in the recognition of a right of use asset and a corresponding lease liability. The right of use asset and lease
liability will be measured initially using the present value of the remaining rental payments. A significant portion of
the population of contracts that will be subject to recognition on our Consolidated Statements of Financial Condition
have been identified; however, their initial measurement still remains under evaluation. We are currently modifying
certain of our lease accounting systems to enable us to comply with the accounting requirements of this guidance. In
July 2018, the FASB issued additional guidance on leases which allows an entity to recognize a cumulative- effect
adjustment to the opening balance of retained earnings upon adoption. The guidance is effective for annual and interim
periods beginning after December 15, 2018. We plan on adopting the lease standard in the first quarter of fiscal 2020
with a cumulative- effect adjustment to opening retained earnings in the period of adoption. We are currently evaluating
the impact of the new guidance on our consolidated financial statements.
Financial Instruments – Credit Losses. In June 2016, the FASB issued new guidance for estimating credit losses on
certain types of financial instruments by introducing an approach based on expected losses. The guidance is effective
in the first quarter of fiscal 2021. We are currently evaluating the impact of the new guidance on our consolidated
financial statements.
Goodwill. In January 2017, the FASB issued new guidance for simplifying goodwill impairment testing. The guidance
is effective in the first quarter of fiscal 2021. We do not believe the new guidance will have a material impact on our
consolidated financial statements.
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Notes to Consolidated Financial Statements, continued
Note 4. Accounting Developments, continued
Derivatives and Hedging. In August 2017, the FASB issued new guidance to improve the financial reporting of hedging
relationships to better portray the economic results of an entity’s risk management activities in its financial statements.
The guidance is effective in the first quarter of fiscal 2020. We do not believe the new guidance will have a material
impact on our consolidated financial statements.
Defined Benefit Plans. In August 2018, the FASB issued new guidance to improve the effectiveness of disclosure
requirements on defined benefit pension plans and other post- retirement plans. The guidance is effective in the first
quarter of fiscal 2021. We do not believe the new guidance will have a material impact on our consolidated financial
statements.
Internal- Use Software. In August 2018, the FASB issued new guidance which amends the definition of a hosting
arrangement and requires that the customer in a hosting arrangement that is a service contract capitalize certain
implementation costs as if the arrangement was an internal- use software project. The guidance is effective in the first
quarter of fiscal 2021. We are currently evaluating the impact of the new guidance on our consolidated financial
statements.
Consolidation. In October 2018, the FASB issued new guidance which requires indirect interests held through related
parties under common control arrangements be considered on a proportional basis for determining whether fees paid
to decision makers and service providers are variable interests. The guidance is effective in the first quarter of fiscal
2021. We are currently evaluating the impact of the new guidance on our consolidated financial statements.
Note 5. Fair Value Disclosures
The following is a summary of our financial instruments, trading liabilities, short- term borrowings and long- term debt
that are accounted for at fair value on a recurring basis, excluding Investments at fair value based on NAV (within
trading assets) of $394.4 million and $590.1 million by level within the fair value hierarchy at November 30, 2018 and
December 31, 2017, respectively (in thousands):
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Notes to Consolidated Financial Statements, continued
Note 5. Fair Value Disclosures, continued
November 30, 2018
________________________________________________________________________
Counterparty
and Cash
Collateral
Level 1 Level 2 Level 3 Netting (1) Total
_____________ ____________ ____________ _____________________ _________
Assets:
Trading assets, at fair value:
Corporate equity securities . . . . . . . . . $2,497,045 $ 118,681 $ 52,192 $ – $ 2,667,918
Corporate debt securities . . . . . . . . . . – 2,683,180 9,484 – 2,692,664
Collateralized debt obligations and
collateralized loan obligations . . . . – 72,949 36,105 – 109,054
U.S. government and federal agency
securities . . . . . . . . . . . . . . . . . . . . . 1,789,614 56,592 – – 1,846,206
Municipal securities . . . . . . . . . . . . . . – 894,253 – – 894,253
Sovereign obligations . . . . . . . . . . . . . 1,769,556 1,043,409 – – 2,812,965
Residential mortgage- backed
securities . . . . . . . . . . . . . . . . . . . . . – 2,163,629 19,603 – 2,183,232
Commercial mortgage- backed
securities . . . . . . . . . . . . . . . . . . . . . – 819,406 10,886 – 830,292
Other asset- backed securities . . . . . . . – 239,381 53,175 – 292,556
Loans and other receivables . . . . . . . . – 2,056,593 46,985 – 2,103,578
Derivatives . . . . . . . . . . . . . . . . . . . . . 34,841 2,539,943 5,922 (2,413,931) 166,775
Investments at fair value . . . . . . . . . . . – – 396,254 – 396,254
FXCM term loan . . . . . . . . . . . . . . . . – – 73,150 – 73,150
_________________
Total trading assets, excluding
investments at fair value based
on NAV . . . . . . . . . . . . . . . . . . . . $6,091,056 $12,688,016 $703,756 $(2,413,931) $17,068,897
_________________
_________________
Available for sale securities:
U.S. government securities . . . . . . . . . $1,072,856 $ – $ – $ – $ 1,072,856
Residential mortgage- backed
securities . . . . . . . . . . . . . . . . . . . . . – 210,518 – – 210,518
Commercial mortgage- backed
securities . . . . . . . . . . . . . . . . . . . . . – 15,642 – – 15,642
Other asset- backed securities . . . . . . . – 110,870 – – 110,870
_________________
Total available for sale securities . . $1,072,856 $ 337,030 $ – $ – $ 1,409,886
_________________
_________________
Liabilities:
Trading liabilities:
Corporate equity securities . . . . . . . . . $1,685,071 $ 1,444 $ – $ – $ 1,686,515
Corporate debt securities . . . . . . . . . . – 1,505,618 522 – 1,506,140
U.S. government and federal agency
securities . . . . . . . . . . . . . . . . . . . . . 1,384,295 – – – 1,384,295
Sovereign obligations . . . . . . . . . . . . . 1,735,242 661,095 – – 2,396,337
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . – 1,371,630 6,376 – 1,378,006
Derivatives . . . . . . . . . . . . . . . . . . . . . 26,473 3,586,694 27,536 (2,513,050) 1,127,653
_________________
Total trading liabilities . . . . . . . . . . $4,831,081 $ 7,126,481 $ 34,434 $(2,513,050) $ 9,478,946
_________________
_________________
Long- term debt – structured notes . . . . . $ – $ 485,425 $200,745 $ – $ 686,170
___________________ ______________ ___________________ ___________________
___________________ ______________ ___________________ ___________________
___________________ ______________ ___________________ ___________________
___________________ ______________ ___________________ ___________________
___________________ ______________ ___________________ ___________________
___________________ ______________ ___________________ ___________________
___________________ ______________ ___________________ ___________________
___________________ ______________ ___________________ ___________________
___________________ ______________ ___________________ ___________________
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Notes to Consolidated Financial Statements, continued
Note 5. Fair Value Disclosures, continued
December 31, 2017
_______________________________________________________________________
Counterparty
and Cash
Collateral
Level 1 Level 2 Level 3 Netting (1) Total
_____________ ____________ ____________ _____________________ _________
Assets:
Trading assets, at fair value:
Corporate equity securities . . . . . . . . . $2,975,463 $ 60,300 $ 22,270 $ – $ 3,058,033
Corporate debt securities . . . . . . . . . . – 3,261,300 26,036 – 3,287,336
Collateralized debt obligations and
collateralized loan obligations . . . . – 139,166 42,184 – 181,350
U.S. government and federal agency
securities . . . . . . . . . . . . . . . . . . . . . 1,269,230 39,443 – – 1,308,673
Municipal securities . . . . . . . . . . . . . . – 710,513 – – 710,513
Sovereign obligations . . . . . . . . . . . . . 1,381,552 1,035,907 – – 2,417,459
Residential mortgage- backed
securities . . . . . . . . . . . . . . . . . . . . . – 1,453,294 26,077 – 1,479,371
Commercial mortgage- backed
securities . . . . . . . . . . . . . . . . . . . . . – 508,115 12,419 – 520,534
Other asset- backed securities . . . . . . . – 217,111 61,129 – 278,240
Loans and other receivables . . . . . . . . – 1,620,581 47,304 – 1,667,885
Derivatives . . . . . . . . . . . . . . . . . . . . . 165,396 3,323,278 9,295 (3,318,481) 179,488
Investments at fair value . . . . . . . . . . . – 946 329,944 – 330,890
FXCM term loan . . . . . . . . . . . . . . . . – – 72,800 – 72,800
_________________
Total trading assets, excluding
investments at fair value based
on NAV . . . . . . . . . . . . . . . . . . . . $5,791,641 $12,369,954 $649,458 $(3,318,481) $15,492,572
_________________
_________________
Available for sale securities:
Corporate equity securities (2) . . . . . . $ 88,486 $ – $ – $ – $ 88,486
U.S. government securities . . . . . . . . . 552,805 – – – 552,805
Residential mortgage- backed
securities . . . . . . . . . . . . . . . . . . . . . – 34,561 – – 34,561
Commercial mortgage- backed
securities . . . . . . . . . . . . . . . . . . . . . – 5,870 – – 5,870
Other asset- backed securities . . . . . . . – 34,839 – – 34,839
_________________
Total available for sale securities . . $ 641,291 $ 75,270 $ – $ – $ 716,561
_________________
_________________
Liabilities:
Trading liabilities:
Corporate equity securities . . . . . . . . . $1,721,267 $ 32,122 $ 48 $ – $ 1,753,437
Corporate debt securities . . . . . . . . . . – 1,688,825 522 – 1,689,347
U.S. government and federal agency
securities . . . . . . . . . . . . . . . . . . . . . 1,430,737 – – – 1,430,737
Sovereign obligations . . . . . . . . . . . . . 1,216,643 956,992 – – 2,173,635
Commercial mortgage- backed
securities . . . . . . . . . . . . . . . . . . . . . – – 105 – 105
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . – 1,148,824 3,486 – 1,152,310
Derivatives . . . . . . . . . . . . . . . . . . . . . 249,361 3,480,506 16,041 (3,490,514) 255,394
_________________
Total trading liabilities . . . . . . . . . . $4,618,008 $ 7,307,269 $ 20,202 $(3,490,514) $ 8,454,965
_________________
_________________
Short- term borrowings . . . . . . . . . . . . . . $ – $ 23,324 $ – $ – $ 23,324
Long- term debt – structured notes . . . . . $ – $ 606,956 $ – $ – $ 606,956
___________________ ______________ ___________________ ___________________
___________________ ______________ ___________________ ___________________
___________________ ______________ ___________________ ___________________
___________________ ______________ ___________________ ___________________
___________________ ______________ ___________________ ___________________
___________________ ______________ ___________________ ___________________
___________________ ______________ ___________________ ___________________
___________________ ______________ ___________________ ___________________
___________________ ______________ ___________________ ___________________
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Notes to Consolidated Financial Statements, continued
Note 5. Fair Value Disclosures, continued
(1) Represents counterparty and cash collateral netting across the levels of the fair value hierarchy for positions with
the same counterparty.
(2) As of January 1, 2018, the Company adopted the FASB’s new guidance that affects the accounting for equity
investments and the presentation and disclosure requirements for financial instruments. At November 30, 2018,
equity investments are primarily classified as Trading assets, at fair value and the change in fair value of equity
securities is now recognized through the Consolidated Statements of Operations. See Note 4 for additional
information.
The following is a description of the valuation basis, including valuation techniques and inputs, used in measuring our
financial assets and liabilities that are accounted for at fair value on a recurring basis:
Corporate Equity Securities
• Exchange Traded Equity Securities: Exchange traded equity securities are measured based on quoted closing
exchange prices obtained from external pricing services, which are generally obtained from external pricing
services, and are categorized within Level 1 of the fair value hierarchy, otherwise they are categorized within
Level 2 of the fair value hierarchy. To the extent these securities are actively traded, valuation adjustments are
not applied.
• Non- Exchange Traded Equity Securities: Non- exchange traded equity securities are measured primarily using
broker quotations, pricing data from external pricing services and prices observed from recently executed
market transactions and are categorized within Level 2 of the fair value hierarchy. Where such information is
not available, non- exchange traded equity securities are categorized within Level 3 of the fair value hierarchy
and measured using valuation techniques involving quoted prices of or market data for comparable companies,
similar company ratios and multiples (e.g., price/Earnings before interest, taxes, depreciation and amortization
(“EBITDA”), price/book value), discounted cash flow analyses and transaction prices observed from subsequent
financing or capital issuance by Jefferies Group. When using pricing data of comparable companies, judgment
must be applied to adjust the pricing data to account for differences between the measured security and the
comparable security (e.g., issuer market capitalization, yield, dividend rate, geographical concentration).
• Equity Warrants: Non- exchange traded equity warrants are measured primarily using pricing data from external
pricing services, prices observed from recently executed market transactions and broker quotations and are
categorized within Level 2 of the fair value hierarchy. Where such information is not available, non- exchange
traded equity warrants are generally categorized within Level 3 of the fair value hierarchy and are measured
using the Black- Scholes model with key inputs impacting the valuation including the underlying security price,
implied volatility, dividend yield, interest rate curve, strike price and maturity date.
Corporate Debt Securities
• Corporate Bonds: Corporate bonds are measured primarily using pricing data from external pricing services
and broker quotations, where available, prices observed from recently executed market transactions and bond
spreads or credit default swap spreads of the issuer adjusted for basis differences between the swap curve and
the bond curve. Corporate bonds measured using these valuation methods are categorized within Level 2 of
the fair value hierarchy. If broker quotes, pricing data or spread data is not available, alternative valuation
techniques are used including cash flow models incorporating interest rate curves, single name or index credit
default swap curves for comparable issuers and recovery rate assumptions. Corporate bonds measured using
alternative valuation techniques are categorized within Level 3 of the fair value hierarchy and are a limited
portion of our corporate bonds.
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Notes to Consolidated Financial Statements, continued
Note 5. Fair Value Disclosures, continued
• High Yield Corporate and Convertible Bonds: A significant portion of our high yield corporate and convertible
bonds are categorized within Level 2 of the fair value hierarchy and are measured primarily using broker
quotations and pricing data from external pricing services, where available, and prices observed from recently
executed market transactions of institutional size. Where pricing data is less observable, valuations are
categorized within Level 3 of the fair value hierarchy and are based on pending transactions involving the issuer
or comparable issuers, prices implied from an issuer’s subsequent financing or recapitalization, models
incorporating financial ratios and projected cash flows of the issuer and market prices for comparable issuers.
Collateralized Debt Obligations and Collateralized Loan Obligations
Collateralized Debt Obligations (“CDOs”) and Collateralized Loan Obligations (“CLOs”) are measured based on
prices observed from recently executed market transactions of the same or similar security or based on valuations
received from third party brokers or data providers and are categorized within Level 2 or Level 3 of the fair value
hierarchy depending on the observability and significance of the pricing inputs. Valuation that is based on recently
executed market transactions of similar securities incorporates additional review and analysis of pricing inputs and
comparability criteria, including, but not limited to, collateral type, tranche type, rating, origination year, prepayment
rates, default rates and loss severity.
U.S. Government and Federal Agency Securities
• U.S. Treasury Securities: U.S. Treasury securities are measured based on quoted market prices and categorized
within Level 1 of the fair value hierarchy.
• U.S. Agency Debt Securities: Callable and non- callable U.S. agency debt securities are measured primarily
based on quoted market prices obtained from external pricing services and are generally categorized within
Level 1 or Level 2 of the fair value hierarchy.
Municipal Securities
Municipal securities are measured based on quoted prices obtained from external pricing services and are generally
categorized within Level 2 of the fair value hierarchy.
Sovereign Obligations
Sovereign government obligations are measured based on quoted market prices obtained from external pricing services,
where available, or recently executed independent transactions of comparable size. Sovereign government obligations,
with consideration given to the country of issuance, are generally categorized in Level 1 or Level 2 of the fair value
hierarchy.
Residential Mortgage- Backed Securities
• Agency Residential Mortgage- Backed Securities: Agency residential mortgage- backed securities include
mortgage pass- through securities (fixed and adjustable rate), collateralized mortgage obligations and principal-
only and interest- only (including inverse interest- only) securities. Agency residential mortgage- backed securities
are generally measured using recent transactions, pricing data from external pricing services or expected future
cash flow techniques that incorporate prepayment models and other prepayment assumptions to amortize the
underlying mortgage loan collateral and are categorized within Level 2 of the fair value hierarchy. We use prices
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Notes to Consolidated Financial Statements, continued
Note 5. Fair Value Disclosures, continued
observed from recently executed transactions to develop market- clearing spread and yield curve assumptions.
Valuation inputs with regard to the underlying collateral incorporate factors such as weighted average coupon,
loan- to- value, credit scores, geographic location, maximum and average loan size, originator, servicer and
weighted average loan age.
• Non- Agency Residential Mortgage- Backed Securities: The fair value of non- agency residential mortgage- backed
securities is determined primarily using discounted cash flow methodologies and securities are categorized within
Level 2 or Level 3 of the fair value hierarchy based on the observability and significance of the pricing inputs
used. Performance attributes of the underlying mortgage loans are evaluated to estimate pricing inputs, such as
prepayment rates, default rates and the severity of credit losses. Attributes of the underlying mortgage loans that
affect the pricing inputs include, but are not limited to, weighted average coupon; average and maximum loan
size; loan- to- value; credit scores; documentation type; geographic location; weighted average loan age; originator;
servicer; historical prepayment, default and loss severity experience of the mortgage loan pool; and delinquency
rate. Yield curves used in the discounted cash flow models are based on observed market prices for comparable
securities and published interest rate data to estimate market yields. In addition, broker quotes, where available,
are also referenced to compare prices primarily on interest- only securities.
Commercial Mortgage- Backed Securities
• Agency Commercial Mortgage- Backed Securities: Government National Mortgage Association (“GNMA”)
project loan bonds are measured based on inputs corroborated from and benchmarked to observed prices of
recent securitization transactions of similar securities with adjustments incorporating an evaluation of various
factors, including prepayment speeds, default rates and cash flow structures, as well as the likelihood of pricing
levels in the current market environment. Federal National Mortgage Association (“FNMA”) Delegated
Underwriting and Servicing (“DUS”) mortgage- backed securities are generally measured by using prices
observed from recently executed market transactions to estimate market- clearing spread levels for purposes of
estimating fair value. GNMA project loan bonds and FNMA DUS mortgage- backed securities are categorized
within Level 2 of the fair value hierarchy.
• Non- Agency Commercial Mortgage- Backed Securities: Non- agency commercial mortgage- backed securities
are measured using pricing data obtained from external pricing services, prices observed from recently executed
market transactions or based on expected cash flow models that incorporate underlying loan collateral
characteristics and performance. Non- agency commercial mortgage- backed securities are categorized within
Level 2 or Level 3 of the fair value hierarchy depending on the observability of the underlying inputs.
Other Asset- Backed Securities
Other asset- backed securities include, but are not limited to, securities backed by auto loans, credit card receivables,
student loans and other consumer loans and are categorized within Level 2 or Level 3 of the fair value
hierarchy. Valuations are primarily determined using pricing data obtained from external pricing services, broker quotes
and prices observed from recently executed market transactions. In addition, recent transaction data from comparable
deals is deployed to develop market clearing yields and cumulative loss assumptions. The cumulative loss assumptions
are based on the analysis of the underlying collateral and comparisons to earlier deals from the same issuer to gauge
the relative performance of the deal.
Loans and Other Receivables
• Corporate Loans: Corporate loans categorized within Level 2 of the fair value hierarchy are measured based on
market consensus pricing service quotations. Where available, market price quotations from external pricing
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Notes to Consolidated Financial Statements, continued
Note 5. Fair Value Disclosures, continued
services are reviewed to ensure they are supported by transaction data. Corporate loans categorized within Level
3 of the fair value hierarchy are measured based on price quotations that are considered to be less transparent,
market prices for debt securities of the same creditor and estimates of future cash flows incorporating assumptions
regarding creditor default and recovery rates and consideration of the issuer’s capital structure.
• Participation Certificates in Agency Residential Loans: Valuations of participation certificates in agency residential
loans are based on observed market prices of recently executed purchases and sales of similar loans and data
provider pricing. The loan participation certificates are categorized within Level 2 of the fair value hierarchy given
the observability and volume of recently executed transactions and availability of data provider pricing.
• Project Loans and Participation Certificates in GNMA Project and Construction Loans: Valuations of
participation certificates in GNMA project and construction loans are based on inputs corroborated from and
benchmarked to observed prices of recent securitizations with similar underlying loan collateral to derive an
implied spread. Securitization prices are adjusted to estimate the fair value of the loans to account for the
arbitrage that is realized at the time of securitization. The measurements are categorized within Level 2 of the
fair value hierarchy given the observability and volume of recently executed transactions.
• Consumer Loans and Funding Facilities: Consumer and small business whole loans and related funding
facilities are valued based on observed market transactions and incorporating valuation inputs including, but
not limited to, delinquency and default rates, prepayment rates, borrower characteristics, loan risk grades and
loan age. These assets are categorized within Level 2 or Level 3 of the fair value hierarchy.
• Escrow and Trade Claim Receivables: Escrow and trade claim receivables are categorized within Level 3 of
the fair value hierarchy where fair value is estimated based on reference to market prices and implied yields of
debt securities of the same or similar issuers. Escrow and trade claim receivables are categorized within Level
2 of the fair value hierarchy where fair value is based on recent observations in the same receivable.
Derivatives
• Listed Derivative Contracts: Listed derivative contracts that are actively traded are measured based on quoted
exchange prices, broker quotes or vanilla option valuation models, such as Black- Scholes, using observable
valuation inputs from the principal market or consensus pricing services. Exchange quotes and/or valuation
inputs are generally obtained from external vendors and pricing services. Broker quotes are validated directly
through observable and tradeable quotes. Listed derivative contracts that use unadjusted exchange close prices
are generally categorized within Level 1 of the fair value hierarchy. All other listed derivative contracts are
generally categorized within Level 2 of the fair value hierarchy.
• Over- the- Counter (“OTC”) Derivative Contracts: OTC derivative contracts are generally valued using models,
whose inputs reflect assumptions that we believe market participants would use in valuing the derivative in a
current transaction. Where available, valuation inputs are calibrated from market data. For many OTC derivative
contracts, the valuation models do not involve material subjectivity as the methodologies do not entail significant
judgment and the inputs to valuation models do not involve a high degree of subjectivity as the valuation model
inputs are readily observable or can be derived from actively quoted markets. OTC derivative contracts are
primarily categorized within Level 2 of the fair value hierarchy given the observability and significance of the
inputs to the valuation models. Where significant inputs to the valuation are unobservable, derivative instruments
are categorized within Level 3 of the fair value hierarchy.
OTC options include OTC equity, foreign exchange, interest rate and commodity options measured using
various valuation models, such as Black- Scholes, with key inputs including the underlying security price,
foreign exchange spot rate, commodity price, implied volatility, dividend yield, interest rate curve, strike price
and maturity date. Discounted cash flow models are utilized to measure certain OTC derivative contracts
including the valuations of our interest rate swaps, which incorporate observable inputs related to interest rate
curves, valuations of our foreign exchange forwards and swaps, which incorporate observable inputs related to
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Notes to Consolidated Financial Statements, continued
Note 5. Fair Value Disclosures, continued
foreign currency spot rates and forward curves and valuations of our commodity swaps and forwards, which
incorporate observable inputs related to commodity spot prices and forward curves. Discounted cash flow
models are also utilized to measure certain variable funding note swaps, which are backed by CLOs and
incorporate constant prepayment rate, constant default rate and loss severity assumptions. Credit default swaps
include both index and single- name credit default swaps. Where available, external data is used in measuring
index credit default swaps and single- name credit default swaps. For commodity and equity total return swaps,
market prices are generally observable for the underlying asset and used as the basis for measuring the fair
value of the derivative contracts. Total return swaps executed on other underlyings are measured based on
valuations received from external pricing services.
• Oil Futures Derivatives: Vitesse Energy Finance uses swaps and call and put options in order to reduce exposure
to future oil price fluctuations. Vitesse Energy Finance accounts for the derivative instruments at fair value,
which are classified as either Level 1 or Level 2 within the fair value hierarchy. Fair values classified as Level
1 are measured based on quoted closing exchange prices obtained from external pricing services and Level 2
are determined under the income valuation technique using an option- pricing model that is based on directly
or indirectly observable inputs.
Investments at Fair Value
Investments at fair value include investments in hedge funds, fund of funds and private equity funds, which are measured
at the NAV of the funds, provided by the fund managers and are excluded from the fair value hierarchy. Investments at
fair value also include direct equity investments in private companies, which are measured at fair value using valuation
techniques involving quoted prices of or market data for comparable companies, similar company ratios and multiples
(e.g., price/EBITDA, price/book value), discounted cash flow analyses, contingent claims analysis and transaction
prices observed for subsequent financing or capital issuance by the company. Direct equity investments in private
companies are categorized within Level 2 or Level 3 of the fair value hierarchy. Additionally, investments at fair value
included investments in insurance contracts relating to Jefferies Group’s defined benefit plan in Germany. Fair value
for the insurance contracts is determined using a third party and is categorized within Level 3 of the fair value hierarchy.
The following tables present information about our investments in entities that have the characteristics of an investment
company (in thousands).
Redemption
Frequency
Unfunded (if currently
November 30, 2018 Fair Value (1) Commitments eligible)
________________________________ ______________________ ________________________ ___________________
Equity Long/Short Hedge Funds (2) . . . . . . . . . . . . . . . . . . $ 86,788 $ – (2)
Equity Funds (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,070 20,996 –
Commodity Funds (4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,129 – Quarterly
Multi- asset Fund (5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 256,972 – –
Other funds (6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400 – –
_____________
___
____________
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $394,359 $20,996
_____________
___
____________
_____________
___
____________
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Notes to Consolidated Financial Statements, continued
Note 5. Fair Value Disclosures, continued
Redemption
Frequency
Unfunded (if currently
December 31, 2017 Fair Value (1) Commitments eligible)
________________________________ ______________________ ________________________ ___________________
Equity Long/Short Hedge Funds (2) . . . . . . . . . . . . . . . . . . $407,895 $ – (2)
Equity Funds (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,798 19,084 –
Multi- asset Fund (5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154,805 – –
Other funds (6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 606 – –
___
____________
_____________
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $590,104 $19,084
_____________
___
____________
_____________
___
____________
(1) Where fair value is calculated based on NAV, fair value has been derived from each of the funds’ capital
statements.
(2) This category includes investments in hedge funds that invest, long and short, in primarily equity securities in
domestic and international markets in both the public and private sectors. At December 31, 2017, 73% of these
investments were redeemable with 10 business days or less prior written notice; these investments were primarily
liquidated during 2018. At November 30, 2018 and December 31, 2017, 17% and 15%, respectively, of these
investments are redeemable with 60 days prior written notice.
(3) The investments in this category include investments in equity funds that invest in the equity of various U.S.
and foreign private companies in the energy, technology, internet service and telecommunication service
industries. These investments cannot be redeemed; instead distributions are received through the liquidation of
the underlying assets of the funds, which are expected to liquidate in one to ten years.
(4) This category includes investments in hedge funds that invest, long and short, primarily in commodities.
Investments in this category are redeemable quarterly with 60 days prior written notice.
(5) This category includes investments in hedge funds that invest, long and short, primarily in multi- asset securities
in domestic and international markets in both the public and private sectors. At November 30, 2018 and
December 31, 2017, investments representing approximately 15% and 12%, respectively, of the fair value of
investments in this category are redeemable with 30 days prior written notice.
(6) This category includes investments in funds that invest in loans secured by a first trust deed on property,
domestic and international public high yield debt, private high yield investments, senior bank loans, public
leveraged equities, distressed debt and private equity investments and there are no redemption provisions. This
category also includes investments in fund of funds that invest in various private equity funds that are managed
by Jefferies Group and have no redemption provisions. These investments are gradually being liquidated or
Jefferies Group has requested redemption, however, Jefferies Group is unable to estimate when these funds will
be received.
Investments at fair value also include our investment in WeWork. We invested $9.0 million in WeWork in 2013 and
currently own less than 1% of the company. Our interest in WeWork is reflected in Trading assets at fair value of $254.4
million at November 30, 2018.
Investment in FXCM
FXCM is a provider of online foreign exchange trading services. In January 2015, we entered into a credit agreement
with FXCM, and provided FXCM a $300 million senior secured term loan due January 2017 (the term of which was
subsequently extended to the first quarter of 2019), with rights to a variable proportion of certain future distributions
in connection with an FXCM sale of assets or certain other events, and to require a sale of FXCM beginning in January
2018. The loan had an initial interest rate of 10% per annum, increasing by 1.5% per annum each quarter, not to exceed
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Notes to Consolidated Financial Statements, continued
Note 5. Fair Value Disclosures, continued
20.5% per annum. During the eleven months ended November 30, 2018, interest accrued at 20.5% per annum. During
the eleven months ended November 30, 2018, we received $18.3 million of principal and interest from FXCM and
$67.6 million of principal remained outstanding under the term loan as of November 30, 2018. Through November 30,
2018, we have received cumulatively $349.8 million of principal, interest and fees from our initial $279.0 million
investment in FXCM.
Our investment in the FXCM term loan is reported within Trading assets, at fair value in our Consolidated Statements
of Financial Condition, and unrealized and realized changes in value, including the component related to interest
income on the loan, is included within Principal transactions revenues in the Consolidated Statements of Operations. We
recorded gains (losses) in Principal transactions revenues of $18.6 million and $23.2 million during the eleven months
ended November 30, 2018 and twelve months ended December 31, 2017, respectively, from our term loan and $(54.6)
million during the twelve months ended December 31, 2016 from our term loan and related rights.
On September 1, 2016, we, Global Brokerage Inc. (“Global Brokerage”) and Global Brokerage Holdings, LLC (“Global
Brokerage Holdings”) entered into an agreement that amended the terms of our loan and associated rights. On
November 10, 2017, the terms of our loan and associated rights were amended further. Among other changes, the
amendments extended the maturity of the term loan to the first quarter of 2019; and exchanged our rights for a 50%
voting interest in FXCM and up to 75% of all distributions. Through these amendments, we also gained the right to
appoint three of six board members for FXCM. We have the right, as does Global Brokerage Holdings, the owner of
the remaining 50% of FXCM voting interest that is not held by Jefferies, to require a sale of FXCM beginning in
January 2018. Distributions to Jefferies under the amended agreements are now: 100% until amounts due under the
loan are repaid; 50% of the next $350 million; then 90% of the next $600 million; and 60% of all amounts thereafter.
Through the amendments, we gained the ability to significantly influence FXCM through our seats on the board of
directors. As a result, we classify our equity investment in FXCM in our November 30, 2018 and December 31, 2017
Consolidated Statements of Financial Condition as Loans to and investments in associated companies. We account for
our equity interest on a one month lag. As the amendments only extended the maturity of the term loan, we continue
to use the fair value option and classify our term loan within Trading assets, at fair value.
FXCM is considered a variable interest entity (“VIE”) and our term loan and equity ownership are variable interests. We
have determined that we are not the primary beneficiary of FXCM because we do not have the power to direct the
activities that most significantly impact FXCM’s performance. Therefore, we do not consolidate FXCM and we account
for our equity interest under the equity method as an investment in an associated company.
Our maximum exposure to loss as a result of our involvement with FXCM is limited to the carrying value of the term
loan ($73.2 million) and the investment in associated company ($75.0 million), which totaled $148.2 million at
November 30, 2018.
We estimate the fair value of our term loan by using a valuation model with inputs including management’s assumptions
concerning the amount and timing of expected cash flows, the loan’s implied credit rating and effective yield. Because
of these inputs and the degree of judgment involved, we have categorized our term loan within Level 3 of the fair value
hierarchy.
Nonrecurring Fair Value Measurements
As described further in Note 11, in the third quarter of 2018 we engaged an independent valuation firm to assist
management in estimating the fair value of our equity investment in Golden Queen. Our estimate of fair value was
based on a discounted cash flow analysis and is categorized within Level 3 of the fair value hierarchy. The discounted
cash flow valuation model used inputs including management’s projections of future Golden Queen cash flows and a
discount rate of 12%. The estimated fair value of our equity investment in Golden Queen was $62.3 million, which
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Notes to Consolidated Financial Statements, continued
Note 5. Fair Value Disclosures, continued
was $47.9 million lower than our carrying value. As a result, an impairment charge of $47.9 million was recorded in
Income (loss) related to associated companies in the third quarter of 2018.
As discussed further in Note 11, during the fourth quarter of 2018, we recorded an impairment charge of $62.1 million
related to the equity component of our investment in FXCM, which is based on updated expectations that have been
impacted by the recently revised regulations of the European Securities Market Authority and dampened operating
results. We engaged an independent valuation firm to assist management in estimating the fair value of our equity
investment in FXCM. Our fourth quarter estimate of fair value was based on a discounted cash flow analysis and is
categorized within Level 3 of the fair value hierarchy. The discounted cash flow valuation model used inputs including
management’s projections of future FXCM cash flows and a discount rate of 18.5%. The estimated fair value of our
equity investment in FXCM was $75.0 million, which was $62.1 million lower than our carrying value. As a result, an
impairment charge of $62.1 million was recorded in Income (loss) related to associated companies in the fourth quarter
of 2018.
In the first quarter of 2017 we engaged an independent valuation firm to assist management in estimating the fair value
of our equity investment in FXCM. Our first quarter estimate of fair value was based on a discounted cash flow and
comparable public company analysis and is categorized within Level 3 of the fair value hierarchy. The discounted cash
flow valuation model used inputs including management’s projections of future FXCM cash flows and a discount rate
of approximately 15%. The comparable public company model used market data for comparable companies including
a price to EBITDA multiple of 5.4 and a price to revenue multiple of 1.5. The estimated fair value of our equity
investment in FXCM was $186.7 million, which was $130.2 million lower than the carrying value at the end of the
first quarter 2017. As a result, an impairment charge of $130.2 million was recorded in Income (loss) related to
associated companies in the first quarter of 2017.
In the third quarter of 2016, JETX Energy curtailed development of both its southern acreage in the East Eagle Ford
and its Houston County acreage and performed an impairment analysis of these unproved oil and gas properties. To
measure the estimated fair value of the unproved properties, we used unobservable Level 3 inputs, which took into
account the following factors: remaining lease terms, drilling results and/or future plans to develop the acreage. The
estimated fair value of JETX Energy’s southern acreage in the East Eagle Ford and its Houston County acreage totaled
$51.6 million, which was $55.0 million lower than the carrying value as of the end of third quarter of 2016. As a result,
an impairment charge of $55.0 million was recorded in Selling, general and other expenses in the third quarter of 2016.
Short- term Borrowings and Long- term Debt
Short- term borrowings that are accounted for at fair value include equity- linked notes, which are generally categorized
within Level 2 of the fair value hierarchy, as the fair value is based on the price of the underlying equity security. Long-
term debt includes variable rate, fixed- to- floating rate, CMS (constant maturity swap), digital and Bermudan structured
notes. These are valued using various valuation models that incorporate Jefferies Group’s own credit spread, market
price quotations from external pricing sources referencing the appropriate interest rate curves, volatilities and other
inputs as well as prices for transactions in a given note during the period. Long- term debt notes are generally categorized
within Level 2 of the fair value hierarchy where market trades have been observed during the quarter, otherwise they
are categorized within Level 3.
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Notes to Consolidated Financial Statements, continued
Note 5. Fair Value Disclosures, continued
Level 3 Rollforwards
The following is a summary of changes in fair value of our financial assets and liabilities that have been categorized
within Level 3 of the fair value hierarchy for the eleven months ended November 30, 2018 (in thousands):
Eleven Months Ended November 30, 2018
Changes in
unrealized
gains/losses
included in
Total gains earnings
(losses) Net relating to
(realized transfers instruments
Balance, and into Balance at still held at
December 31, unrealized) (out of) November 30, November 30,
2017 (1) Purchases Sales Settlements Issuances Level 3 2018 2018 (1)
___________ _________ _________ ______ __________ ________ ________ ___________ ___________
Assets:
Trading assets:
Corporate equity
securities . . . . . . . $ 22,270 $ 24,914 $ 31,669 $ (22,759) $
(3,977) $
– $
75 $ 52,192 $ 23,665
Corporate debt
securities . . . . . . .
CDOs and CLOs . . .
Residential mortgage-
backed securities .
Commercial mortgage-
backed securities .
Other asset- backed
26,036
42,184
(439)
(16,258)
10,352
356,650
(23,364)
(353,330)
(1,679)
(10,247)
26,077
(6,970)
3,118
(12,816)
(513)
12,419
(2,186)
1,436
(471)
(16,624)
securities . . . . . . .
61,129
(9,934)
706,846
(677,220)
(27,641)
Loans and other
receivables . . . . . .
47,304
(5,137)
149,228
(130,832)
(15,311)
Investments at fair
value . . . . . . . . . .
Investment in FXCM .
Liabilities:
Trading liabilities:
Corporate equity
329,944
72,800
76,636
18,616
9,798
–
(17,570)
–
–
(18,266)
–
–
–
–
–
–
–
–
(1,422)
17,106
9,484
36,105
(2,606)
(9,495)
10,707
19,603
521
16,312
10,886
(4,000)
(5)
53,175
(5,283)
1,733
46,985
(8,457)
(2,554)
–
396,254
73,150
76,042
7,723
securities . . . . . . . $
48 $
– $
– $
– $
– $
– $
(48) $
– $
Corporate debt
securities . . . . . . .
Commercial mortgage-
backed securities .
Loans . . . . . . . . . . . .
Net derivatives (2) . .
Long- term debt (1) . . . .
522
105
3,486
6,746
–
–
–
–
–
–
–
522
(105)
84
(3,237)
(30,347)
–
(4,626)
(17)
–
–
7,432
14,920
–
–
–
(1,335)
–
–
–
–
84,860
–
–
4,537
146,232
–
6,376
21,614
200,745
–
–
–
(28)
(646)
10,951
(1) Realized and unrealized gains (losses) are primarily reported in Principal transactions revenues in the
Consolidated Statements of Operations. Changes in instrument- specific credit risk related to structured notes
are included in our Consolidated Statements of Comprehensive Income (Loss), net of tax. Changes in unrealized
gains (losses) included in other comprehensive income (loss) for instruments still held at November 30, 2018
were gains of $19.4 million.
(2) Net derivatives represent Trading assets – Derivatives and Trading liabilities – Derivatives.
Analysis of Level 3 Assets and Liabilities for the eleven months ended November 30, 2018
During the eleven months ended November 30, 2018, transfers of assets of $57.8 million from Level 2 to Level 3 of
the fair value hierarchy are attributed to:
• Commercial mortgage- backed securities of $16.3 million, residential mortgage- backed securities of $15.3
million and CDOs and CLOs of $17.3 million due to reduced pricing transparency.
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Notes to Consolidated Financial Statements, continued
Note 5. Fair Value Disclosures, continued
During the eleven months ended November 30, 2018, transfers of assets of $12.3 million from Level 3 to Level 2 are
primarily attributed to:
• Residential mortgage- backed securities of $4.6 million, corporate debt securities of $3.6 million and corporate
equity securities of $2.9 million due to greater pricing transparency supporting classification into Level 2.
During the eleven months ended November 30, 2018, there were transfers of structured notes of $146.2 million from
Level 2 to Level 3 due to reduced market transparency.
Net gains on Level 3 assets were $79.2 million and net gains on Level 3 liabilities were $33.6 million for the eleven
months ended November 30, 2018. Net gains on Level 3 assets were primarily due to an increased valuation of
investments at fair value and our FXCM term loan and increased market values in corporate equity securities, partially
offset by decreased market values in CDOs and CLOs, other asset- backed securities, residential mortgage- backed
securities and certain loans and other receivables. Net gains on Level 3 liabilities were primarily due to decreased
valuations of certain structured notes.
The following is a summary of changes in fair value of our financial assets and liabilities that have been categorized
within Level 3 of the fair value hierarchy for the twelve months ended December 31, 2017 (in thousands):
Twelve Months Ended December 31, 2017
Changes in
unrealized
Total gains gains (losses)
(losses) Net relating to
(realized transfers instruments
Balance, and into Balance at still held at
December 31, unrealized) (out of) December 31, December 31,
2016 (1) Purchases Sales Settlements Issuances Level 3 2017 2017 (1)
___________ _________ _________ ______ __________ ________ ________ ___________ ___________
Assets:
Trading assets:
Corporate equity
securities . . . . . . . $ 21,739 $ 3,353 $
896 $
(1,623) $
52 $
– $ (2,147) $ 22,270 $ 2,606
Corporate debt
securities . . . . . . .
CDOs and CLOs . . .
Municipal securities .
Residential mortgage-
backed securities . .
Commercial mortgage-
backed securities . .
Other asset- backed
25,005
54,354
27,257
(3,723)
(27,238)
(1,547)
36,850
112,239
–
(34,077)
(101,226)
(25,710)
(1,968)
(367)
–
38,772
(10,817)
6,805
(26,193)
(115)
20,580
(5,346)
3,275
(5,263)
(1,018)
securities . . . . . . .
40,911
(17,705)
77,508
(8,613)
(25,799)
Loans and other
receivables . . . . . .
81,872
24,794
63,768
(53,095)
(34,622)
Investments at fair
–
–
–
–
–
–
–
3,949
4,422
–
26,036
42,184
–
(3,768)
(20,262)
–
17,625
26,077
(7,201)
191
12,419
(6,976)
(5,173)
61,129
(12,562)
(35,413)
47,304
17,451
value . . . . . . . . . .
Investment in FXCM .
314,359
164,500
20,975
23,161
18,528
–
(22,818)
–
(1,100)
(114,861)
–
–
– –
329,944
72,800
22,999
1,070
Liabilities:
Trading liabilities:
Corporate equity
securities . . . . . . . $
313 $
60 $
(373) $
48 $
– $
– $
– $
48 $
–
Corporate debt
securities . . . . . . .
Commercial mortgage-
backed securities . .
Loans . . . . . . . . . . . .
Net derivatives (2) . .
523
–
378
3,441
Other secured
(1)
–
–
–
105
196
(1,638)
–
(385)
–
–
2,485
–
–
–
5,558
financings . . . . . . . .
418
(418)
–
–
–
–
–
–
456
–
–
–
812
(1,071)
–
522
105
3,486
6,746
–
1
(105)
(2,639)
(17,740)
–
F-41
92472_02_Leucadia_AR _Notes.qxp 2/6/19 7:30 PM Page F-42
Notes to Consolidated Financial Statements, continued
Note 5. Fair Value Disclosures, continued
(1) Realized and unrealized gains (losses) are reported in Principal transactions revenues in the Consolidated
Statements of Operations.
(2) Net derivatives represent Trading assets - Derivatives and Trading liabilities - Derivatives.
Analysis of Level 3 Assets and Liabilities for the twelve months ended December 31, 2017
During the twelve months ended December 31, 2017, transfers of assets of $38.2 million from Level 2 to Level 3 of
the fair value hierarchy are attributed to:
• Residential mortgage- backed securities of $19.6 million and corporate debt securities of $8.3 million due
to a lack of observable market transactions.
During the twelve months ended December 31, 2017, transfers of assets of $54.9 million from Level 3 to Level 2 are
attributed to:
• Loans and other receivables of $40.9 million due to greater pricing transparency supporting classification into
Level 2.
Net gains on Level 3 assets were $5.9 million and net gains on Level 3 liabilities were $1.7 million for the twelve
months ended December 31, 2017. Net gains on Level 3 assets were primarily due to increased valuations of our
investment in FXCM, investments at fair value and certain loans and other receivables partially offset by decreased
valuations of CDOs and CLOs, other asset- backed securities and residential mortgage- backed securities. Net gains on
Level 3 liabilities were primarily due to increased valuations of certain net derivatives.
F-42
92472_02_Leucadia_AR _Notes.qxp 2/6/19 7:30 PM Page F-43
Notes to Consolidated Financial Statements, continued
Note 5. Fair Value Disclosures, continued
The following is a summary of changes in fair value of our financial assets and liabilities that have been categorized
within Level 3 of the fair value hierarchy for the twelve months ended December 31, 2016 (in thousands):
Twelve Months Ended December 31, 2016
Changes in
unrealized
Total gains gains (losses)
(losses) Net relating to
(realized transfers instruments
Balance, and into Balance at still held at
December 31, unrealized) (out of) December 31, December 31,
2015 (1) Purchases Sales Settlements Issuances Level 3 2016 2016 (1)
___________ _________ _________ ______ __________ ________ ________ ___________ ___________
Assets:
Trading assets:
Corporate equity
securities . . . . . . . $ 40,906 $ (8,463) $ 3,365 $
(49) $
(671) $
– $(13,349) $ 21,739 $
291
Corporate debt
securities . . . . . . .
CDOs and CLOs . . .
Municipal securities . .
Sovereign obligations
Residential mortgage-
backed securities . .
Commercial mortgage-
backed securities . .
Other asset- backed
25,876
85,092
–
120
(16,230)
(14,918)
(1,462)
5
27,242
52,316
–
–
(29,347)
(69,394)
–
(125)
(7,223)
(2,750)
–
–
70,263
(9,612)
623
(12,249)
(931)
14,326
(7,550)
3,132
(2,024)
(2,229)
securities . . . . . . .
42,925
(14,381)
133,986
(102,952)
(8,769)
Loans and other
receivables . . . . . .
189,289
(42,566)
75,264
(69,262)
(46,851)
Investments at fair
value . . . . . . . . . .
199,794
54,538
29,728
(542)
(1,107)
Investment in
–
–
–
–
–
–
–
–
–
24,687
4,008
28,719
–
25,005
54,354
27,257
–
(18,799)
(7,628)
(1,462)
–
(9,322)
38,772
(1,095)
14,925
20,580
(7,243)
(9,898)
40,911
(18,056)
(24,002)
81,872
(52,003)
31,948
314,359
54,608
FXCM (2) . . . . . .
625,689
(54,634)
–
–
(406,555)
– –
164,500
(1,014)
Liabilities:
Trading liabilities:
Corporate equity
securities . . . . . . . $
38 $
– $
– $
313 $
(38) $
– $
– $
313 $
–
Corporate debt
securities . . . . . . .
Loans . . . . . . . . . . . .
Net derivatives (3) . .
Other secured
–
10,469
(242)
(27)
–
(1,760)
financings . . . . . . . . .
544
(126)
–
–
–
–
550
378
11,101
–
–
–
–
31
–
–
2,067
–
(10,469)
(7,756)
–
–
523
378
3,441
418
–
–
(6,458)
(126)
(1) Realized and unrealized gains (losses) are reported in Principal transactions revenues in the Consolidated
Statements of Operations.
(2) Includes $334.5 million related to the settlement of our participation rights for equity ownership in FXCM on
September 1, 2016. We classify the equity ownership as Loans to and investments in associated companies at
November 30, 2018 and December 31, 2017.
(3) Net derivatives represent Trading assets – Derivatives and Trading liabilities – Derivatives.
Analysis of Level 3 Assets and Liabilities for the twelve months ended December 31, 2016
During the twelve months ended December 31, 2016, transfers of assets of $179.6 million from Level 2 to Level 3 of
the fair value hierarchy are attributed to:
• CDOs and CLOs of $19.4 million, residential mortgage- backed securities of $17.5 million, commercial
mortgage- backed securities of $17.4 million and other asset- backed securities of $16.9 million, for which
no recent trade activity was observed for purposes of determining observable inputs;
F-43
92472_02_Leucadia_AR _Notes.qxp 2/6/19 7:30 PM Page F-44
Notes to Consolidated Financial Statements, continued
Note 5. Fair Value Disclosures, continued
• Loans and other receivables of $13.8 million due to a lower number of contributors for certain vendor quotes
supporting classification within Level 2; and
• Corporate debt securities of $28.1 million, investments at fair value of $31.9 million and municipal securities
of $28.7 million due to a lack of observable market transactions.
During the twelve months ended December 31, 2016, transfers of assets of $133.2 million from Level 3 to Level 2 are
attributed to:
• Residential mortgage- backed securities of $26.8 million, other asset- backed securities of $26.8 million and
CDOs and CLOs of $15.4 million for which market trades were observed in the year for either identical or
similar securities;
• Loans and other receivables of $37.8 million due to a greater number of contributors for certain vendor quotes
supporting classification into Level 2; and
• Corporate equity securities of $19.2 million due to an increase in observable market transactions.
During the twelve months ended December 31, 2016, there were transfers of loan liabilities of $10.5 million from
Level 3 to Level 2 due to an increase in observable inputs in the valuation.
Net losses on Level 3 assets were $115.3 million and net gains on Level 3 liabilities were $1.9 million for the twelve
months ended December 31, 2016. Net losses on Level 3 assets were primarily due to decreased valuations of our
investment in FXCM, loans and other receivables, corporate debt securities, CDOs and CLOs, other asset- backed
securities, residential and commercial mortgage- backed securities and corporate equity securities partially offset by
increased valuations of certain investments at fair value. Net gains on Level 3 liabilities were primarily due to increased
valuations of certain net derivatives.
Quantitative Information about Significant Unobservable Inputs used in Level 3 Fair Value Measurements
The tables below present information on the valuation techniques, significant unobservable inputs and their ranges for
our financial assets and liabilities, subject to threshold levels related to the market value of the positions held, measured
at fair value on a recurring basis with a significant Level 3 balance. The range of unobservable inputs could differ
significantly across different firms given the range of products across different firms in the financial services sector. The
inputs are not representative of the inputs that could have been used in the valuation of any one financial instrument (i.e.,
the input used for valuing one financial instrument within a particular class of financial instruments may not be appropriate
for valuing other financial instruments within that given class). Additionally, the ranges of inputs presented below should
not be construed to represent uncertainty regarding the fair values of our financial instruments; rather the range of inputs
is reflective of the differences in the underlying characteristics of the financial instruments in each category.
For certain categories, we have provided a weighted average of the inputs allocated based on the fair values of the
financial instruments comprising the category. We do not believe that the range or weighted average of the inputs is
indicative of the reasonableness of uncertainty of our Level 3 fair values. The range and weighted average are driven
by the individual financial instruments within each category and their relative distribution in the population. The
disclosed inputs when compared with the inputs as disclosed in other periods should not be expected to necessarily be
indicative of changes in our estimates of unobservable inputs for a particular financial instrument as the population of
financial instruments comprising the category will vary from period to period based on purchases and sales of financial
instruments during the period as well as transfers into and out of Level 3 each period.
F-44
92472_02_Leucadia_AR _Notes.qxp 2/7/19 5:58 PM Page F-45
Notes to Consolidated Financial Statements, continued
Note 5. Fair Value Disclosures, continued
November 30, 2018
Valuation Significant Weighted
Technique Unobservable Input(s) Input/Range Average
_________ ___________________ ___________ _______
Financial Instruments Owned
__________________________
Corporate equity securities
Non- exchange traded securities
Fair Value
(in thousands)
___________
$ 43,644
Market approach
Corporate debt securities
$ 9,484
Market approach
CDOs and CLOs
$ 36,105
Discounted cash flows
Residential mortgage- backed
$ 19,603
securities
Commercial mortgage- backed
$ 9,444
securities
Scenario analysis
Discounted cash flows
Market approach
Discounted cash flows
Scenario analysis
Other asset- backed securities
$ 53,175
Discounted cash flows
Loans and other receivables
$ 46,078
Derivatives
Total return swaps
Interest rate swaps
Investments at fair value
Private equity securities
$ 4,602
$368,231
Price
Transaction level
Estimated recovery percentage
Transaction level
Constant prepayment rate
Constant default rate
Loss severity
Discount rate/yield
Estimated recovery percentage
Cumulative loss rate
Duration (years)
Discount rate/yield
Loss severity
Price
Cumulative loss rate
Duration (years)
Discount rate/yield
Loss severity
Estimated recovery percentage
Price
Cumulative loss rate
Duration (years)
Discount rate/yield
Price
Price
Estimated recovery percentage
Market approach
Market approach
Scenario analysis
Market approach
Market approach
Price
Price
Market approach
Scenario analysis
Contingent claims
analysis
Price
Transaction level
Discount rate/yield
Revenue growth
Volatility
Duration (years)
Term based on the
pay off (years)
$1 to $75
$47
46%
$80
10% to 20%
1% to 2%
25% to 30%
11% to 16%
2% to 41%
4%
13 years
3%
0%
$100
8% to 85%
1 year to 3 years
2% to 15%
64%
26%
$49
12% to 30%
1 year to 2 years
6% to 12%
$100
$50 to $100
$12.0
–
–
–
18%
2%
26%
14%
23%
–
–
–
–
–
45%
1 year
6%
–
–
–
22%
1 year
8%
–
$96.0
13% to 117% 105%
$97
$20
$3 to $250
$169
20%
0%
25% to 35%
4 years
–
–
$108.0
–
–
–
30%
–
0 months to 0.3 years
0.3 years
Investment in FXCM
$ 73,150
Term loan
Discounted cash flows
Trading Liabilities
________________
Loans
Derivatives
Equity options
Interest rate swaps
Total return swaps
Long- term debt
_____________
Structured notes
$ 6,376
$ 27,536
Market approach
Price
$50 to $101
$74.0
Option model/
default rate
Default probability
0%
Volatility benchmarking Volatility
Market approach
Market approach
Price
Price
39% to 62%
$20
$97
–
50%
–
–
$200,745
Market approach
Price
Price
$78 to $94
€68 to €110
$86.0
€96.0
F-45
92472_02_Leucadia_AR _Notes.qxp 2/6/19 7:30 PM Page F-46
Notes to Consolidated Financial Statements, continued
Note 5. Fair Value Disclosures, continued
December 31, 2017
Valuation Significant Weighted
Technique Unobservable Input(s) Input/Range Average
_________ ___________________ ___________ _______
Financial Instruments Owned
__________________________
Corporate equity securities
Non- exchange traded securities
Fair Value
(in thousands)
___________
$ 18,109
Corporate debt securities
$ 26,036
CDOs and CLOs
$ 38,845
Residential mortgage- backed
$ 26,077
securities
Commercial mortgage- backed
$ 12,419
securities
Loans and other receivables
$ 46,121
Derivatives
Total return swaps
Interest rate swaps
Investments at fair value
Private equity securities
$ 9,295
$110,010
Market approach
Price
Underlying stock price
Comparable asset price
Comparable pricing
Convertible bond model Discount rate/yield
Market approach
Discounted cash flows
Volatility
Estimated recovery percentage
Price
Constant prepayment rate
Constant default rate
Loss severity
Discount rate/yield
Estimated recovery percentage
Cumulative loss rate
Duration (years)
Discount rate/yield
Discounted cash flows Discount rate/yield
Scenario analysis
Discounted cash flows
Cumulative loss rate
Duration (years)
Estimated recovery percentage
Price
Cumulative loss rate
Duration (years)
Discount rate/yield
Price
Estimated recovery percentage
Estimated recovery percentage
Price
Estimated recovery percentage
Market approach
Scenario analysis
Market approach
Scenario analysis
Market approach
Market approach
Price
Credit spread
Market approach
Transaction level
Price
Discount rate
Other asset- backed securities
$ 61,129
Discounted cash flows
Scenario analysis
Investment in FXCM
$ 72,800
Term loan
Discounted cash flows
Term based on the pay off (years)
Trading Liabilities
________________
Derivatives
Equity options
Unfunded commitments
Total return swaps
Variable funding note swaps
$ 16,041
Option model/default rate Default probability
Market approach
Market approach
Discounted cash flows
Price
Price
Constant prepayment rate
Constant default rate
Loss severity
Discount rate/yield
$3 to $75
$6
$7
8%
40%
17%
$10
20%
2%
25% to 30%
3% to 26%
8% to 45%
3% to 19%
2 years to 4 years
6% to 10%
2% to 26%
8% to 65%
1 year to 3 years
26% to 32%
$52 to $56
0% to 33%
1 year to 6 years
5% to 39%
$100
14%
76%
$54 to $100
13% to 107%
$33.0
–
–
–
–
–
–
–
–
26%
12%
26%
10%
3 years
8%
12%
44%
2 years
28%
$54.0
23%
2 years
9%
–
–
–
$95.0
78%
$101 to $106
800 bps
$103.0
–
$3 to $250
$7
20%
0 months
to 1 year
$172.0
–
–
0.2 years
0%
$99
$101 to $106
20%
2%
25%
26%
–
–
$103.0
–
–
–
–
The fair values of certain Level 3 assets and liabilities that were determined based on third- party pricing information,
unadjusted past transaction prices, reported NAV or a percentage of the reported enterprise fair value are excluded
from the above tables. At November 30, 2018 and December 31, 2017, asset exclusions consisted of $40.3 million and
$228.6 million, respectively, primarily comprised of investments at fair value, private equity securities, non- exchange
F-46
92472_02_Leucadia_AR _Notes.qxp 2/6/19 7:30 PM Page F-47
Notes to Consolidated Financial Statements, continued
Note 5. Fair Value Disclosures, continued
traded securities, commercial mortgage- backed securities, loans and other receivables and certain derivatives. At
November 30, 2018 and December 31, 2017, liability exclusions consisted of $0.5 million and $4.2 million, respectively,
of commercial mortgage- backed securities, loans and corporate debt and equity securities.
Uncertainty of Fair Value Measurement From Use of Significant Unobservable Inputs
For recurring fair value measurements categorized within Level 3 of the fair value hierarchy, the uncertainty of the fair
value measurement due to the use of significant unobservable inputs and interrelationships between those unobservable
inputs (if any) are described below:
• Non- exchange traded securities using comparable pricing valuation techniques. A significant increase
(decrease) in the comparable asset price in isolation would result in a significantly higher (lower) fair value
measurement.
• Corporate debt securities using a convertible bond model. A significant increase (decrease) in the bond discount
rate/yield would result in a significantly lower (higher) fair value measurement. A significant increase (decrease)
in volatility would result in a significantly higher (lower) fair value measurement.
• Non- exchange traded securities, corporate debt securities, loans and other receivables, unfunded commitments,
interest rate swaps, total return swaps, residential mortgage- backed securities, other asset- backed securities,
private equity securities and structured notes using a market approach valuation technique. A significant increase
(decrease) in the transaction level of a non- exchange traded security, corporate debt security and private equity
security would result in a significantly higher (lower) fair value measurement. A significant increase (decrease)
in the underlying stock price of the non- exchange traded securities would result in a significantly higher (lower)
fair value measurement. A significant increase (decrease) in the credit spread of certain derivatives would result
in a significantly lower (higher) fair value measurement. A significant increase (decrease) in the price of the
private equity securities, non- exchange traded securities, corporate debt securities, unfunded commitments,
total return swaps, interest rate swaps, residential mortgage- backed securities, other asset- backed securities,
loans and other receivables or structured notes would result in a significantly higher (lower) fair value
measurement. A significant increase (decrease) in the estimated recovery rates of the cash flow outcomes
underlying the corporate debt securities or loans and other receivables would result in a significantly higher
(lower) fair value measurement.
• Loans and other receivables, CDOs and CLOs, commercial mortgage- backed securities, other asset- backed
securities and private equity securities using scenario analysis. A significant increase (decrease) in the possible
recovery rates of the cash flow outcomes underlying the investment would result in a significantly higher (lower)
fair value measurement for the financial instrument. A significant increase (decrease) in the price of the
commercial mortgage- backed securities would result in a significantly higher (lower) fair value measurement.
A significant increase (decrease) in the discount rate/yield underlying the investment would result in a
significantly lower (higher) fair value measurement. A significant increase (decrease) in the revenue growth
underlying the investment would result in a significantly higher (lower) fair value measurement.
• CDOs and CLOs, residential mortgage- backed securities, commercial mortgage- backed securities, other asset-
backed securities and variable funding note swaps using a discounted cash flow valuation technique. A
significant increase (decrease) in isolation in the constant default rate, loss severity or cumulative loss rate
would result in a significantly lower (higher) fair value measurement. The impact of changes in the constant
prepayment rate and duration would have differing impacts depending on the capital structure and type of
security. A significant increase (decrease) in the discount rate/security yield would result in a significantly
lower (higher) fair value measurement.
• Derivative equity options using an option/default rate model. A significant increase (decrease) in default
probability would result in a significantly lower (higher) fair value measurement.
F-47
92472_02_Leucadia_AR _Notes.qxp 2/6/19 7:30 PM Page F-48
Notes to Consolidated Financial Statements, continued
Note 5. Fair Value Disclosures, continued
• Derivative equity options using volatility benchmarking. A significant increase (decrease) in volatility would
result in a significantly higher (lower) fair value measurement.
•
Investments at fair value using contingent claims analysis. A significant increase (decrease) in volatility would
result in a significantly lower (higher) fair value measurement. A significant increase (decrease) in duration
would result in a significantly lower (higher) fair value measurement.
• FXCM term loan using a discounted cash flow valuation technique. A significant increase (decrease) in term
based on the time to pay off the loan would result in a higher (lower) fair value measurement.
Fair Value Option Election
We have elected the fair value option for all loans and loan commitments made by Jefferies Group’s capital markets
businesses. These loans and loan commitments include loans entered into by Jefferies Group’s investment banking
division in connection with client bridge financing and loan syndications, loans purchased by Jefferies Group’s leveraged
credit trading desk as part of its bank loan trading activities and mortgage and consumer loan commitments, purchases
and fundings in connection with mortgage- and other asset- backed securitization activities. Loans and loan
commitments originated or purchased by Jefferies Group’s leveraged credit and mortgage- backed businesses are
managed on a fair value basis. Loans are included in Trading assets and loan commitments are included in Trading
liabilities. The fair value option election is not applied to loans made to affiliate entities as such loans are entered into
as part of ongoing, strategic business ventures. Loans to affiliate entities are included in Loans to and investments in
associated companies in the Consolidated Statements of Financial Condition and are accounted for on an amortized
cost basis. Jefferies Group has also elected the fair value option for certain of its structured notes which are managed
by Jefferies Group’s capital markets businesses and are included in Long- term debt and Short- term borrowings in the
Consolidated Statements of Financial Condition. Jefferies Group has elected the fair value option for certain financial
instruments held by its subsidiaries as the investments are risk managed by Jefferies Group on a fair value basis. The
fair value option has also been elected for certain secured financings that arise in connection with Jefferies Group’s
securitization activities and other structured financings. Other secured financings, receivables from brokers, dealers
and clearing organizations, receivables from customers of securities operations, payables to brokers, dealers and clearing
organizations and payables to customers of securities operations, are accounted for at cost plus accrued interest rather
than at fair value; however, the recorded amounts approximate fair value due to their liquid or short- term nature.
The following is a summary of Jefferies Group’s gains (losses) due to changes in instrument specific credit risk on
loans, other receivables and debt instruments and gains (losses) due to other changes in fair value on long- term debt
and short- term borrowings measured at fair value under the fair value option (in thousands):
F-48
92472_02_Leucadia_AR _Notes.qxp 2/6/19 7:30 PM Page F-49
Notes to Consolidated Financial Statements, continued
Note 5. Fair Value Disclosures, continued
Eleven Months Twelve Months Twelve Months
Ended Ended Ended
November 30, December 31, December 31,
2018 2017 2016
______________________ ______________________ ______________________
Financial instruments owned:
Loans and other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (3,856) $ 22,088 $(68,812)
Financial instruments sold:
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (46) – 9
Loan commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (739) 230 5,509
Long- term debt:
Changes in instrument specific credit risk (1) . . . . . . . . . . . . . 38,064 (34,609) (10,745)
Other changes in fair value (2) . . . . . . . . . . . . . . . . . . . . . . . . . 48,748 47,291 30,995
Short- term borrowings:
Other changes in fair value (2) . . . . . . . . . . . . . . . . . . . . . . . . . – (681) –
(1) Changes in instrument specific credit risk related to structured notes are included in the Consolidated Statements
of Comprehensive Income (Loss), net of taxes.
(2) Other changes in fair value are included within Principal transactions revenues in the Consolidated Statements
of Operations.
The following is a summary of the amount by which contractual principal exceeds fair value for loans and other
receivables, long- term debt and short- term borrowings measured at fair value under the fair value option (in thousands):
November 30, December 31,
2018 2017
______________________ ______________________
Financial instruments owned:
Loans and other receivables (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $806,798 $752,076
Loans and other receivables on nonaccrual status and/or
90 days or greater past due (1) (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,389 159,462
Long- term debt and short- term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . 114,669 32,839
(1) Interest income is recognized separately from other changes in fair value and is included in Interest income in the
Consolidated Statements of Operations.
(2) Amounts include loans and other receivables 90 days or greater past due by which contractual principal exceeds
fair value of $20.5 million and $38.7 million at November 30, 2018 and December 31, 2017, respectively.
The aggregate fair value of Jefferies Group’s loans and other receivables on nonaccrual status and/or 90 days or greater
past due, was $105.3 million and $55.1 million at November 30, 2018 and December 31, 2017, respectively, which
includes loans and other receivables 90 days or greater past due of $19.4 million and $37.4 million at November 30,
2018 and December 31, 2017, respectively.
Jefferies Group had elected the fair value option for its investment in KCG Holdings, Inc. (“KCG”). The change in the
fair value of this investment was $93.4 million and $19.6 million for the twelve months ended December 31, 2017 and
2016, respectively. Jefferies Group’s investment in KCG was sold in July 2017. Additionally, in connection with a KCG
shares and warrants exchange transaction, Jefferies Group earned advisory fees of $2.9 million during the twelve
months ended December 31, 2016.
As of December 31, 2017, we owned approximately 46.6 million common shares of HRG, representing approximately
23% of HRG’s outstanding common shares, which were accounted for under the fair value option. On July 13, 2018,
HRG merged into its 62% owned subsidiary, Spectrum Brands. Our approximately 23% owned interest in HRG
F-49
92472_02_Leucadia_AR _Notes.qxp 2/6/19 7:30 PM Page F-50
Notes to Consolidated Financial Statements, continued
Note 5. Fair Value Disclosures, continued
thereby converted into approximately 14% of the outstanding shares of the re- named company, Spectrum Brands,
which we account for under the fair value option. As of November 30, 2018, we owned approximately 7.5 million
common shares of Spectrum Brands, representing approximately 14% of Spectrum Brands outstanding common
shares. The shares are included in our Consolidated Statements of Financial Condition at fair value of $371.1 million
and $789.9 million at November 30, 2018 and December 31, 2017, respectively. The shares were acquired at an
aggregate cost of $475.6 million. The change in the fair value of our investment in Spectrum Brands/HRG
aggregated $(418.8) million, $64.8 million and $93.2 million during the eleven months ended November 30, 2018
and the twelve months ended December 31, 2017 and 2016, respectively. One of our officers currently serves as a
director on Spectrum Brands board.
As reported in its Form 10-Q for the nine months ended June 30, 2018 and Form 10-K for its fiscal years ended
September 30, 2017 and 2016, HRG’ revenues were $2,358.1 million, $5,008.5 million and $5,048.6 million,
respectively; net income (loss) from continuing operations was $443.7 million, $102.9 million and $144.2 million,
respectively; net income (loss) was $941.6 million, $273.2 million and $(33.9) million, respectively; and net income
(loss) attributable to HRG controlling interest was $847.7 million, $106.0 million and $(198.8) million, respectively.
We believe accounting for these investments at fair value better reflects the economics of these investments, and quoted
market prices for these investments provides an objectively determined fair value at each balance sheet date. Our
investment in HomeFed, which is a publicly traded company, is accounted for under the equity method of accounting
rather than the fair value option method. HomeFed’s common stock is not listed on any stock exchange, and price
information for the common stock is not regularly quoted on any automated quotation system. It is traded in the over-
the- counter market with high and low bid prices published by the NASD OTC Bulletin Board Service; however, trading
volume is minimal. For these reasons, we did not elect the fair value option for HomeFed.
Financial Instruments Not Measured at Fair Value
Certain of our financial instruments are not carried at fair value but are recorded at amounts that approximate fair
value due to their liquid or short- term nature and generally negligible credit risk. These financial assets include Cash
and cash equivalents and Cash and securities segregated and on deposit for regulatory purposes or deposited with
clearing and depository organizations and would generally be presented in Level 1 of the fair value hierarchy. Cash
and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations
includes U.S. Treasury securities with a fair value of $34.8 million and $99.7 million at November 30, 2018 and
December 31, 2017, respectively. See Note 26 for additional information related to financial instruments not measured
at fair value.
Note 6. Derivative Financial Instruments
Derivative Financial Instruments
Derivative activities are recorded at fair value in the Consolidated Statements of Financial Condition in Trading assets
and Trading liabilities, net of cash paid or received under credit support agreements and on a net counterparty basis
when a legally enforceable right to offset exists under a master netting agreement. Predominantly, Jefferies Group
enters into derivative transactions to satisfy the needs of its clients and to manage its own exposure to market and credit
risks resulting from its trading activities. In addition, Jefferies Group applies hedge accounting to an interest rate swap
that has been designated as a fair value hedge of the changes in fair value due to the benchmark interest rate for certain
fixed rate senior long- term debt. See Notes 5 and 24 for additional disclosures about derivative financial instruments.
Derivatives are subject to various risks similar to other financial instruments, including market, credit and operational
risk. The risks of derivatives should not be viewed in isolation, but rather should be considered on an aggregate basis
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Notes to Consolidated Financial Statements, continued
Note 6. Derivative Financial Instruments, continued
along with our other trading- related activities. Jefferies Group manages the risks associated with derivatives on an
aggregate basis along with the risks associated with proprietary trading as part of its firm wide risk management
policies.
In connection with Jefferies Group’s derivative activities, Jefferies Group may enter into ISDA master netting
agreements or similar agreements with counterparties. See Note 2 for additional information regarding the offsetting
of derivative contracts.
The following table presents the fair value and related number of derivative contracts categorized by type of derivative
contract as reflected in the Consolidated Statements of Financial Condition at November 30, 2018 and December 31,
2017. The fair value of assets/liabilities represents our receivable/payable for derivative financial instruments, gross of
counterparty netting and cash collateral received and pledged. The following tables also provide information regarding
(1) the extent to which, under enforceable master netting arrangements, such balances are presented net in our
Consolidated Statements of Financial Condition as appropriate under GAAP and (2) the extent to which other rights
of setoff associated with these arrangements exist and could have an effect on our financial position (in thousands,
except contract amounts):
November 30, 2018
______________________________________________________
Assets Liabilities
_________________________________________________ __________________________________________________
Number of Number of
Fair Value Contracts (1) Fair Value Contracts (1)
__________________ ______________________ __________________ ______________________
29,647 1
796,493 35,652 $
__________ __________
Derivatives designated as accounting hedges –
interest rate contracts . . . . . . . . . . . . . . . . . . . . . . . . $ – – $
Derivatives not designated as accounting hedges:
Interest rate contracts . . . . . . . . . . . . . . . . . . . . . . . $
904,043 69,305
Foreign exchange contracts . . . . . . . . . . . . . . . . . . . 311,270 10,086 314,989 1,602
Equity contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,410,148 2,109,810 2,377,133 1,782,600
Commodity contracts . . . . . . . . . . . . . . . . . . . . . . . 37,823 8,546 1,717 5,683
Credit contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,972 130 13,174 93
__________ __________
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,580,706 3,611,056
Counterparty /cash- collateral netting (2) . . . . . . . . . (2,413,931) (2,513,050)
__________ __________
Total derivatives not designated as
accounting hedges . . . . . . . . . . . . . . . . . . . . . . $
Total per Consolidated Statement of
Financial Condition (3) . . . . . . . . . . . . . . . . . . $
166,775 $ 1,098,006
__________ __________
166,775 $ 1,127,653
__________ __________
__________ __________
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Notes to Consolidated Financial Statements, continued
Note 6. Derivative Financial Instruments, continued
– – $
__________ __________
December 31, 2017
______________________________________________________
Assets Liabilities
_________________________________________________ __________________________________________________
Number of Number of
Fair Value Contracts (1) Fair Value Contracts (1)
_________________ ___________________ _________________ ______________________
Derivatives designated as accounting hedges –
interest rate contracts (4) . . . . . . . . . . . . . . . . . . . . . $
Derivatives not designated as accounting hedges:
Interest rate contracts (4) . . . . . . . . . . . . . . . . . . . . . $ 1,717,058 38,941 $ 1,708,776 12,828
Foreign exchange contracts . . . . . . . . . . . . . . . . . . . 366,541 6,463 349,512 4,612
Equity contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,373,016 2,728,750 1,638,258 2,118,526
Commodity contracts . . . . . . . . . . . . . . . . . . . . . . . 3,093 7,249 5,141 6,047
Credit contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,261 130 41,801 191
__________ __________
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,497,969 3,743,488
Counterparty /cash- collateral netting (2)(4) . . . . . . . (3,318,481) (3,490,514)
__________ __________
Total derivatives not designated as
accounting hedges . . . . . . . . . . . . . . . . . . . . . . $
Total per Consolidated Statement of
Financial Condition (3) . . . . . . . . . . . . . . . . . . $
252,974
__________ __________
179,488 $
2,420 1
255,394
__________ __________
__________ __________
179,488 $
(1) Number of exchange- traded contracts may include open futures contracts. The unsettled fair value of these
futures contracts is included in Receivables and Payables, expense accruals and other liabilities in our
Consolidated Statements of Financial Condition.
(2) Amounts netted include both netting by counterparty and for cash collateral paid or received.
(3) We have not received or pledged additional collateral under master netting agreements and/or other credit
support agreements that is eligible to be offset beyond what has been offset in the Consolidated Statements of
Financial Condition.
(4) Pursuant to a rule change by the London Clearing House in the first fiscal quarter of 2018, variation margin
exchanged each day with this clearing organization on certain interest rate derivatives is characterized as
settlement payments as opposed to cash posted as collateral. The impact of this rule change would have been a
reduction in gross interest rate derivative assets and liabilities as of December 31, 2017 of approximately $800
million, and a corresponding decrease in counterparty and cash collateral netting, with no impact to our
Consolidated Statement of Financial Condition.
The following table provides information related to gains (losses) recognized in Interest expense of Jefferies Group in
the Consolidated Statements of Operations on a fair value hedge (in thousands):
Eleven Months Twelve Months Twelve Months
Ended Ended Ended
November 30, December 31, December 31,
2018 2017 2016
_______________________ _______________________ _______________________
Interest rate swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(25,539) $(2,091) $ –
Long- term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,363 8,124 –
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,824 $ 6,033 $ –
_____________
_____________
_____________
___________
___________
___________
____________
____________
____________
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Notes to Consolidated Financial Statements, continued
Note 6. Derivative Financial Instruments, continued
The following table presents unrealized and realized gains (losses) on derivative contracts which are primarily
recognized in Principal transactions revenues in the Consolidated Statements of Operations, which are utilized in
connection with our client activities and our economic risk management activities (in thousands):
Eleven Months Twelve Months Twelve Months
Ended Ended Ended
November 30, December 31, December 31,
2018 2017 2016
_______________________ _______________________ _______________________
Interest rate contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 67,291 $ 3,171 $ (36,559)
Foreign exchange contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 226 4,376 20,401
Equity contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (267,187) (319,775) (635,305)
Commodity contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,785 (9,049) (3,339)
Credit contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 449 1,959 5,013
________________ ________________ ________________
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(177,436) $(319,318) $(649,789)
________________ ________________ ________________
________________ ________________ ________________
The net gains (losses) on derivative contracts in the table above are one of a number of activities comprising Jefferies
Group’s business activities and are before consideration of economic hedging transactions, which generally offset the
net gains (losses) included above. Jefferies Group substantially mitigates its exposure to market risk on its cash
instruments through derivative contracts, which generally provide offsetting revenues, and Jefferies Group manages
the risk associated with these contracts in the context of its overall risk management framework.
OTC Derivatives. The following tables set forth by remaining contract maturity the fair value of OTC derivative assets
and liabilities as reflected in the Consolidated Statement of Financial Condition at November 30, 2018 (in thousands):
OTC Derivative Assets (1) (2) (3)
____________________________________________________________________________________________
Cross-
Greater Than Maturity
0-12 Months 1-5 Years 5 Years Netting (4) Total
_________________ ______________ __________________ ______________ ______
Commodity swaps, options and forwards . . . . . . . . . $ 4,006 $ 6,185 $ – $ (1,445) $ 8,746
Equity swaps and options . . . . . . . . . . . . . . . . . . . . 1,769 13,966 4,934 (1,889) 18,780
Credit default swaps . . . . . . . . . . . . . . . . . . . . . . . . 66 12,060 3,984 (899) 15,211
Total return swaps . . . . . . . . . . . . . . . . . . . . . . . . . . 95,130 19,519 – (1,786) 112,863
Foreign currency forwards, swaps and options . . . . 39,162 15,942 – (12,528) 42,576
Fixed income forwards . . . . . . . . . . . . . . . . . . . . . . 3,911 – – – 3,911
Interest rate swaps, options and forwards . . . . . . . . 27,851 93,303 103,165 (77,874) 146,445
______________ ______________ ______________ _____________ ______________
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $171,895 $160,975 $112,083 $(96,421) 348,532
______________ ______________ ______________ _____________
______________ ______________ ______________ _____________
Cross product counterparty netting . . . . . . . . . . . . (18,743)
Total OTC derivative assets included in
Trading assets . . . . . . . . . . . . . . . . . . . . . . . $329,789
______________
______________
______________
(1) At November 30, 2018, we held exchange traded derivative assets, other derivatives assets and other credit
agreements with a fair value of $42.2 million, which are not included in this table.
(2) OTC derivative assets in the table above are gross of collateral received. OTC derivative assets are recorded net
of collateral received in the Consolidated Statements of Financial Condition. At November 30, 2018, cash
collateral received was $205.3 million.
(3) Derivative fair values include counterparty netting within product category.
(4) Amounts represent the netting of receivable balances with payable balances for the same counterparty within
product category across maturity categories.
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Notes to Consolidated Financial Statements, continued
Note 6. Derivative Financial Instruments, continued
OTC Derivative Liabilities (1) (2) (3)
____________________________________________________________________________________________
Cross-
Greater Than Maturity
0-12 Months 1-5 Years 5 Years Netting (4) Total
_________________ ______________ __________________ ______________ ______
Commodity swaps, options and forwards . . . . . . . . $ 1,074 $
371 $ – $ (1,445) $ –
Equity swaps and options . . . . . . . . . . . . . . . . . . . . 52,466 83,938 35,730 (1,889) 170,245
Credit default swaps . . . . . . . . . . . . . . . . . . . . . . . . 164 1,197 1,548 (899) 2,010
Total return swaps . . . . . . . . . . . . . . . . . . . . . . . . . . 64,296 11,549 – (1,786) 74,059
Foreign currency forwards, swaps and options . . . . 43,593 15,546 – (12,528) 46,611
Interest rate swaps, options and forwards . . . . . . . . 30,518 135,874 196,171 (77,874) 284,689
______________ ______________ ______________ _____________ ______________
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $192,111 $248,475 $233,449 $(96,421) 577,614
______________ ______________ ______________ _____________
______________ ______________ ______________ _____________
Cross product counterparty netting . . . . . . . . . . . . (18,743)
Total OTC derivative liabilities included in
Trading liabilities . . . . . . . . . . . . . . . . . . . . $558,871
______________
______________
______________
(1) At November 30, 2018, we held exchange traded derivative liabilities, other derivative liabilities and other credit
agreements with a fair value of $873.5 million, which are not included in this table.
(2) OTC derivative liabilities in the table above are gross of collateral pledged. OTC derivative liabilities are
recorded net of collateral pledged in the Consolidated Statements of Financial Condition. At November 30,
2018, cash collateral pledged was $304.7 million.
(3) Derivative fair values include counterparty netting within product category.
(4) Amounts represent the netting of receivable balances with payable balances for the same counterparty within
product category across maturity categories.
At November 30, 2018, the counterparty credit quality with respect to the fair value of our OTC derivative assets was
as follows (in thousands):
Counterparty credit quality (1):
A- or higher . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $163,656
BBB- to BBB+ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,222
BB+ or lower . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119,713
Unrated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,198
______________
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $329,789
______________
______________
(1) Jefferies Group utilizes internal credit ratings determined by the Jefferies Group Risk Management
department. Credit ratings determined by Jefferies Group Risk Management use methodologies that produce
ratings generally consistent with those produced by external rating agencies.
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Notes to Consolidated Financial Statements, continued
Note 6. Derivative Financial Instruments, continued
Credit Related Derivative Contracts
The external credit ratings of the underlyings or referenced assets for our written credit related derivative contracts (in
millions):
External Credit Rating
_________________________________
Non- investment Total
Investment Grade Grade Unrated Notional
_______________________________ ___________________________ _____________ ______________
November 30, 2018
Credit protection sold:
Index credit default swaps . . . . . . . . . . . . . . . . . . . . . . $ 25.7 $167.4 $ – $193.1
Single name credit default swaps . . . . . . . . . . . . . . . . 57.7 84.5 3.0 145.2
December 31, 2017
Credit protection sold:
Index credit default swaps . . . . . . . . . . . . . . . . . . . . . . $ 3.0 $126.0 $ – $129.0
Single name credit default swaps . . . . . . . . . . . . . . . . 129.1 89.1 – 218.2
Contingent Features
Certain of Jefferies Group’s derivative instruments contain provisions that require their debt to maintain an investment
grade credit rating from each of the major credit rating agencies. If Jefferies Group’s debt were to fall below investment
grade, it would be in violation of these provisions and the counterparties to the derivative instruments could request
immediate payment or demand immediate and ongoing full overnight collateralization on Jefferies Group’s derivative
instruments in liability positions. The following table presents the aggregate fair value of all derivative instruments
with such credit- risk- related contingent features that are in a liability position, the collateral amounts posted or received
in the normal course of business and the potential collateral Jefferies Group would have been required to return and/or
post additionally to its counterparties if the credit- risk- related contingent features underlying these agreements were
triggered (in millions):
November 30, December 31,
2018 2017
_________________________ _________________________
Derivative instrument liabilities with credit- risk- related
contingent features . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 93.5 $ 95.1
Collateral posted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (61.5) (86.4)
Collateral received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91.5 5.6
Return of and additional collateral required in the event of a credit
rating downgrade below investment grade (1) . . . . . . . . . . . . . . . . . . . . . . 123.3 14.3
(1) These potential outflows include initial margin received from counterparties at the execution of the derivative
contract. The initial margin will be returned if counterparties elect to terminate the contract after a downgrade.
Other Derivatives
Vitesse Energy Finance uses swaps and call and put options in order to reduce exposure to future oil price fluctuations.
Vitesse Energy Finance accounts for the derivative instruments at fair value. The gains and losses associated with the
change in fair value of the derivatives are recorded in Other revenues.
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Notes to Consolidated Financial Statements, continued
Note 7. Collateralized Transactions
Jefferies Group enters into secured borrowing and lending arrangements to obtain collateral necessary to effect
settlement, finance inventory positions, meet customer needs or re- lend as part of dealer operations. Jefferies Group
monitors the fair value of the securities loaned and borrowed on a daily basis as compared with the related payable or
receivable, and requests additional collateral or returns excess collateral, as appropriate. Jefferies Group pledges
financial instruments as collateral under repurchase agreements, securities lending agreements and other secured
arrangements, including clearing arrangements. Jefferies Group’s agreements with counterparties generally contain
contractual provisions allowing the counterparty the right to sell or repledge the collateral. Pledged securities owned
that can be sold or repledged by the counterparty are included in Financial instruments owned and noted parenthetically
as Securities pledged in our Consolidated Statements of Financial Condition.
The following tables set forth the carrying value of securities lending arrangements and repurchase agreements by
class of collateral pledged and remaining contractual maturity (in thousands):
Securities Lending Repurchase
Collateral Pledged Arrangements Agreements Total
_______________________________ ______________________________ _____________________ ________
November 30, 2018
Corporate equity securities . . . . . . . . . . . . . . . . . . . . . . . $1,505,218 $
487,124 $ 1,992,342
Corporate debt securities . . . . . . . . . . . . . . . . . . . . . . . . 333,221 1,853,309 2,186,530
Mortgage- and asset- backed securities . . . . . . . . . . . . . 249 2,820,543 2,820,792
U.S. government and federal agency securities . . . . . . . – 8,181,947 8,181,947
Municipal securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . – 604,274 604,274
Sovereign securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . – 2,945,521 2,945,521
Loans and other receivables . . . . . . . . . . . . . . . . . . . . . . – 300,768 300,768
___________________
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,838,688 $17,193,486 $19,032,174
___________________
___________________
___________________
___________________
___________________
_________________
_________________
_________________
December 31, 2017
Corporate equity securities . . . . . . . . . . . . . . . . . . . . . . . $2,353,798 $
214,413 $ 2,568,211
Corporate debt securities . . . . . . . . . . . . . . . . . . . . . . . . 470,908 2,336,702 2,807,610
Mortgage- and asset- backed securities . . . . . . . . . . . . . – 2,562,268 2,562,268
U.S. government and federal agency securities . . . . . . . 19,205 11,792,534 11,811,739
Municipal securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . – 444,861 444,861
Sovereign securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . – 2,023,530 2,023,530
Loans and other receivables . . . . . . . . . . . . . . . . . . . . . . – 454,941 454,941
___________________
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,843,911 $19,829,249 $22,673,160
___________________
___________________
___________________
___________________
___________________
_________________
_________________
_________________
Contractual Maturity
________________________________________________________________________________________________________
Overnight Greater
and Up to 31 to than
Continuous 30 Days 90 Days 90 Days Total
_____
_______ _
November 30, 2018
Securities lending arrangements . . . . . . $ 807,347 $ – $ 560,417 $ 470,924 $ 1,838,688
Repurchase agreements . . . . . . . . . . . . . 7,849,052 1,915,325 6,042,951 1,386,158 17,193,486
___________ __________ __________ __________ ___________
Total . . . . . . . . . . . . . . . . . . . . . . . . $ 8,656,399 $1,915,325 $6,603,368 $1,857,082 $19,032,174
___________ __________ __________ __________ ___________
___________ __________ __________ __________ ___________
_________
_______________ _
________ ___
December 31, 2017
Securities lending arrangements . . . . . . $ 1,676,940 $
– $ 741,971 $ 425,000 $ 2,843,911
Repurchase agreements . . . . . . . . . . . . . 10,780,474 4,058,228 3,211,464 1,779,083 19,829,249
___________ __________ __________ __________ ___________
Total . . . . . . . . . . . . . . . . . . . . . . . . $12,457,414 $4,058,228 $3,953,435 $2,204,083 $22,673,160
___________ __________ __________ __________ ___________
___________ __________ __________ __________ ___________
Jefferies Group receives securities as collateral under resale agreements, securities borrowing transactions and customer
margin loans. Jefferies Group also receives securities as collateral in connection with securities- for- securities
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Notes to Consolidated Financial Statements, continued
Note 7. Collateralized Transactions, continued
transactions in which it is the lender of securities. In many instances, Jefferies Group is permitted by contract to
rehypothecate the securities received as collateral. These securities may be used to secure repurchase agreements, enter
into securities lending transactions, satisfy margin requirements on derivative transactions or cover short positions. At
November 30, 2018 and December 31, 2017, the approximate fair value of securities received as collateral by Jefferies
Group that may be sold or repledged was $23.1 billion and $27.1 billion, respectively. At November 30, 2018 and
December 31, 2017, a substantial portion of these securities have been sold or repledged.
Note 8. Securitization Activities
Jefferies Group engages in securitization activities related to corporate loans, commercial mortgage loans, consumer
loans and mortgage- backed and other asset- backed securities. In securitization transactions, Jefferies Group transfers
assets to special purpose entities (“SPEs”) and acts as the placement or structuring agent for the beneficial interests
sold to investors by the SPE. A significant portion of the securitization transactions are the securitization of assets
issued or guaranteed by U.S. government agencies. These SPEs generally meet the criteria of VIEs; however, the SPEs
are generally not consolidated as Jefferies Group is not considered the primary beneficiary for these SPEs.
Jefferies Group accounts for securitization transactions as sales, provided it has relinquished control over the transferred
assets. Transferred assets are carried at fair value with unrealized gains and losses reflected in Principal transactions
revenues in the Consolidated Statements of Operations prior to the identification and isolation for
securitization. Subsequently, revenues recognized upon securitization are reflected as net underwriting
revenues. Jefferies Group generally receives cash proceeds in connection with the transfer of assets to an SPE. Jefferies
Group may, however, have continuing involvement with the transferred assets, which is limited to retaining one or
more tranches of the securitization (primarily senior and subordinated debt securities in the form of mortgage- and
other asset- backed securities or CLOs), which are included in Trading assets and are generally initially categorized as
Level 2 within the fair value hierarchy. Jefferies Group applies fair value accounting to the securities.
The following table presents activity related to Jefferies Group’s securitizations that were accounted for as sales in
which it had continuing involvement (in millions):
Eleven Months Twelve Months Twelve Months
Ended Ended Ended
November 30, December 31, December 31,
2018 2017 2016
________________________ ________________________ ________________________
Transferred assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $7,159.3 $4,552.9 $5,786.0
Proceeds on new securitizations . . . . . . . . . . . . . . . . . . . 7,165.3 4,594.5 5,809.0
Cash flows received on retained interests . . . . . . . . . . . 48.5 28.7 28.2
Jefferies Group has no explicit or implicit arrangements to provide additional financial support to these SPEs, has no
liabilities related to these SPEs and has no outstanding derivative contracts executed in connection with these
securitizations at November 30, 2018 and December 31, 2017.
The following table summarizes Jefferies Group’s retained interests in SPEs where it transferred assets and has
continuing involvement and received sale accounting treatment (in millions):
Securitization Type
__________________________
U.S. government agency residential
mortgage- backed securities . . . . . . . . . . . . . . . . . . .
U.S. government agency commercial
mortgage- backed securities . . . . . . . . . . . . . . . . . . .
CLOs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer and other loans . . . . . . . . . . . . . . . . . . . . . .
_________________________________
November 30, 2018 December 31, 2017
_________________________________
Retained Retained
Interests Total Assets Interests
___________
________________ ___________
Total Assets
________________
$13,633.5
$365.3 $6,383.5 $28.2
2,027.6
3,512.0
604.1
185.6 2,075.7 81.4
20.9 3,957.8 20.3
48.9 247.6 47.8
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Notes to Consolidated Financial Statements, continued
Note 8. Securitization Activities, continued
Total assets represent the unpaid principal amount of assets in the SPEs in which Jefferies Group has continuing
involvement and are presented solely to provide information regarding the size of the transactions and the size of the
underlying assets supporting its retained interests, and are not considered representative of the risk of potential
loss. Assets retained in connection with a securitization transaction represent the fair value of the securities of one or
more tranches issued by an SPE, including senior and subordinated tranches. Jefferies Group’s risk of loss is limited
to this fair value amount which is included in total Trading assets in our Consolidated Statements of Financial Condition.
Although not obligated, in connection with secondary market- making activities Jefferies Group may make a market in
the securities issued by these SPEs. In these market- making transactions, Jefferies Group buys these securities from
and sells these securities to investors. Securities purchased through these market- making activities are not considered
to be continuing involvement in these SPEs. To the extent Jefferies Group purchased securities through these market-
making activities and Jefferies Group is not deemed to be the primary beneficiary of the VIE, these securities are
included in agency and non- agency mortgage- and asset- backed securitizations in the nonconsolidated VIEs section
presented in Note 10.
Foursight Capital also utilizes SPEs to securitize automobile loans receivable. These SPEs are VIEs and our subsidiary
is the primary beneficiary; the related assets and the secured borrowings are recognized in the Consolidated Statements
of Financial Condition. These secured borrowings do not have recourse to our subsidiary’s general credit. See Note 10
for further information on securitization activities and VIEs.
Note 9. Available for Sale Securities and Other Investments
The amortized cost, gross unrealized gains and losses and estimated fair value of investments classified as available
for sale are as follows (in thousands):
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
_________________ __________________ __________________ _________________
November 30, 2018
Bonds and notes:
U.S. government securities . . . . . . . . . . . . . . . . . $1,073,038 $
1 $ 183 $1,072,856
Residential mortgage- backed securities . . . . . . . 211,209 376 1,067 210,518
Commercial mortgage- backed securities . . . . . . . 16,068 – 426 15,642
Other asset- backed securities . . . . . . . . . . . . . . . . 111,447 1 578 110,870
Total fixed maturities . . . . . . . . . . . . . . . . . . . . 1,411,762 378 2,254 1,409,886
378 $2,254 $1,409,886
Total Available for sale securities . . . . . . . . . . . $1,411,762 $
_________________ ____________
_________________ ____________
_________________ ____________
_________________ ____________
_
_
_
_
_________ _________________
_________ _________________
_________ _________________
_________ _________________
December 31, 2017
Bonds and notes:
U.S. government securities . . . . . . . . . . . . . . . . . . . $ 552,847 $ – $
42 $ 552,805
Residential mortgage- backed securities . . . . . . . . . 34,381 272 92 34,561
Commercial mortgage- backed securities . . . . . . . 5,857 17 4 5,870
Other asset- backed securities . . . . . . . . . . . . . . . . 34,837 46 44 34,839
Total fixed maturities . . . . . . . . . . . . . . . . . . . 627,922 335 182 628,075
Equity securities:
Common stocks:
Banks, trusts and insurance companies . . . . . . 35,071 17,500 – 52,571
Industrial, miscellaneous and all other . . . . . . 17,504 18,411 – 35,915
Total equity securities . . . . . . . . . . . . . . . . . . . 52,575 35,911 – 88,486
Total Available for sale securities . . . . . . . . . . $ 680,497 $36,246 $ 182 $ 716,561
____________
____________
__________
__________
____________
____________
____________
____________
__________
__________
__________
__________
_________________
_________________
_________________
_________________
_________________
_________________
_________________
_________________
_________________
_________________
_________________
_________________
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Notes to Consolidated Financial Statements, continued
Note 9. Available for Sale Securities and Other Investments, continued
As of January 1, 2018, the Company adopted the FASB’s new guidance that affects the accounting for equity investments
and the presentation and disclosure requirements for financial instruments. At November 30, 2018, equity investments
are primarily classified as Trading assets, at fair value and the change in fair value of equity securities is now recognized
through the Consolidated Statements of Operations. See Note 4 for additional information.
At November 30, 2018, the Company had other investments (classified as Other assets and Loans to and investments
in associated companies) in which fair values are not readily determinable, aggregating $230.0 million. There were
no unrealized gains, losses or impairments recognized on these investments during the eleven months ended
November 30, 2018.
The amortized cost and estimated fair value of investments classified as available for sale at November 30, 2018, by
contractual maturity, are shown below. Expected maturities are likely to differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Amortized Estimated
Cost Fair Value
______________ ______________
(In thousands)
Due within one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,073,038 $1,072,856
1,073,038 1,072,856
Mortgage- backed and asset- backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 338,724 337,030
$1,411,762 $1,409,886
_________________ _________________
_________________ _________________
_________________ _________________
_________________ _________________
At November 30, 2018, the unrealized losses on investments which have been in a continuous unrealized loss position
for 12 months or longer were not significant.
Note 10. Variable Interest Entities
VIEs are entities in which equity investors lack the characteristics of a controlling financial interest. VIEs are
consolidated by the primary beneficiary. The primary beneficiary is the party who has both (1) the power to direct the
activities of a VIE that most significantly impact the entity’s economic performance and (2) an obligation to absorb
losses of the entity or a right to receive benefits from the entity that could potentially be significant to the entity.
Our variable interests in VIEs include debt and equity interests, equity interests in associated companies, commitments,
guarantees and certain fees. Our involvement with VIEs arises primarily from the following activities, but also includes
other activities discussed below:
• Purchases of securities in connection with Jefferies Group’s trading and secondary market- making activities;
• Retained interests held as a result of securitization activities, including the resecuritization of mortgage- and
other asset- backed securities and the securitization of commercial mortgage, corporate and consumer loans;
• Acting as placement agent and/or underwriter in connection with client- sponsored securitizations;
• Financing of agency and non- agency mortgage- and other asset- backed securities;
• Warehouse funding arrangements for client- sponsored consumer loan vehicles and CLOs through participation
certificates, forward sale agreements and revolving loan and note commitments; and
• Loans to, investments in and fees from various investment vehicles.
We determine whether we are the primary beneficiary of a VIE upon our initial involvement with the VIE and we
reassess whether we are the primary beneficiary of a VIE on an ongoing basis. Our determination of whether we are
the primary beneficiary of a VIE is based upon the facts and circumstances for each VIE and requires judgment. Our
considerations in determining the VIE’s most significant activities and whether we have power to direct those activities
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Notes to Consolidated Financial Statements, continued
Note 10. Variable Interest Entities, continued
include, but are not limited to, the VIE’s purpose and design and the risks passed through to investors, the voting
interests of the VIE, management, service and/or other agreements of the VIE, involvement in the VIE’s initial design
and the existence of explicit or implicit financial guarantees. In situations where we have determined that the power
over the VIE’s significant activities is shared, we assess whether we are the party with the power over the most significant
activities. If we are the party with the power over the most significant activities, we meet the “power” criteria of the
primary beneficiary. If we do not have the power over the most significant activities or we determine that decisions
require consent of each sharing party, we do not meet the “power” criteria of the primary beneficiary.
We assess our variable interests in a VIE both individually and in aggregate to determine whether we have an obligation
to absorb losses of or a right to receive benefits from the VIE that could potentially be significant to the VIE. The
determination of whether our variable interest is significant to the VIE requires judgment. In determining the significance
of our variable interest, we consider the terms, characteristics and size of the variable interests, the design and
characteristics of the VIE, our involvement in the VIE and our market- making activities related to the variable interests.
Consolidated VIEs
The following table presents information about the assets and liabilities of our consolidated securitization vehicles
VIEs, which are presented in our Consolidated Statements of Financial Condition in the respective asset and liability
categories (in millions). The assets and liabilities in the table below are presented prior to consolidation and thus a
portion of these assets and liabilities are eliminated in consolidation.
November 30, December 31,
2018 2017
___________ ___________
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ – $ 11.7
Financial instruments owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . – 37.6
Securities purchased under agreements to resell (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . 883.1 729.3
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 626.0 318.1
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78.4 15.5
_____________ _____________
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,587.5 $1,112.2
_____________ _____________
_____________ _____________
Other secured financings (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,535.3 $1,073.5
Other (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45.9 38.3
_____________ _____________
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,581.2 $1,111.8
_____________ _____________
_____________ _____________
(1) Securities purchased under agreements to resell represent an amount due under a collateralized transaction on a
related consolidated entity, which is eliminated in consolidation.
(2) Approximately $1.0 million and $44.1 million of the secured financing represent amounts held by Jefferies Group
in inventory and are eliminated in consolidation at November 30, 2018 and December 31, 2017, respectively.
(3) Includes $44.1 million and $32.0 million at November 30, 2018 and December 31, 2017, respectively, of
intercompany payables that are eliminated in consolidation.
Securitization Vehicles. Jefferies Group is the primary beneficiary of asset- backed financing vehicles to which Jefferies
Group sells agency and non- agency residential and commercial mortgage loans, mortgage- backed securities and
consumer loans pursuant to the terms of a master repurchase agreement. Jefferies Group’s variable interests in these
vehicles consist of its collateral margin maintenance obligations under the master repurchase agreement, which Jefferies
Group manages, and retained interests in securities issued. The assets of these VIEs consist of reverse repurchase
agreements, which are available for the benefit of the vehicle’s debt holders. The creditors of these VIEs do not have
recourse to Jefferies Group’s general credit and each such VIE’s assets are not available to satisfy any other debt.
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Notes to Consolidated Financial Statements, continued
Note 10. Variable Interest Entities, continued
Jefferies Group was previously the primary beneficiary of a securitization vehicle associated with their financing of
small business loans. In the creation of the securitization vehicle, Jefferies Group was involved in the decisions made
during the establishment and design of the entity and holds variable interests consisting of the securities retained that
could potentially be significant. The assets of the VIE consisted of small business loans, which were available for the
benefit of the vehicles’ beneficial interest holders. The creditors of the VIE did not have recourse to Jefferies Group’s
general credit and the assets of the VIE were not available to satisfy any other debt.
At November 30, 2018 and December 31, 2017, Foursight Capital is the primary beneficiary of SPEs it utilized to
securitize automobile loans receivable. Foursight Capital acts as the servicer for which it receives a fee, and owns an
equity interest in the SPEs. The notes issued by the SPEs are secured solely by the assets of the SPEs and do not have
recourse to Foursight Capital’s general credit and the assets of the VIEs are not available to satisfy any other debt.
During the eleven months ended November 30, 2018, automobile loan receivables aggregating $552.2 million were
securitized by Foursight Capital in connection with secured borrowing offerings. The majority of the proceeds from
issuance of the secured borrowings were used to pay down Foursight Capital’s two credit facilities.
Nonconsolidated VIEs
The following tables present information about our variable interests in nonconsolidated VIEs (in millions):
Maximum
Financial Statement Exposure
Carrying Amount to Loss VIE Assets
________________________________________________ _______________ _________________
Assets Liabilities
__________ ________________
November 30, 2018
CLOs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 45.2 $– $ 571.4 $ 3,281.9
Consumer loan vehicles . . . . . . . . . . . . . . . . . . . . . . . . 462.1 – 807.1 3,273.1
Related party private equity vehicles . . . . . . . . . . . . . 35.5 – 53.5 108.3
Other investment vehicles . . . . . . . . . . . . . . . . . . . . . . 203.6 – 214.7 5,719.1
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $746.4 $– $1,646.7 $12,382.4
__________ ______
__________ ______
__________ ______
_____________ _______________
_____________ _______________
_____________ _______________
December 31, 2017
CLOs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $168.1 $8.9 $1,030.4 $ 5,364.3
Consumer loan vehicles . . . . . . . . . . . . . . . . . . . . . . . . 254.8 – 759.8 2,322.7
Related party private equity vehicles . . . . . . . . . . . . . 23.7 – 45.4 75.0
Other investment vehicles . . . . . . . . . . . . . . . . . . . . . . 133.0 – 142.0 4,624.9
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $579.6 $8.9 $1,977.6 $12,386.9
__________ ______
__________ ______
__________ ______
_____________ _______________
_____________ _______________
_____________ _______________
Our maximum exposure to loss often differs from the carrying value of the variable interests. The maximum exposure
to loss is dependent on the nature of the variable interests in the VIEs and is limited to the notional amounts of certain
loan and equity commitments and guarantees. Our maximum exposure to loss does not include the offsetting benefit
of any financial instruments that may be utilized to hedge the risks associated with its variable interests and is not
reduced by the amount of collateral held as part of a transaction with a VIE.
Collateralized Loan Obligations. Assets collateralizing the CLOs include bank loans, participation interests and sub-
investment grade and senior secured U.S. loans. Jefferies Group underwrites securities issued in CLO transactions on
behalf of sponsors and provides advisory services to the sponsors. Jefferies Group may also sell corporate loans to the
CLOs. Jefferies Group’s variable interests in connection with CLOs where it has been involved in providing underwriting
and/or advisory services consist of the following:
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Notes to Consolidated Financial Statements, continued
Note 10. Variable Interest Entities, continued
• Forward sale agreements whereby Jefferies Group commits to sell, at a fixed price, corporate loans and
ownership interests in an entity holding such corporate loans to CLOs;
• Warehouse funding arrangements in the form of participation interests in corporate loans held by CLOs and
commitments to fund such participation interests;
• Trading positions in securities issued in a CLO transaction; and
•
Investments in variable funding notes issued by CLOs.
Consumer Loan Vehicles and Other Asset- Backed Vehicles. Jefferies Group provides financing and lending related
services to certain client- sponsored VIEs in the form of revolving funding note agreements, revolving credit facilities
and forward purchase agreements. The underlying assets, which are collateralizing the vehicles, are primarily composed
of unsecured consumer and small business loans and trust preferred securities. In addition, Jefferies Group may provide
structuring and advisory services and act as an underwriter or placement agent for securities issued by the
vehicles. Jefferies Group does not control the activities of these entities.
Related Party Private Equity Vehicles. Jefferies Group committed to invest equity in private equity funds (the “JCP
Funds”) managed by Jefferies Capital Partners, LLC (the “JCP Manager”). Additionally, Jefferies Group committed
to invest equity in the general partners of the JCP Funds (the “JCP General Partners”) and the JCP Manager. Jefferies
Group’s variable interests in the JCP Funds, JCP General Partners and JCP Manager (collectively, the “JCP Entities”)
consist of equity interests that, in total, provide Jefferies Group with limited and general partner investment returns of
the JCP Funds, a portion of the carried interest earned by the JCP General Partners and a portion of the management
fees earned by the JCP Manager. At November 30, 2018 and December 31, 2017, Jefferies Group’s total equity
commitment in the JCP Entities was $139.3 million and $148.1 million, respectively, of which $121.3 million and
$126.3 million had been funded, respectively. The carrying value of Jefferies Group’s equity investments in the JCP
Entities was $35.5 million and $23.7 million at November 30, 2018 and December 31, 2017, respectively. Jefferies
Group’s exposure to loss is limited to the total of its carrying value and unfunded equity commitment. The assets of
the JCP Entities primarily consist of private equity and equity related investments. For further information regarding
related party private equity vehicles, see Note 27.
Other Investment Vehicles. The carrying amount of our equity investment was $203.6 million and $133.0 million at
November 30, 2018 and December 31, 2017, respectively. Our unfunded equity commitment related to these investments
totaled $11.1 million and $9.1 million at November 30, 2018 and December 31, 2017, respectively. Our exposure to
loss is limited to the total of our carrying value and unfunded equity commitment. These investment vehicles have assets
primarily consisting of private and public equity investments, debt instruments and various oil and gas assets.
Mortgage- and Other Asset- Backed Securitization Vehicles. In connection with Jefferies Group’s secondary trading
and market- making activities, Jefferies Group buys and sells agency and non- agency mortgage- backed securities and
other asset- backed securities, which are issued by third- party securitization SPEs and are generally considered variable
interests in VIEs. Securities issued by securitization SPEs are backed by residential mortgage loans, U.S. agency
collateralized mortgage obligations, commercial mortgage loans, CDOs and CLOs and other consumer loans, such as
installment receivables, auto loans and student loans. These securities are accounted for at fair value and included in
Trading assets in our Consolidated Statements of Financial Condition. Jefferies Group has no other involvement with
the related SPEs and therefore does not consolidate these entities.
Jefferies Group also engages in underwriting, placement and structuring activities for third- party- sponsored
securitization trusts generally through agency (FNMA (“Fannie Mae”), Federal Home Loan Mortgage Corporation
(“Freddie Mac”) or GNMA (“Ginnie Mae”)) or non- agency- sponsored SPEs and may purchase loans or mortgage-
backed securities from third parties that are subsequently transferred into the securitization trusts. The securitizations
are backed by residential and commercial mortgage, home equity and auto loans. Jefferies Group does not consolidate
agency- sponsored securitizations as it does not have the power to direct the activities of the SPEs that most significantly
impact their economic performance. Further, Jefferies Group is not the servicer of non- agency- sponsored securitizations
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Notes to Consolidated Financial Statements, continued
Note 10. Variable Interest Entities, continued
and therefore does not have power to direct the most significant activities of the SPEs and accordingly, does not
consolidate these entities. Jefferies Group may retain unsold senior and/or subordinated interests at the time of
securitization in the form of securities issued by the SPEs.
At November 30, 2018 and December 31, 2017, Jefferies Group held $2,913.0 million and $1,829.6 million of agency
mortgage- backed securities, respectively, and $170.5 million and $253.2 million of non- agency mortgage- and other
asset- backed securities, respectively, as a result of its secondary trading and market- making activities, and underwriting,
placement and activities. Jefferies Group’s maximum exposure to loss on these securities is limited to the carrying value
of its investments in these securities. These mortgage- and other asset- backed securitization vehicles discussed are not
included in the above table containing information about Jefferies Group’s variable interests in nonconsolidated VIEs.
We also have a variable interest in a nonconsolidated VIE consisting of our equity interest in an associated company,
Golden Queen. In addition, we have a variable interest in a nonconsolidated VIE consisting of our senior secured term
loan receivable and equity interest in FXCM. See Notes 5 and 11 for further discussion.
Note 11. Loans to and Investments in Associated Companies
A summary of Loans to and investments in associated companies for the eleven months ended November 30, 2018
and the twelve months ended December 31, 2017 and 2016 accounted for under the equity method of accounting is as
follows (in thousands):
__________________ __________________ __________________ __________________ __________________
Loans to and Contributions Other, Loans to and
investments to including investments
in associated Income Income (losses) (distributions foreign in associated
companies (losses) related to from) exchange and companies
as of related to Jefferies Group associated unrealized as of
December 31, associated associated companies, gains November 30,
2017 companies companies (1) net (losses) 2018
__________________
Jefferies Finance . . . . . . $ 655,467 $ – $59,138 $ 13,955 $
– $ 728,560
National Beef (2) . . . . . – 110,049 – (48,656) 592,237 653,630
Berkadia (3) . . . . . . . . . 210,594 80,092 20,001 (65,197) (262) 245,228
FXCM (4) . . . . . . . . . . . 158,856 (83,174) – – (651) 75,031
Garcadia Companies (5) . 179,143 21,646 – (26,962) (173,827) –
Linkem . . . . . . . . . . . . . 192,136 (20,534) – 542 (6,987) 165,157
HomeFed . . . . . . . . . . . . 341,874 (4,332) – – – 337,542
Golden Queen (6) . . . . . 105,005 (51,990) – 10,941 – 63,956
54 Madison (7) . . . . . . . 123,010 11,288 – (47,224) – 87,074
Other . . . . . . . . . . . . . . . 100,744 (6,022) (5,477) (18,275) (9,816) 61,154
Total . . . . . . . . . . . . $2,066,829 $ 57,023 $73,662 $(180,876) $ 400,694 $2,417,332
_________________
_________________
_________________
_______________ ______________
_______________ ______________
_______________ ______________
________________
________________
________________
_______________ _________________
_______________ _________________
_______________ _________________
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Notes to Consolidated Financial Statements, continued
Note 11. Loans to and Investments in Associated Companies, continued
__________________ __________________ __________________ __________________ __________________ __________________
Loans to and Contributions Other, Loans to and
investments to including investments
in associated Income Income (losses) (distributions foreign in associated
companies (losses) related to from) exchange and companies
as of related to Jefferies Group associated unrealized as of
December 31, associated associated companies, gains December 31,
2016 companies companies (1) net (losses) 2017
Jefferies Finance . . . . . . $ 490,464 $
Jefferies LoanCore (8) . . 154,731 – 22,368 (3,994) (173,105) –
Berkadia . . . . . . . . . . . . 184,443 93,801 – (67,384) (266) 210,594
FXCM (4) . . . . . . . . . . . 336,258 (177,644) – – 242 158,856
Garcadia Companies . . . 185,815 48,198 – (54,870) – 179,143
Linkem . . . . . . . . . . . . . 154,000 (32,561) – 31,996 38,701 192,136
HomeFed . . . . . . . . . . . . 302,231 7,725 – 31,918 – 341,874
Golden Queen (6) . . . . . 111,302 (7,733) – 1,436 – 105,005
54 Madison (7) (9) . . . . 161,400 (6,224) – 35,204 (67,370) 123,010
Other . . . . . . . . . . . . . . . 44,454 (463) (3,177) 31,837 28,093 100,744
Total . . . . . . . . . . . . $2,125,098 $ (74,901) $109,395 $ 80,942 $(173,705) $2,066,829
_________________
_________________
_________________
______________ ________________
______________ ________________
______________ ________________
– $ 90,204 $ 74,799 $ – $ 655,467
_______________
_______________
_______________
_______________ _________________
_______________ _________________
_______________ _________________
__________________ __________________ __________________ __________________ __________________ __________________
Loans to and Contributions Other, Loans to and
investments to including investments
in associated Income Income (losses) (distributions foreign in associated
companies (losses) related to from) exchange and companies
as of related to Jefferies Group associated unrealized as of
December 31, associated associated companies, gains December 31,
2015 companies companies (1) net (losses) 2016
Jefferies Finance . . . . . . $ 528,575 $
– $(1,761) $ (36,350) $ – $ 490,464
Jefferies LoanCore . . . . 288,741 – 21,221 (155,231) – 154,731
Berkadia . . . . . . . . . . . . 190,986 94,201 – (100,766) 22 184,443
FXCM (4) . . . . . . . . . . . – 1,919 – – 334,339 336,258
Garcadia Companies . . . 172,660 52,266 – (39,111) – 185,815
Linkem . . . . . . . . . . . . . 150,149 (22,867) – 33,303 (6,585) 154,000
HomeFed . . . . . . . . . . . . 275,378 23,893 – 2,960 – 302,231
Golden Queen (6) . . . . . 114,323 (3,021) – – – 111,302
54 Madison (9) . . . . . . . – 4,255 – 153,503 3,642 161,400
Other . . . . . . . . . . . . . . . 36,557 3,952 (2,276) 9,622 (3,401) 44,454
Total . . . . . . . . . . . . $1,757,369 $154,598 $17,184 $(132,070) $328,017 $2,125,098
_________________
_________________
_________________
_____________ ________________
_____________ ________________
_____________ ________________
_______________ _
_______________ _
_______________ _
_______________ _________________
_______________ _________________
_______________ _________________
(1) Primarily classified in Investment banking revenues and Other revenues.
(2) As discussed more fully in Notes 1 and 28, in June 2018, we completed the sale of 48% of National Beef to
Marfrig, reducing our ownership in National Beef to 31%. As of the closing of the sale on June 5, 2018, we
deconsolidated our investment in National Beef and account for our remaining interest under the equity method
of accounting. The carrying value of our retained 31% interest was adjusted to a fair value of $592.3 million
on the date of sale.
(3) In the fourth quarter of 2018, we transferred our interest in Berkadia to Jefferies Group.
(4) As further described in Note 5, in 2016, we amended the terms of our loan and associated rights with FXCM.
Through the amendments, we converted our participation rights for a 50% voting interest in FXCM. Our investment
in FXCM includes both our equity method investment in FXCM and our term loan with FXCM. Our equity
method investment is included as Loans to and investments in associated companies and our term loan is included
as Trading assets, at fair value in our Consolidated Statements of Financial Condition.
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Notes to Consolidated Financial Statements, continued
Note 11. Loans to and Investments in Associated Companies, continued
(5) As more fully discussed in Note 1, during the third quarter of 2018, we sold 100% of our equity interests in
Garcadia and our associated real estate to our former partners, the Garff family.
(6) At November 30, 2018 and December 31, 2017 and 2016, the balance reflects $15.1 million, $30.5 million and
$32.8 million, respectively, related to a noncontrolling interest.
(7) On November 30, 2017, we sold our interest in the general partner of the 54 Madison fund and as a result no
longer control the 54 Madison investment committee. We retained two of the four seats on the investment
committee and continue to have significant influence over the fund. We therefore deconsolidated the 54 Madison
fund and account for our interest under the equity method of accounting.
(8) On October 31, 2017, Jefferies Group sold all of its membership interests in Jefferies LoanCore for approximately
$173.1 million.
(9) At December 31, 2016, the balance reflects $95.3 million related to noncontrolling interests.
Jefferies Finance
Through Jefferies Group, we own 50% of Jefferies Finance, our joint venture with Massachusetts Mutual Life Insurance
Company (“MassMutual”). Jefferies Finance is a commercial finance company whose primary focus is the origination
and syndication of senior secured debt to middle market and growth companies in the form of term and revolving
loans. Loans are originated primarily through the investment banking efforts of Jefferies Group. Jefferies Finance may
also originate other debt products such as second lien term, bridge and mezzanine loans, as well as related equity co-
investments. Jefferies Finance also purchases syndicated loans in the secondary market and acts as an investment
adviser for various loan funds.
At November 30, 2018, Jefferies Group and MassMutual each had equity commitments to Jefferies Finance of $750.0
million. At November 30, 2018, approximately $694.8 million of Jefferies Group’s commitment was funded. The
investment commitment is scheduled to expire on March 1, 2019 with automatic one year extensions absent a 60-day
termination notice by either party.
Jefferies Finance has executed a Secured Revolving Credit Facility with Jefferies Group and MassMutual, to be funded
equally, to support loan underwritings by Jefferies Finance, which bears interest based on the interest rates of the
related Jefferies Finance underwritten loans and is secured by the underlying loans funded by the proceeds of the
facility. The total Secured Revolving Credit Facility is a committed amount of $500.0 million at November 30, 2018
and December 31, 2017. Advances are shared equally between Jefferies Group and MassMutual. The facility is
scheduled to mature on March 1, 2019 with automatic one year extensions absent a 60-day termination notice by
either party. At November 30, 2018 and December 31, 2017, none of Jefferies Group’s $250.0 million commitment
was funded. Jefferies Group recognized interest income and unfunded commitment fees related to the facility of $2.4
million, $3.9 million and $1.3 million during the eleven months ended November 30, 2018 and the twelve months
ended December 31, 2017 and 2016, respectively.
Jefferies Group engages in debt capital markets transactions with Jefferies Finance related to the originations and
syndications of loans by Jefferies Finance. In connection with such services, Jefferies Group earned fees of $377.7
million, $327.9 million and $112.6 million during the eleven months ended November 30, 2018 and the twelve months
ended December 31, 2017 and 2016, respectively, which are recognized in Investment banking revenues in the
Consolidated Statements of Operations. In addition, Jefferies Group paid fees to Jefferies Finance in respect of certain
loans originated by Jefferies Finance of $56.6 million, $2.4 million and $0.5 million during the eleven months ended
November 30, 2018 and the twelve months ended December 31, 2017 and 2016, respectively, which are recognized
within Selling, general and other expenses in the Consolidated Statements of Operations.
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Notes to Consolidated Financial Statements, continued
Note 11. Loans to and Investments in Associated Companies, continued
During the eleven months ended November 30, 2018 and the twelve months ended December 31, 2017 and 2016,
Jefferies Group acted as a placement agent for CLOs managed by Jefferies Finance, for which Jefferies Group
recognized fees of $3.7 million, $6.1 million and $2.6 million, respectively, which are included in Investment banking
revenues in the Consolidated Statements of Operations. At November 30, 2018 and December 31, 2017, Jefferies
Group held securities issued by CLOs managed by Jefferies Finance, which are included in Trading assets. Additionally,
Jefferies Group has entered into participation agreements and derivative contracts with Jefferies Finance based upon
certain securities issued by the CLO. Gains (losses) related to the derivative contracts were not material.
Under a service agreement, Jefferies Group charged Jefferies Finance $61.7 million, $50.7 million and $46.1 million
for services provided during the eleven months ended November 30, 2018 and the twelve months ended December 31,
2017 and 2016, respectively. At November 30, 2018, Jefferies Group had a receivable from Jefferies Finance, included
within Other assets in the Consolidated Statement of Financial Condition of $35.2 million and a payable to Jefferies
Finance, included in Payables, expense accruals and other liabilities in the Consolidated Statement of Financial
Condition of $14.1 million. At December 31, 2017, Jefferies Group had a receivable from Jefferies Finance, included
within Other assets in the Consolidated Statement of Financial Condition of $34.6 million and a payable to Jefferies
Finance, included in Payables, expense accruals and other liabilities in the Consolidated Statement of Financial
Condition of $14.1 million.
Jefferies Group enters into OTC foreign exchange contracts with Jefferies Finance. In connection with these contracts
Jefferies Group had $0.2 million recorded in Payables, expense accruals and other liabilities and $0.4 million recorded
in Trading liabilities in our Consolidated Statement of Financial Condition at November 30, 2018 and $1.5 million
included in Trading assets in our Consolidated Statement of Financial Condition at December 31, 2017.
Jefferies LoanCore
Jefferies LoanCore, LLC (“Jefferies LoanCore”), a commercial real estate finance company and was a joint venture
with the Government of Singapore Investment Corporation, the Canada Pension Plan Investment Board and LoanCore,
LLC, originates and purchases commercial real estate loans throughout the U.S. and Europe. On October 31, 2017,
Jefferies Group sold all of its membership interests (which constituted a 48.5% voting interest) in Jefferies LoanCore
for approximately $173.1 million, the estimated book value as of October 31, 2017. In addition, Jefferies Group may
be entitled to additional cash consideration over the next four years in the event Jefferies LoanCore’s yearly return on
equity exceeds certain thresholds.
Jefferies LoanCore had entered into master repurchase agreements with Jefferies Group. During the twelve months
ended December 31, 2017 and 2016, Jefferies Group recognized interest income and fees related to these agreements
of $0.6 million and $8.4 million, respectively.
National Beef
National Beef processes and markets fresh and chilled boxed beef, ground beef, beef by- products, consumer- ready
beef and pork, and wet blue leather for domestic and international markets. As discussed in Notes 1 and 28, on June 5,
2018, we completed the sale of 48% of National Beef to Marfrig, reducing our ownership in National Beef to 31%. As
of the closing of the sale on June 5, 2018, we deconsolidated our investment in National Beef and account for our
remaining interest under the equity method of accounting.
As required as a result of the deconsolidation of National Beef, we adjusted the carrying value of our retained 31%
interest in National Beef to fair value. The fair value of our retained 31% interest in National Beef of $592.3 million
was based on the implied equity value of 100% of National Beef from the transaction with Marfrig. The transaction
with Marfrig was based on a $1.9 billion equity valuation and a $2.3 billion enterprise valuation for 100% of National
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Notes to Consolidated Financial Statements, continued
Note 11. Loans to and Investments in Associated Companies, continued
Beef. The fair value was allocated to the tangible and intangible assets of National Beef and a number of assets including
customer relationships, tradenames, cattle supply contracts and property, plant and equipment had fair values higher
than book values. As we recognize our share of National Beef’s income going forward, the difference between the
estimated fair value and the underlying book value of National Beef’s customer relationships, tradenames, cattle supply
contracts and property, plant and equipment will be amortized over their respective useful lives (weighted average life
of 15 years).
Berkadia
Berkadia is a commercial mortgage banking and servicing joint venture formed in 2009 with Berkshire Hathaway Inc.
We and Berkshire Hathaway each contributed $217.2 million of equity capital to the joint venture and each have a 50%
membership interest in Berkadia. We are entitled to receive 45% of the profits. Berkadia originates
commercial/multifamily real estate loans that are sold to U.S. government agencies, and originates and brokers
commercial/multifamily mortgage loans which are not part of government agency programs. Berkadia is an investment
sales adviser focused on the multifamily industry. Berkadia is a servicer of commercial real estate loans in the U.S.,
performing primary, master and special servicing functions for U.S. government agency programs, commercial
mortgage- backed securities transactions, banks, insurance companies and other financial institutions.
Berkadia uses all of the proceeds from the commercial paper sales of an affiliate of Berkadia to fund new mortgage
loans, servicer advances, investments and other working capital requirements. Repayment of the commercial paper is
supported by a $1.5 billion surety policy issued by a Berkshire Hathaway insurance subsidiary and corporate guaranty,
and we have agreed to reimburse Berkshire Hathaway for one- half of any losses incurred thereunder. As of
November 30, 2018, the aggregate amount of commercial paper outstanding was $1.47 billion.
FXCM
As discussed more fully in Note 5, at November 30, 2018, Jefferies has a 50% voting interest in FXCM and a senior
secured term loan to FXCM due in the first quarter of 2019. On September 1, 2016, we gained the ability to significantly
influence FXCM through our seats on the board of directors. As a result, we classify our equity investment in FXCM
in our Consolidated Statements of Financial Condition as Loans to and investments in associated companies. Our term
loan remains classified within Trading assets, at fair value. We account for our equity interest in FXCM on a one month
lag. We are amortizing our basis difference between the estimated fair value and the underlying book value of FXCM
customer relationships, technology, trade name, leases and long- term debt over their respective useful lives.
During February 2017, Global Brokerage Holdings and FXCM’s U.S. subsidiary, Forex Capital Markets LLC (“FXCM
U.S.”) settled complaints filed by the National Futures Association and the Commodity Futures Trading Commission
(“CFTC”) against FXCM U.S. and certain of its principals relating to matters that occurred between 2010 and 2014.
As part of the settlements, FXCM U.S. withdrew from business and sold FXCM U.S.’s customer accounts. Based on
the above actions, we evaluated in the first quarter of 2017 whether our equity method investment was fully recoverable.
We engaged an independent valuation firm to assist management in estimating the fair value of FXCM. Our estimate
of fair value was based on a discounted cash flow and comparable public company analysis. The result of our analysis
indicated that the estimated fair value of our equity interest in FXCM was lower than our carrying value by $130.2
million. We concluded based on the regulatory actions, FXCM’s restructuring plan, investor perception and declines
in the trading price of Global Brokerage’s common shares and convertible debt, that the decline in fair value of our
equity interest was other than temporary. As such, we impaired our equity investment in FXCM in the first quarter of
2017 by $130.2 million, which was recorded in Income (loss) related to associated companies.
During the fourth quarter of 2018, we recorded an additional impairment charge of $62.1 million related to the equity
component of our investment in FXCM, which is based on updated expectations that have been impacted by the recently
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Notes to Consolidated Financial Statements, continued
Note 11. Loans to and Investments in Associated Companies, continued
revised regulations of the European Securities Market Authority and dampened operating results. Based on the updated
projections, we evaluated in the fourth quarter of 2018 whether our equity method investment was fully recoverable.
We engaged an independent valuation firm to assist management in estimating the fair value of FXCM. Our estimate
of fair value was based on a discounted cash flow analysis. The result of our analysis indicated that the estimated fair
value of our equity interest in FXCM was lower than our carrying value by $62.1 million. We concluded that based on
the decline in projections and the adverse effects of the European regulations, that the decline in fair value of our equity
interest was other than temporary. As a result, we impaired our equity investment in FXCM in the fourth quarter of
2018 by $62.1 million, which was recorded in Income (loss) related to associated companies.
FXCM is considered a VIE and our term loan and equity interest are variable interests. We have determined that we
are not the primary beneficiary of FXCM because we do not have the power to direct the activities that most
significantly impact FXCM’s performance. Therefore, we do not consolidate FXCM.
Garcadia
Garcadia was a joint venture between us and Garff Enterprises, Inc. (“Garff ”) that owned and operated 28 automobile
dealerships comprised of domestic and foreign automobile makers. The Garcadia joint venture agreement specified
that we and Garff had equal board representation and equal votes on all matters affecting Garcadia, and that all operating
cash flows from Garcadia would be allocated 65% to us and 35% to Garff, with the exception of one dealership from
which we received 83% of all operating cash flows and four other dealerships from which we received 71% of all
operating cash flows. Garcadia’s strategy was to acquire automobile dealerships in primary or secondary market
locations meeting its specified return criteria.
In the third quarter of 2018, we sold 100% of our equity interests in Garcadia and our associated real estate to our
former partners, the Garff family, for $417.2 million in cash. The pre- tax gain recognized as a result of this transaction,
$221.7 million for the eleven months ended November 30, 2018, is classified as Other revenue.
Linkem
We own approximately 42% of the common shares of Linkem, a fast- growing fixed wireless broadband services
provider in Italy. In addition, we own convertible preferred stock, which is automatically convertible to common shares
in 2022. If all of our convertible preferred stock was converted, it would increase our ownership to approximately 54%
of Linkem’s common equity at November 30, 2018. We have approximately 48% of the total voting securities of
Linkem. We account for our equity interest in Linkem on a two month lag.
HomeFed
At November 30, 2018, we own 10,852,123 shares of HomeFed’s common stock, representing approximately 70% of
HomeFed’s outstanding common shares; however, we have contractually agreed to limit our voting rights such that we
will not be able to vote more than 45% of HomeFed’s total voting securities voting on any matter, assuming all HomeFed
shares not owned by us are voted. HomeFed develops and owns residential and mixed- use real estate properties. We
account for our equity interest in HomeFed on a two month lag. HomeFed is a public company traded on the NASD
OTC Bulletin Board (Symbol: HOFD). As a result of a 1998 distribution to all of our shareholders, approximately 5%
of HomeFed is beneficially owned by our Chairman at November 30, 2018. Three of our executives serve on the board
of directors of HomeFed, including our Chairman who serves as HomeFed’s Chairman, and our President. Since we
do not control HomeFed, our investment in HomeFed is accounted for under the equity method as an investment in an
associated company.
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Notes to Consolidated Financial Statements, continued
Note 11. Loans to and Investments in Associated Companies, continued
Golden Queen Mining Company
Since 2014, we invested $93.0 million, net in cash in a limited liability company (Gauss LLC) to partner with the Clay
family and Golden Queen Mining Co. Ltd., to jointly fund, develop and operate the Soledad Mountain gold and silver
mine project. Previously 100% owned by Golden Queen Mining Co. Ltd., the project is a fully- permitted, open pit,
heap leach gold and silver project located in Kern County, California, which commenced gold and silver production
in March 2016. In exchange for a noncontrolling ownership interest in Gauss LLC, the Clay family contributed $34.5
million, net in cash. Gauss LLC invested both our and the Clay family’s net contributions totaling $127.5 million to
the joint venture, Golden Queen, in exchange for a 50% ownership interest. Golden Queen Mining Co. Ltd. contributed
the Soledad Mountain project to the joint venture in exchange for the other 50% interest. We account for our interest
in Golden Queen on a two month lag.
As a result of our consolidating Gauss LLC, our Loans to and investments in associated companies reflects Gauss
LLC’s net investment of $127.5 million in the joint venture, which includes both the amount we contributed and the
amount contributed by the Clay family. The joint venture, Golden Queen, is considered a VIE and we have determined
that we are not the primary beneficiary of the joint venture and are therefore not consolidating its results. Our maximum
exposure to loss as a result of our involvement with the joint venture is limited to our investment.
In the third quarter of 2018, Golden Queen completed an updated mine plan and financial projections reflecting lower
grades of gold as well as a decrease in the market price of gold. As a result of lower projected cash flows, we engaged
an independent valuation firm to assist management in estimating the fair value of our equity investment in Golden
Queen. Our estimate of fair value was based on a discounted cash flow analysis. The result of our analysis indicated
that the estimated fair value of our equity interest in Golden Queen was lower than our prior carrying value by $47.9
million. We concluded based on lower projected cash flows and a decline in the market price of gold that the decline
in fair value of our equity interest was other than temporary. As such, an impairment charge of $47.9 million was
recorded in Income (loss) related to associated companies in the eleven months ended November 30, 2018.
54 Madison
We own approximately 48.1% of 54 Madison, a fund that seeks long- term capital appreciation through investment in
real estate development and similar projects. Prior to November 30, 2017, we consolidated 54 Madison as a result of
our control of the 54 Madison investment committee. 54 Madison invests both in projects which they consolidate and
projects where they have significant influence and utilize the equity method of accounting. Based on total committed
capital of the 54 Madison fund, all projects of this fund have already been identified and launched. On November 30,
2017, we sold our interest in the general partner of the 54 Madison fund and as a result no longer control the 54 Madison
investment committee. We retained two of the four seats on the 54 Madison investment committee and continue to
have significant influence over the fund, including a number of protective rights such as the right to block material
investments, divestitures and changes outside of agreed upon parameters. We therefore deconsolidated the 54 Madison
fund on November 30, 2017 and account for our interest under the equity method of accounting. We account for our
equity interest in 54 Madison on a two month lag.
Other
The following table provides summarized data for associated companies as of November 30, 2018 and December 31,
2017 and for the eleven months ended November 30, 2018 and the twelve months ended December 31, 2017 and 2016
(in thousands):
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Notes to Consolidated Financial Statements, continued
Note 11. Loans to and Investments in Associated Companies, continued
November 30, December 31,
2018 2017
______________________ ______________________
Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $17,050,564 $16,340,643
Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,752,273 11,920,465
Noncontrolling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154,963 169,274
Eleven Months Twelve Months Twelve Months
Ended Ended Ended
November 30, December 31, December 31,
2018 2017 2016
______________________ ______________________ ______________________
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $7,694,612 $4,883,063 $4,275,016
Income from continuing operations before extraordinary items . . . . . . . 852,649 503,489 422,167
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 798,615 438,881 430,291
The Company’s income related to associated companies . . . . . . . . . . 130,685 34,494 171,782
Except for our investment in Berkadia and Jefferies Finance, we have not provided any guarantees, nor are we
contingently liable for any of the liabilities reflected in the above table. All such liabilities are non- recourse to us. Our
exposure to adverse events at the investee companies is limited to the book value of our investment. See Note 24 for
further discussion of these guarantees.
Included in consolidated retained earnings at November 30, 2018 is approximately $252.9 million of undistributed
earnings of the associated companies accounted for under the equity method of accounting.
Note 12. Financial Statement Offsetting
In connection with Jefferies Group’s derivative activities and securities financing activities, Jefferies Group may enter
into master netting agreements and collateral arrangements with counterparties. Generally, transactions are executed
under standard industry agreements, including, but not limited to: derivative transactions – ISDA master netting
agreements; master securities lending agreements (securities lending transactions); and master repurchase agreements
(repurchase transactions). See Note 2 for additional information on financial statement offsetting.
The following table provides information regarding derivative contracts, repurchase agreements and securities
borrowing and lending arrangements that are recognized in the Consolidated Statements of Financial Condition and
(1) the extent to which, under enforceable master netting arrangements, such balances are presented net in the
Consolidated Statements of Financial Condition as appropriate under GAAP and (2) the extent to which other rights
of setoff associated with these arrangements exist and could have an effect on our consolidated financial position.
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Notes to Consolidated Financial Statements, continued
Note 12. Financial Statement Offsetting, continued
Netting in Net Amounts in
Consolidated Consolidated Additional
Statement of Statement of Amounts
Gross Financial Financial Available Available
(In thousands) Amounts Condition Condition for Setoff (1) Collateral (2) Net Amount (3)
__________________ ____________ ___________________ ________________ ________________ _________________ ____________________
Assets at November 30, 2018
Derivative contracts . . . . . . . . . . . . . . . . $ 2,580,706 $ (2,413,931) $ 166,775 $ – $ – $ 166,775
Securities borrowing arrangements . . . 6,538,212 – 6,538,212 (468,778) (1,193,986) 4,875,448
Reverse repurchase agreements . . . . . . 11,336,175 (8,550,417) 2,785,758 (609,225) (2,126,730) 49,803
Liabilities at November 30, 2018
Derivative contracts . . . . . . . . . . . . . . . . $ 3,640,703 $ (2,513,050) $1,127,653 $ – $ – $1,127,653
Securities lending arrangements . . . . . . 1,838,688 – 1,838,688 (468,778) (1,343,704) 26,206
Repurchase agreements . . . . . . . . . . . . . 17,193,486 (8,550,417) 8,643,069 (609,225) (7,070,967) 962,877
Assets at December 31, 2017
Derivative contracts . . . . . . . . . . . . . . . . $ 3,497,969 $ (3,318,481) $ 179,488 $ – $ – $ 179,488
Securities borrowing arrangements . . . 7,721,803 – 7,721,803 (966,712) (1,032,629) 5,722,462
Reverse repurchase agreements . . . . . . 14,858,297 (11,168,738) 3,689,559 (463,973) (3,207,147) 18,439
Liabilities at December 31, 2017
Derivative contracts . . . . . . . . . . . . . . . . $ 3,745,908 $ (3,490,514) $ 255,394 $ – $ – $ 255,394
Securities lending arrangements . . . . . . 2,843,911 – 2,843,911 (966,712) (1,795,408) 81,791
Repurchase agreements . . . . . . . . . . . . . 19,829,249 (11,168,738) 8,660,511 (463,973) (7,067,512) 1,129,026
(1) Under master netting agreements with our counterparties, we have the legal right of offset with a counterparty,
which incorporates all of the counterparty’s outstanding rights and obligations under the arrangement. These
balances reflect additional credit risk mitigation that is available by a counterparty in the event of a counterparty’s
default, but which are not netted in the balance sheet because other netting provisions of GAAP are not
met. Further, for derivative assets and liabilities, amounts netted include cash collateral paid or received.
(2) Includes securities received or paid under collateral arrangements with counterparties that could be liquidated in
the event of a counterparty default and thus offset against a counterparty’s rights and obligations under the
respective repurchase agreements or securities borrowing or lending arrangements.
(3) At November 30, 2018, amounts include $4,825.7 million of securities borrowing arrangements, for which we
have received securities collateral of $4,711.7 million, and $931.7 million of repurchase agreements, for which
we have pledged securities collateral of $963.6 million, which are subject to master netting agreements but we
have not determined the agreements to be legally enforceable. At December 31, 2017, amounts include $5,678.6
million of securities borrowing arrangements, for which we have received securities collateral of $5,516.7 million,
and $1,084.4 million of repurchase agreements, for which we have pledged securities collateral of $1,115.9 million,
which are subject to master netting agreements but we have not determined the agreements to be legally
enforceable.
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Notes to Consolidated Financial Statements, continued
Note 13. Intangible Assets, Net and Goodwill
A summary of intangible assets, net and goodwill is as follows (in thousands):
November 30, December 31,
2018 2017
__________________ __________________
Indefinite lived intangibles:
Exchange and clearing organization membership interests and registrations . . . . . . $ 8,524 $ 8,551
Amortizable intangibles:
Customer and other relationships, net of accumulated amortization of
$102,579 and $230,074 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67,894 347,767
Trademarks and tradename, net of accumulated amortization of $21,086
and $95,627 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107,262 293,851
Supply contracts, net of accumulated amortization of $0 and $57,440 . . . . . . . . – 86,160
Other, net of accumulated amortization of $4,339 and $3,885 . . . . . . . . . . . . . . . 4,611 4,701
_________________ _________________
Total intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188,291 741,030
_________________ _________________
Goodwill:
National Beef . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . – 14,991
Jefferies Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,698,381 1,703,300
Other operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,459 3,859
_________________ _________________
Total goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,701,840 1,722,150
_________________ _________________
Total intangible assets, net and goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,890,131 $2,463,180
_________________ _________________
_________________ _________________
As further discussed in Notes 1 and 28, on June 5, 2018, we sold 48% of National Beef to Marfrig. Upon closing of
the transaction with Marfrig, we deconsolidated our investment in National Beef, including its Intangible assets, net
and goodwill. Intangible assets, net and goodwill at December 31, 2017 included $539.6 million of intangibles and
$15.0 million of goodwill related to National Beef.
Amortization expense on intangible assets included in Income (loss) from continuing operations was $13.2 million,
$12.9 million and $18.2 million for the eleven months ended November 30, 2018 and the twelve months ended
December 31, 2017 and 2016, respectively.
The estimated aggregate future amortization expense for the intangible assets for each of the next five years is as
follows (in thousands):
2019. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $13,439
2020. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,439
2021. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,085
2022. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,110
2023. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,981
Goodwill Impairment Testing
The quantitative goodwill impairment test is performed at our reporting unit level and consists of two steps. In the first
step, the fair value of the reporting unit is compared with its carrying value, including goodwill and allocated intangible
assets. If the fair value is in excess of the carrying value, the goodwill for the reporting unit is considered not to be
impaired. If the fair value is less than the carrying value, then a second step is performed in order to measure the
amount of the impairment loss, if any, which is based on comparing the implied fair value of the reporting unit’s
goodwill to the carrying value of the reporting unit’s goodwill.
The estimated fair values are based on valuation techniques that we believe market participants would use, although
the valuation process requires significant judgment and often involves the use of significant estimates and assumptions.
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Notes to Consolidated Financial Statements, continued
Note 13. Intangible Assets, Net and Goodwill, continued
The methodologies we utilize in estimating fair value include price- to- earnings and price- to- book multiples of
comparable public companies, multiples of mergers and acquisitions of similar businesses, projected cash flows and/or
market capitalization. In addition, as the fair values determined under the market approach represent a noncontrolling
interest, we applied a control premium to arrive at the estimated fair value of our reporting units on a controlling basis.
An independent valuation specialist was engaged to assist with the valuation process for Jefferies Group at August 1,
2018. The results of our annual impairment test for Jefferies Group did not indicate any goodwill impairment.
Note 14. Short- Term Borrowings
Jefferies Group’s short- term borrowings, which mature in one year or less, are as follows (in thousands):
November 30, December 31,
2018 2017
_______________________ _______________________
Bank loans (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $330,942 $304,651
Floating rate puttable notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56,550 108,240
Equity- linked notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . – 23,324
Total short- term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $387,492 $436,215
______________ ______________
______________ ______________
______________ ______________
(1) Bank loans include loans entered into, pursuant to a Master Loan Agreement, between the Bank of New York
Mellon and Jefferies Group.
At November 30, 2018 and December 31, 2017, the weighted average interest rate on short- term borrowings outstanding
was 3.08% and 2.51% per annum, respectively.
During the eleven months ended November 30, 2018, Jefferies Group’s floating rate puttable notes with principal
amounts of €41.0 million and Jefferies Group’s equity- linked notes with a principal amount of $23.3 million matured.
See Note 5 for further information.
The Bank of New York Mellon has agreed to make revolving intraday credit advances (“Intraday Credit Facility”) for
an aggregate committed amount of $150.0 million. The Intraday Credit Facility contains financial covenants, which
include a minimum regulatory net capital requirement for Jefferies Group. Interest is based on the higher of the Federal
funds effective rate plus 0.5% or the prime rate. At November 30, 2018, Jefferies Group was in compliance with debt
covenants under the Intraday Credit Facility.
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Notes to Consolidated Financial Statements, continued
Note 15. Long-Term Debt
The principal amount (net of unamortized discounts, premiums and debt issuance costs), stated interest rate and maturity
date of outstanding debt are as follows (dollars in thousands):
November 30, December 31,
2018 2017
__________________ _________________
Parent Company Debt:
Senior Notes:
5.50% Senior Notes due October 18, 2023, $750,000 principal . . . . . . . . . . . $ 743,397 $ 742,348
6.625% Senior Notes due October 23, 2043, $250,000 principal . . . . . . . . . . 246,719 246,673
_________________ _________________
Total long- term debt – Parent Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 990,116 989,021
_________________ _________________
Subsidiary Debt (non- recourse to Parent Company):
Jefferies Group:
5.125% Senior Notes, due April 13, 2018, $0 and $678,300 principal . . . . . . – 682,338
8.5% Senior Notes, due July 15, 2019, $680,800 principal . . . . . . . . . . . . . . . 699,659 728,872
2.375% Euro Medium Term Notes, due May 20, 2020, $565,500 and
$594,725 principal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 564,702 593,334
6.875% Senior Notes, due April 15, 2021, $750,000 principal . . . . . . . . . . . . 791,814 808,157
2.25% Euro Medium Term Notes, due July 13, 2022, $4,524 and
$4,758 principal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,243 4,389
5.125% Senior Notes, due January 20, 2023, $600,000 principal . . . . . . . . . . 612,928 615,703
4.85% Senior Notes, due January 15, 2027, $750,000 principal (1) . . . . . . . . 709,484 736,357
6.45% Senior Debentures, due June 8, 2027, $350,000 principal . . . . . . . . . . 373,669 375,794
3.875% Convertible Senior Debentures, due November 1, 2029, $0
and $324,779 principal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . – 324,779
4.15% Senior Notes, due January 23, 2030, $1,000,000 and $0 principal . . . . . 987,788 –
6.25% Senior Debentures, due January 15, 2036, $500,000 principal . . . . . . 511,662 512,040
6.50% Senior Notes, due January 20, 2043, $400,000 principal . . . . . . . . . . . 420,625 420,990
Structured Notes (2) (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 686,170 614,091
Jefferies Group Revolving Credit Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183,539 –
National Beef Reducing Revolver Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . – 120,000
National Beef Revolving Credit Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . – 76,809
Foursight Capital Credit Facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . – 170,455
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81,164 112,654
_________________ _________________
Total long- term debt – subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,627,447 6,896,762
_________________ _________________
Long- term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $7,617,563 $7,885,783
_________________ _________________
_________________ _________________
(1) Amounts include gains of $27.4 million and $8.1 million during the eleven months ended November 30, 2018
and twelve months ended December 31, 2017, respectively, associated with an interest rate swap based on its
designation as a fair value hedge. See Notes 2 and 5 for further information.
(2) Includes $686.2 million and $607.0 million at fair value at November 30, 2018 and December 31, 2017,
respectively. These structured notes contain various interest rate payment terms and are accounted for at fair
value, with changes in fair value resulting from a change in the instrument specific credit risk presented in
Accumulated other comprehensive income and changes in fair value resulting from non- credit components
recognized in Principal transactions revenues.
(3) Of the $686.2 million of structured notes at November 30, 2018, $5.7 million matures in 2019, $27.3 million
matures in 2022 and the remaining $653.2 million matures in 2024 or thereafter.
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Notes to Consolidated Financial Statements, continued
Note 15. Long-Term Debt, continued
At November 30, 2018, $840.1 million of consolidated assets (primarily other assets) are pledged for indebtedness
aggregating $261.3 million.
The aggregate annual mandatory redemptions of all long- term debt during the five year period ending November 30,
2023 are as follows (in millions):
2019. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 690.2
2020. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 565.5
2021. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 935.0
2022. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32.5
2023. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,429.0
Parent Company Debt
Our senior note indentures contain covenants that restrict our ability to incur more Indebtedness or issue Preferred
Stock of Subsidiaries unless, at the time of such incurrence or issuance, the Company meets a specified ratio of
Consolidated Debt to Consolidated Tangible Net Worth, limit the ability of the Company and Material Subsidiaries to
incur, in certain circumstances, Liens, limit the ability of Material Subsidiaries to incur Funded Debt in certain
circumstances, and contain other terms and restrictions all as defined in the senior note indentures. We have the ability
to incur substantial additional indebtedness or make distributions to our shareholders and still remain in compliance
with these restrictions. If we are unable to meet the specified ratio, we would not be able to issue additional Indebtedness
or Preferred Stock, but our inability to meet the applicable ratio would not result in a default under our senior note
indentures. The senior note indentures do not restrict the payment of dividends.
Subsidiary Debt
In November 2017, all of Jefferies Group’s 3.875% Convertible Senior Debentures due 2029 were called for redemption,
with a redemption date of January 5, 2018, at a redemption price equal to 100% of the principal amount of the
convertible debentures redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. All of these
remaining convertible debentures were redeemed in January 2018. In addition, Jefferies Group’s 5.125% Senior Notes
with a principal of $668.3 million were redeemed in April 2018.
In January 2018, Jefferies Group issued 4.15% Senior Notes with a principal amount of $1.0 billion, due 2030.
Additionally, structured notes with a total principal amount of approximately $173.2 million, net of retirements were
issued during the eleven months ended November 30, 2018.
During 2018, Jefferies Group entered into a senior secured revolving credit facility (“Jefferies Group Revolving Credit
Facility”) with a group of commercial banks for an aggregate principal amount of $185.0 million. Jefferies Group
Revolving Credit Facility contains certain financial covenants, including, but not limited to, restrictions on future
indebtedness of certain of its subsidiaries and its’ minimum tangible net worth, liquidity requirements and minimum
capital requirements. Interest is based on an annual alternative base rate or an adjusted London Interbank Offered Rate
(“LIBOR”), as defined in Jefferies Group Revolving Credit Facility agreement. The obligations of certain of Jefferies
Group’s subsidiaries under Jefferies Group Revolving Credit Facility are secured by substantially all its assets. At
November 30, 2018, Jefferies Group was in compliance with debt covenants under the Jefferies Group Revolving
Credit Facility.
As further discussed in Notes 1 and 28, on June 5, 2018, we sold 48% of National Beef to Marfrig. Upon closing of
the transaction with Marfrig, we deconsolidated our investment in National Beef, including its long- term debt. Long-
term debt at December 31, 2017 included $199.2 million related to National Beef.
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Notes to Consolidated Financial Statements, continued
Note 15. Long-Term Debt, continued
At November 30, 2018, Foursight Capital’s credit facilities consisted of two warehouse credit commitments aggregating
$225.0 million, which mature in March 2020 and July 2020. The March 2020 credit facility bears interest based on the
three- month LIBOR plus a credit spread fixed through its maturity and the July 2020 credit facility bears interest based
on the one- month LIBOR plus a credit spread fixed through its maturity. As a condition of the March 2020 credit
facility, Foursight Capital is obligated to maintain cash reserves in an amount equal to the quoted price of an interest
rate cap sufficient to meet the hedging requirements of the credit commitment. The credit facilities are secured by first
priority liens on auto loan receivables owed to Foursight Capital.
Note 16. Mezzanine Equity
Redeemable Noncontrolling Interests
At December 31, 2017, the redeemable noncontrolling interests primarily relate to National Beef and were held by its
minority owners, USPB, NBPCo Holdings and the chief executive officer of National Beef. The holders of these
interests shared in the profits and losses of National Beef on a pro rata basis with us. As discussed in Notes 1 and 28,
we deconsolidated National Beef as a result of the 48% sale to Marfrig on June 5, 2018. Immediately prior to the
deconsolidation, the cumulative increase in fair value of $237.7 million recorded to the redeemable noncontrolling
interest since the initial acquisition of National Beef was reversed through Additional paid- in capital in the Consolidated
Statement of Financial Condition.
Redeemable noncontrolling interests in National Beef are reflected in the Consolidated Statements of Financial
Condition at fair value. The following table shows the activity within redeemable noncontrolling interests related to
National Beef (in thousands):
Eleven Months Twelve Months
Ended Ended
November 30, December 31,
2018 2017
_______________________ _______________________
Balance, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 412,128 $321,962
Income allocated to redeemable noncontrolling interests . . . . . . . . . . . . . . . . . 37,141 85,277
Distributions to redeemable noncontrolling interests . . . . . . . . . . . . . . . . . . . . . (70,681) (90,048)
Increase in fair value of redeemable noncontrolling interests charged to
additional paid- in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,404 94,937
Reversal of cumulative National Beef redeemable noncontrolling
interests fair value adjustment prior to deconsolidation . . . . . . . . . . . . . . . . . (237,669) –
Deconsolidation of National Beef . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (162,323) –
Balance, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
_______________ ______________
– $412,128
_______________ ______________
_______________ ______________
At November 30, 2018 and December 31, 2017, redeemable noncontrolling interests also includes other redeemable
noncontrolling interests of $19.8 million and $14.5 million, respectively, primarily related to our oil and gas exploration
and development businesses. We estimated the fair value of Vitesse Energy Finance based on a discounted cash flow
analysis, market comparable method and market transaction method.
Mandatorily Redeemable Convertible Preferred Shares
In connection with our acquisition of Jefferies Group in March 2013, we issued a new series of 3.25% Cumulative
Convertible Preferred Shares (“Preferred Shares”) ($125.0 million at mandatory redemption value) in exchange for
Jefferies Group’s outstanding 3.25% Series A-1 Cumulative Convertible Preferred Stock. The Preferred Shares have a
3.25% annual, cumulative cash dividend and are currently convertible into 4,162,200 common shares, an effective
conversion price of $30.03 per share. The holders of the Preferred Shares are also entitled to an additional quarterly
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Notes to Consolidated Financial Statements, continued
Note 16. Mezzanine Equity, continued
payment in the event we declare and pay a dividend on our common stock in an amount greater than $0.0625 per
common share per quarter. The additional quarterly payment would be paid to the holders of Preferred Shares on an
as converted basis and on a per share basis would equal the quarterly dividend declared and paid to a holder of a share
of common stock in excess of $0.0625 per share. In the third quarter of 2017, we increased our quarterly dividend
from $0.0625 to $0.10 per common share. In the third quarter of 2018, we increased our quarterly dividend from $0.10
to $0.125 per common share. These increased the preferred stock dividend from $4.4 million for the twelve months
ended December 31, 2017 to $4.5 million for the eleven months ended November 30, 2018. The Preferred Shares are
callable beginning in 2023 at a price of $1,000 per share plus accrued interest and are mandatorily redeemable in 2038.
Note 17. Compensation Plans
Incentive Plan
Upon completion of our combination with Jefferies Group, we assumed its 2003 Incentive Compensation Plan, as
Amended and Restated July 25, 2013 (the “Incentive Plan”). The Incentive Plan allows awards in the form of incentive
stock options (within the meaning of Section 422 of the Internal Revenue Code), nonqualified stock options, stock
appreciation rights, restricted stock, unrestricted stock, performance awards, RSUs, dividend equivalents or other share-
based awards.
RSUs give a participant the right to receive fully vested shares at the end of a specified deferral period allowing a
participant to hold an interest tied to common stock on a tax deferred basis. Prior to settlement, RSUs carry no voting
or dividend rights associated with the stock ownership, but dividend equivalents are accrued to the extent there are
dividends declared on the underlying common shares as cash amounts or as deemed reinvestments in additional RSUs.
Restricted stock and RSUs may be granted to new employees as “sign- on” awards, to existing employees as “retention”
awards and to certain executive officers as awards for multiple years. Sign- on and retention awards are generally subject
to annual ratable vesting over a four- year service period and are amortized as compensation expense on a straight- line
basis over the related four years. Restricted stock and RSUs are granted to certain senior executives with market,
performance and service conditions. Market conditions are incorporated into the grant- date fair value of senior executive
awards using a Monte Carlo valuation model. Compensation expense for awards with market conditions is recognized
over the service period and is not reversed if the market condition is not met. Awards with performance conditions are
amortized over the service period if it is determined that it is probable that the performance condition will be achieved.
The Deferred Compensation Plan (the “DCP”) has been implemented under the Incentive Plan. The DCP permits
eligible executive officers and other employees to defer cash compensation, some or all of which may be deemed
invested in stock units. A portion of the deferrals may also be directed to notional investments in a money market fund
or certain of the employee investment opportunities. Stock units generally have been acquired at a discounted price,
which encourages employee participation in the DCP and enhances long- term retention of equity interests by
participants and aligns executive interests with those of shareholders. Amounts recognized as compensation cost under
the DCP have not been significant. The shares to be delivered in connection with DCP stock units and options are
drawn from the Incentive Plan.
The Incentive Plan’s “evergreen” share reservation was terminated on March 21, 2014; the number of equity awards
available under the Incentive Plan was set at 20,000,000. At November 30, 2018, 6,786,404 common shares remained
available for new grants under the Incentive Plan. Shares issued pursuant to the DCP reduce the shares available under
the Incentive Plan.
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Notes to Consolidated Financial Statements, continued
Note 17. Compensation Plans, continued
The following table details the activity in restricted stock during the eleven months ended November 30, 2018 and the
twelve months ended December 31, 2017 and 2016 (in thousands, except per share amounts):
Weighted-Average
Restricted Grant Date
Stock Fair Value
__________________ ____________________________
Balance at January 1, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,004 $24.56
Grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 356 $18.23
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (24) $26.90
Fulfillment of service requirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (974) $25.65
Balance at December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,362 $22.09
Grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 391 $23.65
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . – $ –
Fulfillment of service requirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (611) $23.73
Balance at December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,142 $21.75
Grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,077 $23.63
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (30) $16.49
Fulfillment of service requirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (394) $24.23
Balance at November 30, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,795 $22.42
__________
__________
__________
__________
__________
The following table details the activity in RSUs during the eleven months ended November 30, 2018 and the twelve
months ended December 31, 2017 and 2016 (in thousands, except per share amounts):
Weighted-Average
Grant Date
Fair Value
_____________________________________________
Future No Future Future No Future
Service Service Service Service
Required Required Required Required
_______________ _______________ _______________ _______________
Balance at January 1, 2016 . . . . . . . . . . . . . . . . . . . . . 3,388 8,583 $26.90 $26.68
Grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . – 128 $ – $14.21
Distributions of underlying shares . . . . . . . . . . . . . – (1,683) $ – $26.59
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . – – $ – $ –
Fulfillment of service requirement . . . . . . . . . . . . . (3,320) 3,320 $26.90 $26.90
Balance at December 31, 2016 . . . . . . . . . . . . . . . . . . 68 10,348 $26.90 $26.61
Grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . – 104 $ – $21.55
Distributions of underlying shares . . . . . . . . . . . . . – (175) $ – $26.46
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . – – $ – $ –
Fulfillment of service requirement . . . . . . . . . . . . . (36) 36 $26.90 $26.90
Balance at December 31, 2017 . . . . . . . . . . . . . . . . . . 32 10,313 $26.90 $26.57
Grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . – 161 $ – $20.24
Distributions of underlying shares . . . . . . . . . . . . . – (192) $ – $26.39
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2) (1) $26.90 $22.16
Fulfillment of service requirement . . . . . . . . . . . . . (28) 28 $26.90 $26.90
Balance at November 30, 2018 . . . . . . . . . . . . . . . . . . 2 10,309 $26.90 $26.48
_____ __________
_____ __________
_____ __________
_____ __________
_____ __________
During the eleven months ended November 30, 2018 and twelve months ended December 31, 2017, grants include
approximately 142,000 and 89,000, respectively, of dividend equivalents declared on RSUs; the weighted- average grant
date fair values of the dividend equivalents were approximately $19.81 and $21.03, respectively.
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Notes to Consolidated Financial Statements, continued
Note 17. Compensation Plans, continued
Senior Executive Compensation Plan
In February 2016, the Compensation Committee of our Board of Directors approved an executive compensation plan
for our CEO and our President (together, our “Senior Executives”) in respect of 2016 (the “2016 Plan”) that is based
on performance metrics achieved over a three- year period from 2016 through 2018. The Compensation Committee
eliminated cash incentive bonuses for 2016 and 100% of each of our CEO and President’s compensation beyond their
base salaries is composed entirely of performance based RSUs that vest at the end of 2018 if certain performance
criteria are met. Any vested RSUs will be subject to a post- vesting, three- year holding period such that no vested RSUs
can be sold or transferred until the first quarter of 2022.
Performance- vesting of the award is based equally on the compound annual growth rates of Jefferies Total Shareholder
Return (“TSR”), which is measured from the December 31, 2015 stock price of $17.39, and Jefferies Return on Tangible
Deployable Equity (“ROTDE”), the annual, two- and three- year results of which is used to determine vesting. TSR is
based on annualized rate of return reflecting price appreciation plus reinvestment of dividends and distributions to
shareholders. ROTDE is net income adjusted for amortization of intangible assets divided by tangible book value at
the beginning of year adjusted for intangible assets and deferred tax assets.
In January 2017, the Compensation Committee of our Board of Directors approved an executive compensation plan
for our Senior Executives in respect of 2017 (the “2017 Plan”) that is based on performance metrics achieved over a
three- year period from 2017 through 2019. This executive compensation plan is identical to the 2016 Plan, described
above, where cash incentive bonuses were eliminated. 100% of each of our CEO and President’s compensation beyond
their base salaries is composed entirely of performance based RSUs that will vest at the end of 2019 if certain
performance criteria are met. Any vested RSUs are subject to a post- vesting, three- year holding period such that no
vested RSUs can be sold or transferred until the first quarter of 2023. Performance- vesting of the award is based equally
on the compound annual growth rates of Jefferies TSR, which is measured from the December 30, 2016 stock price of
$23.25, and Jefferies ROTDE, the annual, two- and three- year results of which are used to determine vesting.
If Jefferies TSR and ROTDE annual compound growth rates are less than 4%, our Senior Executives will not receive
any incentive compensation. If Jefferies TSR and ROTDE grow between 4% and 8% on a compounded basis over the
three- year measurement period, each of our Senior Executives will be eligible to receive between 846,882 and 1,693,766
RSUs related to the 2016 Plan and 537,634 and 1,075,268 RSUs related to the 2017 Plan. If TSR and ROTDE growth
rates are greater than 8%, our Senior Executives are eligible to receive up to 50% additional incentive compensation
on a pro rata basis up to 12% growth rates. When determining whether RSUs will vest, the calculation will be weighted
equally between TSR and ROTDE. If TSR growth was below minimum thresholds, but ROTDE growth was above
minimum thresholds, our Senior Executives would still be eligible to receive some number of vested RSUs based on
ROTDE growth. The TSR award contains a market condition and compensation expense is recognized over the service
period and will not be reversed if the market condition is not met. The ROTDE award contains a performance condition
and compensation expense is recognized over the service period if it is determined that it is probable that the
performance condition will be achieved.
The Compensation Committee of the Jefferies Board of Directors approved an executive compensation plan effective
January 1, 2018 that extends Jefferies prior compensation plans for our Senior Executives for compensation years
2018, 2019 and 2020 (the “2018 Plan”). For each Senior Executive, the Compensation Committee has targeted long-
term compensation of $25.0 million per year under the 2018 Plan with a target of $16.0 million in long- term equity in
the form of RSUs and a target of $9.0 million in long- term cash, subject to performance targets over the three- year
measurement period for each compensation year. To receive targeted long- term equity, our Senior Executives will have
to achieve 8% growth on an annual and multi- year compounded basis in Jefferies TSR and to receive targeted long-
term cash, our Senior Executives will have to achieve 8% growth on an annual and multi- year compounded basis in
Jefferies ROTDE. If TSR and ROTDE are less than 5%, our Senior Executives will receive no long- term compensation.
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Notes to Consolidated Financial Statements, continued
Note 17. Compensation Plans, continued
If TSR and ROTDE growth rates are greater than 8%, our Senior Executives are eligible to receive up to 50% additional
incentive compensation on a pro rata basis up to 12% growth rates.
The following table details the activity in RSUs related to the senior executive compensation plan during the eleven
months ended November 30, 2018 and the twelve months ended December 31, 2017 and 2016 (in thousands, except
per share amounts):
Weighted-
Target Average
Number of Grant Date
Shares Fair Value
_______________ _______________
Balance at January 1, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . – $ –
Grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,434 $ 9.68
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . – $ –
Balance at December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,434 $ 9.68
Grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,221 $19.06
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . – $ –
Balance at December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,655 $13.37
Grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,813 $26.16
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . – $ –
Balance at November 30, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,468 $18.52
________
________
________
________
________
During the eleven months ended November 30, 2018 and twelve months ended December 31, 2017, grants include
approximately 189,000 and 70,000, respectively, of dividend equivalents declared on RSUs; the weighted- average grant
date fair values of the dividend equivalents were approximately $19.80 and $21.04, respectively.
Directors’ Plan
Upon completion of our combination with Jefferies Group, we also assumed the 1999 Directors’ Stock Compensation
Plan, as Amended and Restated July 25, 2013 (the “Directors’ Plan”). Under the Directors’ Plan, we issued each
nonemployee director of Jefferies $150,000 of restricted stock or RSUs during the eleven months ended November
30, 2018 and $120,000 of restricted stock or RSUs during each of the twelve months ended December 31, 2017 and
2016. These grants are made on the date directors are elected or reelected at our annual shareholders’ meeting. These
shares vest over three years from the date of grant and are expensed over the requisite service period. At November 30,
2018, 343,364 common shares were issuable upon settlement of outstanding RSUs and 240,022 shares are available
for future grants.
Other Compensation Plans
Other Stock- Based Plans. Historically, Jefferies Group also sponsored an Employee Stock Purchase Plan and an
Employee Stock Ownership Plan, both of which were assumed by us in connection with the Jefferies Group
acquisition. Amounts related to these plans have not been significant.
Prior to the acquisition of Jefferies Group, we had a fixed stock option plan, which provided for the issuance of stock
options and stock appreciation rights to non- employee directors and certain employees at not less than the fair market
value of the underlying stock at the date of grant. Options granted to employees under this plan were intended to qualify
as incentive stock options to the extent permitted under the Internal Revenue Code and became exercisable in five
equal annual installments starting one year from date of grant. Options granted to non- employee directors became
exercisable in four equal annual installments starting one year from date of grant. No stock appreciation rights have
been granted. In March 2014, we ceased issuing options and rights under our option plan. No shares remain available
for future grants under this plan.
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Notes to Consolidated Financial Statements, continued
Note 17. Compensation Plans, continued
At November 30, 2018 and December 31, 2017, 195,417 and 331,312, respectively, of our common shares were reserved
for stock options.
A summary of activity with respect to our stock options during the eleven months ended November 30, 2018 and the
twelve months ended December 31, 2017 and 2016 is as follows (in thousands, except per share amounts):
Weighted-
Common Weighted- Average
Shares Average Remaining Aggregate
Subject Exercise Contractual Intrinsic
to Option Prices Term Value
________________ _____________ _____________________ _________________
Balance at January 1, 2016 . . . . . . . . . . . . . . . . . . . 661 $24.97
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . – $ –
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . – $ – $ –
________
________
Cancelled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (20) $30.49
Balance at December 31, 2016 . . . . . . . . . . . . . . . . 641 $24.80
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . – $ –
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (20) $22.75 $ 65
________
________
________
Cancelled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (290) $26.98
Balance at December 31, 2017 . . . . . . . . . . . . . . . . 331 $23.03
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . – $ –
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (109) $22.87 $136
________
_______
_______
Cancelled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (27) $24.79
Balance at November 30, 2018 . . . . . . . . . . . . . . . . 195 $22.87 0.1 years $ –
________
________
Exercisable at November 30, 2018 . . . . . . . . . . . . . 195 $22.87 0.1 years $ –
________
________
_______
_______
_______
_______
________
Restricted Cash Awards. Jefferies Group provides compensation to new and existing employees in the form of loans
and/or other cash awards which are subject to ratable vesting terms with service requirements. These awards are
amortized to compensation expense over the relevant service period, which is generally considered to start at the
beginning of the annual compensation year. At November 30, 2018, the remaining unamortized amount of these awards
was $395.0 million and is included within Other assets in the Consolidated Statement of Financial Condition; this cost
is expected to be recognized over a weighted average period of 2 years.
Stock- Based Compensation Expense
Compensation and benefits expense included $48.2 million, $48.4 million and $33.6 million for the eleven months ended
November 30, 2018 and the twelve months ended December 31, 2017 and 2016, respectively, for share- based compensation
expense relating to grants made under our share- based compensation plans. Total compensation cost includes the
amortization of sign- on, retention and senior executive awards, less forfeitures and clawbacks. The total tax benefit
recognized in results of operations related to share- based compensation expenses was $12.2 million, $17.3 million and
$12.4 million for the eleven months ended November 30, 2018 and the twelve months ended December 31, 2017 and
2016, respectively. As of November 30, 2018, total unrecognized compensation cost related to nonvested share- based
compensation plans was $117.6 million; this cost is expected to be recognized over a weighted- average period of 3 years.
The net tax detriment related to share- based compensation plans recognized in additional paid- in capital was $4.2
million during the twelve months ended December 31, 2016.
At November 30, 2018, there were 1,795,000 shares of restricted stock outstanding with future service required,
9,470,000 RSUs outstanding with future service required (including target RSUs issuable under the senior executive
compensation plans), 10,309,000 RSUs outstanding with no future service required and 878,000 shares issuable under
other plans. Excluding shares issuable pursuant to outstanding stock options, the maximum potential increase to
common shares outstanding resulting from these outstanding awards is 20,657,000.
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Notes to Consolidated Financial Statements, continued
Note 18. Accumulated Other Comprehensive Income
Activity in accumulated other comprehensive income is reflected in the Consolidated Statements of Comprehensive
Income (Loss) and Consolidated Statements of Changes in Equity but not in the Consolidated Statements of
Operations. A summary of accumulated other comprehensive income, net of taxes is as follows (in thousands):
November 30, December 31, December 31,
2018 2017 2016
______________________ ______________________ ______________________
Net unrealized gains on available for sale securities . . . . . . . . . . . . $ 542,832 $ 572,085 $ 561,497
Net unrealized foreign exchange losses . . . . . . . . . . . . . . . . . . . . . . (193,402) (101,400) (184,829)
Net unrealized losses on instrument specific credit risk . . . . . . . . . (5,728) (34,432) (6,494)
Net unrealized gains (losses) on cash flow hedges . . . . . . . . . . . . . 470 (1,138) –
Net minimum pension liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . (55,886) (62,391) (59,477)
________________ ________________ ________________
$ 288,286 $ 372,724 $ 310,697
________________ ________________ ________________
________________ ________________ ________________
For the eleven months ended November 30, 2018 and the twelve months ended December 31, 2017, significant amounts
reclassified out of accumulated other comprehensive income to net income are as follows (in thousands):
Details about Accumulated Other
Comprehensive Income Components
______________________________________________________________
Affected Line Item in the
Consolidated Statement of Operations
________________________________________________________________
Amount Reclassified
from Accumulated Other
Comprehensive Income
________________________________________
Eleven
Months
Ended
Twelve
Months
Ended
November 30, December 31,
2017
2018
_________
__________
Net unrealized gains on available for sale Other income
securities, net of income tax provision
of $37 and $124 . . . . . . . . . . . . . . . . . . . . . . . . $ 109 $ 212
Net unrealized foreign exchange gains Other income and other expenses
(losses), net of income tax provision
(benefit) of $(16) and $1,086 . . . . . . . . . . . . . . 20,459 (5,310)
Net unrealized gains on instrument specific Principal transactions revenues
credit risk, net of income tax provision
of $311 and $0 . . . . . . . . . . . . . . . . . . . . . . . . . 916 –
Amortization of defined benefit pension plan Selling, general and other expenses,
actuarial losses, net of income tax benefit
which includes pension expense.
of $(697) and $(811) . . . . . . . . . . . . . . . . . . . . (2,044) (1,748) See Note 19 for information on this
component.
Other pension, net of income tax benefit of Compensation and benefits expense and
$0 and $(1,231) . . . . . . . . . . . . . . . . . . . . . . . . (5,305) 1,231 Income tax provision (benefit)
Total reclassifications for the period,
net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $14,135 $(5,615)
______________ _____________
______________ _____________
______________ _____________
In connection with the acquisition of Jefferies Bache from Prudential on July 1, 2011, Jefferies Group acquired a
defined benefit pension plan located in Germany (the “German Pension Plan”) for the benefit of eligible employees
of Jefferies Bache in that territory. On December 28, 2017, a Liquidation Insurance Contract was entered into between
Jefferies Bache Limited and Generali Lebensversicherung AG (“Generali”) to transfer the defined benefit pension
obligations and insurance contracts to Generali, for approximately €6.5 million, which was paid in January 2018 and
released Jefferies Group from any and all obligations under the German Pension Plan. This transaction was completed
in the first quarter of 2018. In connection with the transfer of the German Pension Plan, $5.3 million was reclassified
to Compensation and benefits expense in the Consolidated Statements of Operations from Accumulated other
comprehensive income during the eleven months ended November 30, 2018.
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Notes to Consolidated Financial Statements, continued
Note 19. Pension Plans and Postretirement Benefits
U.S. Pension Plans
Pursuant to the agreement to sell one of our former subsidiaries, WilTel Communications Group, LLC, (“WilTel”) the
responsibility for WilTel’s defined benefit pension plan was retained by us. All benefits under this plan were frozen as
of October 30, 2005. Prior to the acquisition of Jefferies Group, Jefferies Group sponsored a defined benefit pension
plan covering certain employees; benefits under that plan were frozen as of December 31, 2005.
A summary of activity with respect to both plans is as follows (in thousands):
Eleven Months Twelve Months
Ended Ended
November 30, December 31,
2018 2017
_______________________ _______________________
Change in projected benefit obligation:
Projected benefit obligation, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . $211,257 $205,405
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,783 8,119
Actuarial (gains) losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (16,646) 6,644
Settlement payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,133) –
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,000) (8,911)
______________ ______________
Projected benefit obligation, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . $191,261 $211,257
______________ ______________
______________ ______________
Change in plan assets:
Fair value of plan assets, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . $150,806 $127,514
Actual return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,676) 22,192
Employer contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,890 12,417
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,000) (8,911)
Settlement payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,133) –
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,895) (2,406)
______________ ______________
Fair value of plan assets, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $138,992 $150,806
______________ ______________
______________ ______________
Funded status at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (52,269) $ (60,451)
______________ ______________
______________ ______________
As of November 30, 2018 and December 31, 2017, $49.7 million and $51.3 million, respectively, of the net amount
recognized in the Consolidated Statements of Financial Condition was reflected as a charge to Accumulated other
comprehensive income (substantially all of which were cumulative losses) and $52.3 million and $60.5 million,
respectively, was reflected as accrued pension cost.
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Notes to Consolidated Financial Statements, continued
Note 19. Pension Plans and Postretirement Benefits, continued
The following table summarizes the components of net periodic pension cost and other amounts recognized in other
comprehensive income (loss) excluding taxes (in thousands):
Eleven Months Twelve Months Twelve Months
Ended Ended Ended
November 30, December 31, December 31,
2018 2017 2016
_______________________ _______________________ _______________________
Components of net periodic pension cost:
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,783 $ 8,119 $ 8,464
Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,217) (7,689) (7,589)
Settlement charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 365 – –
Actuarial losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,376 2,207 1,908
___________ _
___________
Net periodic pension cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,307 $ 2,637 $ 2,783
___________ __
__________
______
___________ ______
____________
____________
____________
Amounts recognized in other comprehensive income (loss):
Net (gains) losses arising during the period . . . . . . . . . . . . . . . . $ 1,141 $(5,453) $ 6,811
Settlement charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (365) – –
Amortization of net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,376) (2,207) (1,908)
___________ _
___________
Total recognized in other comprehensive income (loss) . . . . . $(1,600) $(7,660) $ 4,903
__________
___________ __
________
___________ ____
____________
____________
____________
Net amount recognized in net periodic benefit cost
and other comprehensive income (loss) . . . . . . . . . . . . . $
____________
____________
707 $(5,023) $ 7,686
__________
___________ __
___________
___________ _
The amounts in Accumulated other comprehensive income at November 30, 2018 and December 31, 2017 have not
yet been recognized as components of net periodic pension cost in the Consolidated Statements of Operations. The
estimated net loss that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit
cost during the twelve months ended November 30, 2019 is $1.9 million.
We expect to pay $7.5 million of employer contributions during the twelve months ended November 30, 2019.
The assumptions used are as follows:
November 30, December 31,
2018 2017
_______________________ _______________________
WilTel Plan
Discount rate used to determine benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . 4.35% 3.51%
Weighted- average assumptions used to determine net pension cost:
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.51% 3.85%
Expected long- term return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.00% 7.00%
Jefferies Group Plan
Discount rate used to determine benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . 4.30% 3.60%
Weighted- average assumptions used to determine net pension cost:
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.60% 3.90%
Expected long- term return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.25% 6.25%
The following pension benefit payments are expected to be paid (in thousands):
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,689
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,267
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,491
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,017
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,292
2024 – 2028 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66,801
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Notes to Consolidated Financial Statements, continued
Note 19. Pension Plans and Postretirement Benefits, continued
U.S. Plan Assets
The information below on the plan assets for the WilTel plan and the Jefferies Group plan is presented separately for
the plans as the investments are managed independently. Cash equivalents are valued at cost, which approximates fair
value and are categorized in Level 1 of the fair value hierarchy. The estimated fair values for securities measured using
Level 1 inputs are determined using publicly quoted market prices in active markets for identical assets. Certain fixed
income securities are measured using Level 2 inputs. Although these securities trade in brokered markets, the market
for certain securities is sometimes inactive. Valuation inputs include benchmark yields, reported trades, broker dealer
quotes, issuer spreads, two sided markets, benchmark securities, bids, offers, reference data, and industry and economic
events. Neither plan had any assets classified within Level 3 of the fair value hierarchy.
WilTel Plan Assets. At November 30, 2018 and December 31, 2017, the WilTel plan assets at fair value consisted of
the following (in thousands):
Fair Value Measurements Using
______________________________________________________
Total Level 1 Level 2
________ ___________ ____________
November 30, 2018
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . $ 802 $ 802 $ –
Growth Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,656 – 18,656
Liability- Driven Investing Portfolio . . . . . . . . . . . . . 71,359 – 71,359
_____________ ________ _____________
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $90,817 $ 802 $90,015
_____________ ________ _____________
_____________ ________ _____________
December 31, 2017
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . $ 539 $ 539 $ –
Growth Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65,625 – 65,625
Liability- Driven Investing Portfolio . . . . . . . . . . . . . 31,693 – 31,693
_____________ ________ _____________
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $97,857 $ 539 $97,318
_____________ ________ _____________
_____________ ________ _____________
The current investment objectives are designed to close the funding gap while mitigating funded status volatility through
a combination of liability hedging and investment returns. As plan funded status improves, the asset allocation will
move along a predetermined, de- risking glide path that reallocates capital from growth assets to liability- hedging assets
in order to reduce funded status volatility and lock in funded status gains. Plan assets are split into two separate
portfolios, each with different asset mixes and objectives:
• The Growth Portfolio consists of global equities and high yield investments.
• The Liability- Driven Investing (“LDI”) Portfolio consists of long duration credit bonds and a suite of long
duration, Treasury- based instruments designed to provide capital- efficient interest rate exposure as well as
target specific maturities. The objective of the LDI Portfolio is to seek to achieve performance similar to the
WilTel plan’s liability by seeking to match the interest rate sensitivity and credit sensitivity. The LDI Portfolio
is managed to mitigate volatility in funded status deriving from changes in the discounted value of benefit
obligations from market movements in the interest rate and credit components of the underlying discount curve.
To develop the assumption for the expected long- term rate of return on plan assets, we considered the following
underlying assumptions: 2.25% current expected inflation, 1.0% to 1.5% real rate of return for long duration risk free
investments and an additional 1.0% to 1.5% return premium for corporate credit risk. For U.S. and international equity,
we assume an equity risk premium over risk- free assets equal to 4.0%. We then weighted these assumptions based on
invested assets and assumed that investment expenses were offset by expected returns in excess of benchmarks, which
resulted in the selection of the 7.0% expected long- term rate of return assumption for 2018.
Jefferies Group Plan Assets. In May 2017, Jefferies Group entered into an agreement with an external investment
manager to invest and manage the plan’s assets under a strategy using a combination of two portfolios. The investment
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Notes to Consolidated Financial Statements, continued
Note 19. Pension Plans and Postretirement Benefits, continued
manager allocates the plan’s assets between a growth portfolio and a liability- driven portfolio according to certain
target allocations and tolerance bands that are agreed to by Jefferies Group Administrative Committee of the U.S.
Pension Plan. Such target allocations will take into consideration the plan’s funded ratio. The manager will also monitor
the strategy and, as the plan’s funded ratio changes over time, will rebalance the strategy, if necessary, to be within the
agreed tolerance bands and target allocations. The portfolios are comprised of certain common collective investment
trusts that are established and maintained by the investment manager. The common collective trusts are valued at their
NAV as a practical expedient for fair value.
German Pension Plan
Jefferies Group maintained the German Pension Plan in connection with its Futures business. On December 28, 2017,
a Liquidation Insurance Contract was entered into with Generali to transfer the defined benefit pension obligations
and insurance contracts to Generali, for approximately €6.5 million, which was paid in January 2018, and released
Jefferies Group from any and all obligations under the German Pension Plan. In addition, on December 28, 2017,
Jefferies Group received $3.25 million as consideration relating to the German Pension Plan in connection with releasing
the prior plan sponsor from any indemnities. Accumulated other comprehensive income for the eleven months ended
November 30, 2018 included $5.3 million related to the transfer of the German Pension Plan.
Other
We have defined contribution pension plans covering certain employees. Contributions and costs are a percent of each
covered employee’s salary. Amounts charged to expense related to such plans were $8.0 million, $7.6 million and $8.4
million for the eleven months ended November 30, 2018 and the twelve months ended December 31, 2017 and 2016,
respectively.
Note 20. Revenues from Contracts with Customers
The following table presents our total revenues separated for our revenues from contracts with customers and our other
sources of revenues for the eleven months ended November 30, 2018 (in thousands):
Revenues from contracts with customers:
Commissions and other fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 634,271
Investment banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,904,870
Manufacturing revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 357,427
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 223,074
_________________
Total revenues from contracts with customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,119,642
_________________
Other sources of revenue:
Principal transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 232,224
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,294,325
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 363,537
_________________
Total revenues from other sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,890,086
_________________
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,009,728
_________________
_________________
Revenue from contracts with customers is recognized when, or as, we satisfy our performance obligations by
transferring the promised goods or services to the customers. A good or service is transferred to a customer when, or
as, the customer obtains control of that good or service. A performance obligation may be satisfied over time or at a
point in time. Revenue from a performance obligation satisfied over time is recognized by measuring our progress in
satisfying the performance obligation in a manner that depicts the transfer of the goods or services to the customer.
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Notes to Consolidated Financial Statements, continued
Note 20. Revenues from Contracts with Customers, continued
Revenue from a performance obligation satisfied at a point in time is recognized at the point in time that we determine
the customer obtains control over the promised good or service. The amount of revenue recognized reflects the
consideration we expect to be entitled to in exchange for those promised goods or services (the “transaction price”).
In determining the transaction price, we consider multiple factors, including the effects of variable consideration.
Variable consideration is included in the transaction price only to the extent it is probable that a significant reversal in
the amount of cumulative revenue recognized will not occur when the uncertainties with respect to the amount are
resolved. In determining when to include variable consideration in the transaction price, we consider the range of
possible outcomes, the predictive value of our past experiences, the time period of when uncertainties expect to be
resolved and the amount of consideration that is susceptible to factors outside of our influence, such as market volatility
or the judgment and actions of third parties.
The following provides detailed information on the recognition of our revenues from contracts with customers:
Commissions and Other Fees. Jefferies Group earns commission revenue by executing, settling and clearing transactions
for clients primarily in equity, equity- related and futures products. Trade execution and clearing services, when provided
together, represent a single performance obligation as the services are not separately identifiable in the context of the
contract. Commission revenues associated with combined trade execution and clearing services, as well as trade
execution services on a standalone basis, are recognized at a point in time on trade- date. Commissions revenues are
generally paid on settlement date and Jefferies Group records a receivable between trade- date and payment on settlement
date. Jefferies Group permits institutional customers to allocate a portion of their gross commissions to pay for research
products and other services provided by third parties. The amounts allocated for those purposes are commonly referred
to as soft dollar arrangements. Jefferies Group acts as an agent in the soft dollar arrangements as the customer controls
the use of the soft dollars and directs Jefferies Group’s payments to third- party service providers on its behalf.
Accordingly, amounts allocated to soft dollar arrangements are netted against commission revenues in our Consolidated
Statements of Operations.
Jefferies Group earns account advisory and distribution fees in connection with wealth management services. Account
advisory fees are recognized over time using the time- elapsed method as Jefferies Group determined that the customer
simultaneously receives and consumes the benefits of investment advisory services as they are provided. Account
advisory fees may be paid in advance of a specified service period or in arrears at the end of the specified service
period (e.g., quarterly). Account advisory fees paid in advance are initially deferred within Payables, expense accruals
and other liabilities in the Consolidated Statements of Financial Condition. Distribution fees are variable and recognized
when the uncertainties with respect to the amounts are resolved.
Investment Banking. Jefferies Group provides its clients with a full range of capital markets and financial advisory
services. Capital markets services include underwriting and placement agent services in both the equity and debt capital
markets, including private equity placements, initial public offerings, follow- on offerings and equity- linked convertible
securities transactions and structuring, underwriting and distributing public and private debt, including investment
grade debt, high yield bonds, leveraged loans, municipal bonds and mortgage- and asset- backed securities. Underwriting
and placement agent revenues are recognized at a point in time on trade- date, as the client obtains the control and
benefit of the capital markets offering at that point. Costs associated with capital markets transactions are deferred
until the related revenue is recognized or the engagement is otherwise concluded, and are recorded on a gross basis
within Selling, general and other expenses in the Consolidated Statements of Operations as Jefferies Group is acting
as a principal in the arrangement. Any expenses reimbursed by its clients are recognized as Investment banking revenues.
Revenues from financial advisory services primarily consist of fees generated in connection with merger, acquisition
and restructuring transactions. Advisory fees from mergers and acquisitions engagements are recognized at a point in
time when the related transaction is completed, as the performance obligation is to successfully broker a specific
transaction. Fees received prior to the completion of the transaction are deferred within Payables, expense accruals
and other liabilities in the Consolidated Statements of Financial Condition. Advisory fees from restructuring
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Notes to Consolidated Financial Statements, continued
Note 20. Revenues from Contracts with Customers, continued
engagements are recognized over time using a time elapsed measure of progress as Jefferies Group’s clients
simultaneously receive and consume the benefits of those services as they are provided. A significant portion of the
fees Jefferies Group receives for its advisory services are considered variable as they are contingent upon a future event
(e.g., completion of a transaction or third- party emergence from bankruptcy) and are excluded from the transaction
price until the uncertainty associated with the variable consideration is subsequently resolved, which is expected to
occur upon achievement of the specified milestone. Payment for advisory services are generally due promptly upon
completion of a specified milestone or, for retainer fees, periodically over the course of the engagement. Jefferies
Group recognizes a receivable between the date of completion of the milestone and payment by the customer. Expenses
associated with investment banking advisory engagements are deferred only to the extent they are explicitly
reimbursable by the client and the related revenue is recognized at a point in time. All other investment banking advisory
related expenses, including expenses incurred related to restructuring assignments, are expensed as incurred. All
investment banking advisory expenses are recognized within their respective expense category in the Consolidated
Statements of Operations and any expenses reimbursed by Jefferies Group’s clients are recognized as Investment
banking revenues.
Asset Management Fees. Jefferies Group and LAM earn management and performance fees, recorded in Other revenues,
in connection with investment advisory services provided to various funds and accounts, which are satisfied over time
and measured using a time elapsed measure of progress as the customer receives the benefits of the services evenly
throughout the term of the contract. Management and performance fees are considered variable as they are subject to
fluctuation (e.g., changes in assets under management, market performance) and/or are contingent on a future event
during the measurement period (e.g., meeting a specified benchmark) and are recognized only to the extent it is probable
that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty is resolved.
Management fees are generally based on month- end assets under management or an agreed upon notional amount and
are included in the transaction price at the end of each month when the assets under management or notional amount
is known. Performance fees are received when the return on assets under management for a specified performance
period exceed certain benchmark returns, “high- water marks” or other performance targets. The performance period
related to performance fees is annual or semi- annual. Accordingly, performance fee revenue will generally be recognized
only at the end of the performance period to the extent that the benchmark return has been met.
Manufacturing Revenues. Idaho Timber’s primary business consists of the sale of lumber that is manufactured or
remanufactured at one of its locations. Agreements with customers for these sales specify the type, quantity and price
of products to be delivered as well as the delivery date and payment terms. The transaction price is fixed at the time of
sale and revenue is generally recognized when the customer takes control of the product.
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Notes to Consolidated Financial Statements, continued
Note 20. Revenues from Contracts with Customers, continued
Disaggregation of Revenue
The following presents our revenues from contracts with customers disaggregated by major business activity and
primary geographic regions for the eleven months ended November 30, 2018 (in thousands):
Reportable Segments
________________________________________________________________________________
Jefferies Merchant Consolidation
Group Banking Corporate Adjustments Total
______________ ________________ _________________ _____________________ ________
Major Business Activity:
Jefferies Group:
– $ – $ (919) $ 648,712
Equities (1) . . . . . . . . . . . . . . . . . . . . . $ 649,631 $
Fixed Income (1) . . . . . . . . . . . . . . . . . 13,839 – – – 13,839
Investment Banking . . . . . . . . . . . . . . 1,910,203 – – (5,333) 1,904,870
Asset Management . . . . . . . . . . . . . . . 21,214 – – – 21,214
Manufacturing revenues . . . . . . . . . . . . . – 357,427 – – 357,427
Oil and gas revenues . . . . . . . . . . . . . . . . – 136,109 – – 136,109
Other revenues . . . . . . . . . . . . . . . . . . . . – 37,471 – – 37,471
_________________ ______________
Total revenues from contracts
with customers . . . . . . . . . . . . . . . . $2,594,887 $531,007 $ – $(6,252) $3,119,642
_________________ ______________
_________________ ______________
____________ ___________
____________ ___________
____________ ___________
_________________
_________________
_________________
Primary Geographic Region:
Americas . . . . . . . . . . . . . . . . . . . . . . . . . $2,207,826 $529,471 $ – $(6,252) $2,731,045
Europe, Middle East and Africa . . . . . . . 304,370 1,264 – – 305,634
Asia . . . . . . . . . . . . . . . . . . . . . . . . . . 82,691 272 – – 82,963
_________________ ______________
Total revenues from contracts
with customers . . . . . . . . . . . . . . . . $2,594,887 $531,007 $ – $(6,252) $3,119,642
_________________ ______________
_________________ ______________
____________ ___________
____________ ___________
____________ ___________
_________________
_________________
_________________
(1) Revenues from contracts with customers associated with the equities and fixed income businesses primarily
represent commissions and other fee revenue.
Information on Remaining Performance Obligations and Revenue Recognized from Past Performance
We do not disclose information about remaining performance obligations pertaining to contracts that have an original
expected duration of one year or less. The transaction price allocated to remaining unsatisfied or partially unsatisfied
performance obligations with an original expected duration exceeding one year was not material at November 30,
2018. Investment banking advisory fees that are contingent upon completion of a specific milestone and fees associated
with certain distribution services are also excluded as the fees are considered variable and not included in the transaction
price at November 30, 2018.
During the eleven months ended November 30, 2018, Jefferies Group recognized $26.6 million of revenue related to
performance obligations satisfied (or partially satisfied) in previous periods, mainly due to resolving uncertainties in
variable consideration that was constrained in prior periods. In addition, Jefferies Group recognized $18.1 million of
revenues primarily associated with distribution services during the eleven months ended November 30, 2018, a portion
of which relates to prior periods.
Contract Balances
The timing of revenue recognition may differ from the timing of payment by customers. We record a receivable when
revenue is recognized prior to payment and it has an unconditional right to payment. Alternatively, when payment
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Notes to Consolidated Financial Statements, continued
Note 20. Revenues from Contracts with Customers, continued
precedes the provision of the related services, we record deferred revenue until the performance obligations are satisfied.
Jefferies Group deferred revenue primarily relates to retainer and milestone fees received in investment banking advisory
engagements where the performance obligation has not yet been satisfied.
We had receivables related to revenues from contracts with customers of $250.6 million and $469.3 million at
November 30, 2018 and December 31, 2017, respectively. As further discussed in Notes 1 and 28, on June 5, 2018, we
sold 48% of National Beef to Marfrig. Upon closing of the transaction with Marfrig, we deconsolidated our investment
in National Beef, including its receivables related to revenues from contracts with customers. Receivables related to
revenues from contracts with customers at December 31, 2017 included $183.4 million related to National Beef.
We had no significant impairments related to these receivables during the eleven months ended November 30, 2018.
Our deferred revenue, which primarily relates to Jefferies Group, was $14.2 million and $15.5 million at November 30,
2018 and December 31, 2017, respectively, which are recorded as Payables, expense accruals and other liabilities in
the Consolidated Statements of Financial Condition. During the eleven months ended November 30, 2018, we
recognized $10.6 million of deferred revenue from the balance at December 31, 2017.
Contract Costs
Jefferies Group capitalizes costs to fulfill contracts associated with investment banking advisory engagements where
the revenue is recognized at a point in time and the costs are determined to be recoverable. Capitalized costs to fulfill
a contract are recognized at the point in time that the related revenue is recognized.
At November 30, 2018, Jefferies Group’s capitalized costs to fulfill a contract were $4.7 million, which are recorded
in Receivables in the Consolidated Statement of Financial Condition. For the eleven months ended November 30, 2018,
Jefferies Group recognized $2.3 million of expenses related to costs to fulfill a contract that were capitalized as of the
beginning of the period. There were no significant impairment charges recognized in relation to these capitalized costs
during the eleven months ended November 30, 2018. At November 30, 2018, capitalized costs related to our other
subsidiaries were not material.
Note 21. Income Taxes
The provision for income taxes for continuing operations are as follows (in thousands):
Eleven Months Twelve Months Twelve Months
Ended Ended Ended
November 30, December 31, December 31,
2018 2017 2016
_______________________ _______________________ _______________________
Current taxes:
U.S. Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,000 $ (1,060) $ (1,314)
U.S. state and local . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,439 33,132 8,035
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,077 14,597 (4,638)
____________
Total current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58,516 46,669 2,083
____________
Deferred taxes:
U.S. Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,448 586,014 20,517
U.S. state and local . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (73,013) 1,452 1,118
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,943) 8,151 2,055
____________
Total deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (39,508) 595,617 23,690
____________
Total income tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . $ 19,008 $642,286 $25,773
____________
____________
______________ ______________
______________ ______________
______________ ______________
______________ ______________
______________ ______________
______________ ______________
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Notes to Consolidated Financial Statements, continued
Note 21. Income Taxes, continued
The following table presents the U.S. and non- U.S. components of income from continuing operations before income
taxes (in thousands):
Eleven Months Twelve Months Twelve Months
Ended Ended Ended
November 30, December 31, December 31,
2018 2017 2016
_______________________ _______________________ _______________________
U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $284,177 $535,955 $ 7,960
Non- U.S. (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,923 70,547 (20,552)
Income from continuing operations before income taxes . . . . . . . $296,100 $606,502 $(12,592)
______________ ______________
______________ ______________
______________ ______________
_____________
_____________
_____________
(1) For purposes of this table, non- U.S. income is defined as income generated from operations located outside the U.S.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax
Act which reduced the U.S. federal corporate tax rate from 35% to 21%, as well as other changes. Income tax expense
differed from the amounts computed by applying the U.S. Federal statutory income tax rates of 21% for the eleven
months ended November 30, 2018 and 35% for the twelve months ended December 31, 2017 and 2016 to income from
continuing operations before income taxes as a result of the following (dollars in thousands):
Eleven Months Ended Twelve Months Ended Twelve Months Ended
November 30, 2018 December 31, 2017 December 31, 2016
_______________________________________ ___________________________________ ____________________________________
Amount Percent Amount Percent Amount Percent
______________ _____________ _____________ ____________ _____________ ____________
Computed expected federal
income tax . . . . . . . . . . . . . . . . . . . . . $ 62,181 21.0% $212,276 35.0% $ (4,407) 35.0%
Increase (decrease) in income taxes
resulting from:
State and local income taxes, net
of federal income tax benefit . . . 12,391 4.2 14,115 2.3 (4,060) 32.2
International operations (including
foreign rate differential) . . . . . . . 1,823 0.6 (11,577) (1.9) (3,155) 25.1
Increase (decrease) in valuation
allowance . . . . . . . . . . . . . . . . . . (48,058) (16.2) – – 2,825 (22.4)
Permanent differences . . . . . . . . . . 12,331 4.2 4,933 0.8 4,315 (34.3)
Foreign tax credits . . . . . . . . . . . . . (9,046) (3.1) (32,974) (5.4) – –
Excess stock detriment . . . . . . . . . – – 161 – 24,907 (197.8)
Deferred tax asset remeasurement
related to the Tax Act . . . . . . . . . 5,673 1.9 415,000 68.4 – –
Transition tax on foreign earnings
related to the Tax Act . . . . . . . . . 2,590 0.9 35,500 5.9 – –
Base erosion and anti- abuse tax
(BEAT) . . . . . . . . . . . . . . . . . . . 10,000 3.4 – – – –
Change in unrecognized tax
benefits related to prior years . . (19,783) (6.7) 1,553 0.3 (7,064) 56.1
Other, net . . . . . . . . . . . . . . . . . . . . (11,094) (3.8) 3,299 0.5 12,412 (98.6)
___________
Actual income tax provision . . . $ 19,008 6.4% $642,286 105.9% $25,773 (204.7)%
___________
___________
_________________ _________ _________________
_________________ _________ _________________
_________________ _________ _________________
_________ ________________
_________ ________________
_________ ________________
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Notes to Consolidated Financial Statements, continued
Note 21. Income Taxes, continued
The following table presents a reconciliation of gross unrecognized tax benefits (in thousands):
Eleven Months Twelve Months Twelve Months
Ended Ended Ended
November 30, December 31, December 31,
2018 2017 2016
_______________________ _______________________ _______________________
Balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . $169,020 $148,848 $150,867
Increases based on tax positions related to the current period . . . . . 48,083 18,619 5,045
Increases based on tax positions related to prior periods . . . . . . 17,521 10,358 3,697
Decreases based on tax positions related to prior periods . . . . . . (36,324) (8,805) (9,414)
Decreases related to settlements with taxing authorities . . . . . . . (980) – (1,347)
Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $197,320 $169,020 $148,848
______________ ______________
______________ ______________
______________ ______________
______________
______________
______________
Interest and penalties related to unrecognized tax benefits are recorded as components of the provision for income
taxes. Net interest expense (benefit) related to unrecognized tax benefits was $(3.1) million, $9.7 million and $8.6
million for the eleven months ended November 30, 2018 and the twelve months ended December 31, 2017 and 2016,
respectively. At November 30, 2018 and December 31, 2017, we had interest accrued of approximately $54.1 million
and $57.4 million, respectively, included in Payables, expense accruals and other liabilities in the Consolidated
Statements of Financial Condition. No material penalties were accrued for the eleven months ended November 30,
2018 and the twelve months ended December 31, 2017 and 2016.
The statute of limitations with respect to our federal income tax returns has expired for all years through 2014. We
settled our 2013 Internal Revenue Service examination with the settlement having an immaterial impact on our effective
tax rate. We are currently under examination by various major tax jurisdictions. Prior to becoming a wholly- owned
subsidiary, Jefferies Group filed a consolidated U.S. federal income tax return with its qualifying subsidiaries and was
subject to income tax in various states, municipalities and foreign jurisdictions and Jefferies Group is also currently
under examination by various major tax jurisdictions. We do not expect that resolution of these examinations will have
a significant effect on our Consolidated Statements of Financial Condition, but could have a significant impact on the
Consolidated Statements of Operations for the period in which resolution occurs. It is reasonably possible that, within
the next twelve months, statutes of limitation will expire which could have the effect of reducing the balance of
unrecognized tax benefits by $8.2 million.
The principal components of deferred taxes are as follows (in thousands):
November 30, December 31,
2018 2017
______________________ ______________________
Deferred tax asset:
Net operating loss carryover . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 282,650 $ 599,839
Compensation and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 269,788 213,340
Tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66,272 93,026
Securities valuation reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76,931 3,012
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156,751 130,735
852,392 1,039,952
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (38,512) (93,758)
813,880 946,194
Deferred tax liability:
Amortization of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (69,970) (71,583)
Investment in associated companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (171,006) (83,114)
Transition tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . – (35,165)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (60,115) (12,521)
(301,091) (202,383)
Net deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 512,789 $ 743,811
_______________
_______________
_________________
_________________
_______________
_______________
_______________
_______________
_________________
_________________
_________________
_________________
_________________
_______________
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Notes to Consolidated Financial Statements, continued
Note 21. Income Taxes, continued
The valuation allowance represents the portion of our deferred tax assets for which it is more likely than not that the
benefit of such items will not be realized. We believe that the realization of the net deferred tax asset of $512.8 million
at November 30, 2018 is more likely than not based on expectations of future taxable income in the jurisdictions in
which we operate.
As of November 30, 2018, we have consolidated U.S. federal net operating loss carryovers (“NOLs”) of $1.1 billion
that may be used to offset future taxable income, and these NOLs begin to expire in 2025. We have various state NOLs
that expire at different times, which are reflected in the above table to the extent our estimate of future taxable income
will be apportioned to those states. A deferred tax asset of $9.2 million related to net operating losses in Europe has
been fully offset by a valuation allowance, while $0.3 million of deferred tax assets related to net operating losses in
Asia has been fully offset by a valuation allowance. Uncertainties that may affect the utilization of our tax attributes
include future operating results, tax law changes, rulings by taxing authorities regarding whether certain transactions
are taxable or deductible and expiration of carryforward periods.
Under certain circumstances, the ability to use the NOLs and future deductions could be substantially reduced if certain
changes in ownership were to occur. In order to reduce this possibility, our certificate of incorporation includes a charter
restriction that prohibits transfers of our common stock under certain circumstances.
The Tax Act makes broad and complex changes to the U.S. tax code that will impact many areas of taxation, including,
but not limited to: (1) reduction of the U.S. federal corporate tax rate from 35% to 21%; (2) elimination of the corporate
alternative minimum tax; (3) the introduction of the base erosion anti- abuse tax (“BEAT”), a new minimum tax; (4) a
general elimination of U.S. federal income taxes on dividends from foreign subsidiaries; (5) a new provision designed
to tax global intangible low- taxed income (“GILTI”); (6) a new limitation on deductible interest expense; (7) limitations
on the deductibility of certain executive compensation; (8) limitations on the use of foreign tax credits to reduce U.S.
income tax liability; (9) limitations on net operating losses generated after December 31, 2017 to 80% of taxable
income; (10) a one- time transition tax on certain unrepatriated earnings of foreign subsidiaries; and (11) bonus
depreciation that will allow for full expensing of qualified property.
As a result of planning related to the Tax Act, during fiscal 2018, several of our foreign subsidiaries have made tax
elections to be treated as branches of the U.S. for federal income tax purposes (commonly referred to as “check- the-
box” elections) effective during various times during 2018. We believe that, as a result of these foreign subsidiaries
being treated as branches of the U.S. for federal income tax purposes, rather than as controlled foreign corporations,
we will reduce the future tax impact of the BEAT and GILTI provisions, which are effective starting in fiscal 2018 and
fiscal 2019, respectively. We have recorded a provision of $10.0 million for BEAT in the current year.
Under the provisions of the Tax Act, we have paid U.S. federal income tax on all of the historic earnings and profits of
our non- U.S. subsidiaries, and by making the above- mentioned check- the- box elections to treat several of our foreign
entities as branches of the U.S. for federal income tax purposes, we no longer have any basis differences in these
subsidiaries. Consequently, at November 30, 2018, we have no significant basis differences for which the recording of
a U.S. deferred tax liability is required. We intend to continue to indefinitely reinvest in certain non- U.S. entities and
therefore have not provided U.S. federal income tax on other basis differences. Determination of the amount of
unrecognized deferred tax liability, if any, related to these basis differences is not practicable.
Regarding the new GILTI tax rules, which will become applicable in fiscal 2019, we are required to make an accounting
policy election to either treat taxes due on future GILTI inclusions in U.S. taxable income as a current period expense
when incurred or reflect such portion of the future GILTI inclusions in U.S. taxable income that relate to existing basis
differences in our current measurement of deferred taxes. We will make an accounting policy election during the first
quarter of fiscal 2019.
Also, on December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provided
guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend
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Notes to Consolidated Financial Statements, continued
Note 21. Income Taxes, continued
beyond one year from the Tax Act enactment date for companies to complete the accounting under Accounting Standards
Codification 740, Income Taxes (“ASC 740”). While the initial estimated impact of the Tax Act was calculated using all
available information, we anticipate modifications based on the procedures set forth under SAB 118. This process is
applied at each reporting period to account for and qualitatively disclose: (1) the effects of the change in tax law for which
the accounting is complete; (2) provisional amounts (or adjustments to provisional amounts) for the effects of the tax law
where the accounting is not complete, but a reasonable estimate has been determined; and (3) where a reasonable estimate
cannot yet be made, taxes are reflected in accordance with the law prior to the enactment of the Tax Act.
Due to the complex nature of the Tax Act and the unavailability of certain information, we have not completed our
accounting for the income tax effects of certain elements of the Tax Act. If we were able to make reasonable estimates
of the effects of certain elements for which our analysis is not yet complete, we recorded a provisional estimate in our
consolidated financial statements. If we were not yet able to make reasonable estimates of the impact of certain elements,
we have not recorded any adjustments related to those elements and have continued accounting for them in accordance
with ASC 740 on the basis of the tax laws in effect before the Tax Act. The ultimate impact of the Tax Act may differ
from this estimate, possibly materially, due to refinement of our calculations based on updated information, changes
in the interpretations and assumptions, guidance that may be issued and actions we may take in response to the Tax
Act. The provisional accounting impact may change until the accounting analysis is finalized, which will occur no later
than the first quarter of fiscal 2019, as permitted by ASU 2018-05.
We consider the accounting for the deferred tax asset remeasurements, the transition tax and other items to be
incomplete. We recorded a discrete tax expense of $450.5 million as a provisional estimate of the impact of the Tax
Act during the twelve months ended December 31, 2017. This provisional estimate primarily consisted of a $415.0
million expense related to the revaluation of our deferred tax asset and a $35.5 million expense related to the deemed
repatriation of foreign earnings. During the eleven months ended November 30, 2018, we adjusted the provisional
estimate by approximately $8.3 million such that the total amount to date is $458.8 million. This consists of a $420.7
million expense related to the revaluation of our deferred tax asset and a $38.1 million expense related to the deemed
repatriation of foreign earnings.
Note 22. Other Results of Operations Information
Other revenue consists of the following (in thousands):
Eleven Months Twelve Months Twelve Months
Ended Ended Ended
November 30, December 31, December 31,
2018 2017 2016
_______________________ _______________________ _______________________
Asset management fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 28,144 $ 28,831 $ 29,492
Dividend income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,416 (452) 3,856
Income from associated companies classified as
other revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73,975 75,889 17,184
Revenues of oil and gas production and development
businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127,090 61,541 49,890
Net realized securities gains (losses) . . . . . . . . . . . . . . . . . . . . . . . . (939) 23,028 29,542
Gain on sale of Garcadia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 221,712 – –
Gain on sale of Conwed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . – 178,236 –
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131,213 81,478 38,801
$586,611 $448,551 $168,765
______________ ______________
______________ ______________
______________ ______________
______________
______________
______________
In the third quarter of 2018, we sold 100% of our equity interests in Garcadia and our associated real estate to our
former partners, the Garff family, for $417.2 million in cash. The pre- tax gain recognized as a result of this transaction,
$221.7 million for the eleven months ended November 30, 2018, is classified as Other revenue.
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Notes to Consolidated Financial Statements, continued
Note 22. Other Results of Operations Information, continued
In January 2017, we sold 100% of Conwed Plastics (“Conwed”) to Schweitzer- Mauduit International, Inc., (NYSE:
SWM) for $295 million in cash plus potential earn- out payments in 2019, 2020 and 2021 totaling up to $40 million in
cash to the extent the results of Conwed’s subsidiary, Filtrexx International, exceed certain performance thresholds. A
pre- tax gain of $178.2 million (net of working capital adjustments) was recognized during the twelve months ended
December 31, 2017.
Taxes, other than income or payroll included in Income (loss) from continuing operations, amounted to $39.9 million,
$32.7 million and $29.3 million for the eleven months ended November 30, 2018 and the twelve months ended
December 31, 2017 and 2016, respectively.
Proceeds from sales of investments classified as available for sale were $1.6 billion, $0.4 billion and $0.5 billion during
the eleven months ended November 30, 2018 and the twelve months ended December 31, 2017 and 2016,
respectively. Gross gains and gross losses were not material during the eleven months ended November 30, 2018 and
the twelve months ended December 31, 2017 and 2016.
Note 23. Common Shares and Earnings Per Common Share
Basic and diluted earnings per share amounts were calculated by dividing net income by the weighted- average number
of common shares outstanding. The numerators and denominators used to calculate basic and diluted earnings per
share are as follows (in thousands):
Eleven Months Twelve Months Twelve Months
Ended Ended Ended
November 30, December 31, December 31,
2018 2017 2016
_______________________ _______________________ _______________________
Numerator for earnings per share:
Net income attributable to Jefferies Financial Group Inc.
common shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,022,318 $167,351 $125,938
Allocation of earnings to participating securities (1) . . . . . . . . . (5,107) (610) (574)
Net income attributable to Jefferies Financial Group Inc.
_________________ ______________
______________
common shareholders for basic earnings per share . . . . . . . 1,017,211 166,741 125,364
Adjustment to allocation of earnings to participating
securities related to diluted shares (1) . . . . . . . . . . . . . . . . . . . 28 (14) (19)
Mandatorily redeemable convertible preferred
share dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . – – –
Net income attributable to Jefferies Financial Group Inc.
_________________ ______________
______________
common shareholders for diluted earnings per share . . . . . $1,017,239 $166,727 $125,345
_________________ ______________
_________________ ______________
______________
______________
Denominator for earnings per share:
Weighted average common shares outstanding . . . . . . . . . . . . . . 337,817 358,482 361,151
Weighted average shares of restricted stock outstanding
with future service required . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,707) (1,349) (1,645)
Weighted average RSUs outstanding with no future
service required . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,151 11,064 11,705
____________
Denominator for basic earnings per share – weighted
____________
____________
average shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 347,261 368,197 371,211
Stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 24 –
Senior executive compensation plan awards . . . . . . . . . . . . . . . . 4,007 2,480 307
Mandatorily redeemable convertible preferred shares . . . . . . . . . – – –
____________
____________
Denominator for diluted earnings per share . . . . . . . . . . . . . . . 351,275 370,701 371,518
____________
____________
____________
____________
____________
____________
____________
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Notes to Consolidated Financial Statements, continued
Note 23. Common Shares and Earnings Per Common Share, continued
(1) Represents dividends declared during the period on participating securities plus an allocation of undistributed
earnings to participating securities. Net losses are not allocated to participating securities. Participating securities
represent restricted stock and RSUs for which requisite service has not yet been rendered and amounted to
weighted- average shares of 1,724,800, 1,401,000 and 1,986,800 for the eleven months ended November 30,
2018 and the twelve months ended December 31, 2017 and 2016, respectively. Dividends declared on
participating securities were not material during the eleven months ended November 30, 2018 and the twelve
months ended December 31, 2017 and 2016. Undistributed earnings are allocated to participating securities
based upon their right to share in earnings if all earnings for the period had been distributed.
For the eleven months ended November 30, 2018 and the twelve months ended December 31, 2017 and 2016, shares
related to the 3.875% Convertible Senior Debentures were not included in the computation of diluted per share amounts
as the conversion price exceeded the average market price. All of these convertible debentures were redeemed in January
2018. For the eleven months ended November 30, 2018 and the twelve months ended December 31, 2017 and 2016,
4,162,200 shares related to the mandatorily redeemable convertible preferred shares were not included in the
computation of diluted per share amounts as the effect was antidilutive.
The Board of Directors from time to time has authorized the repurchase of our common shares. In April 2018, the
Board of Directors approved an increase to our share repurchase program to 25,000,000 common shares from the
12,500,000 remaining under its prior authorization. In July 2018, the Board of Directors approved an increase to our
share repurchase program by an additional 25,000,000 common shares. During the eleven months ended November
30, 2018, we purchased a total of 50,000,000 of our common shares under these authorizations. As of November 30,
2018, no common shares remained authorized for repurchase. In January 2019, the Board of Directors approved an
additional $500.0 million share repurchase authorization.
Note 24. Commitments, Contingencies and Guarantees
Commitments
We and our subsidiaries rent office space and office equipment under noncancellable operating leases with terms
varying principally from one to twenty- one years. Rental expense (net of sublease rental income) included in Income
(loss) from continuing operations was $55.7 million, $60.2 million and $61.6 million for the eleven months ended
November 30, 2018 and the twelve months ended December 31, 2017 and 2016, respectively. Future minimum annual
rentals (exclusive of month- to- month leases, real estate taxes, maintenance and certain other charges) under these leases
at November 30, 2018 are as follows (in thousands):
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 73,060
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63,982
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65,456
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63,840
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,064
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 432,880
______________
759,282
Less: sublease income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (26,415)
______________
$732,867
______________
______________
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Notes to Consolidated Financial Statements, continued
Note 24. Commitments, Contingencies and Guarantees, continued
The following table summarizes commitments associated with certain business activities (in millions):
Expected Maturity Date
________________________________________________________________________________
2021 2023 2025
and and and Maximum
2019 2020 2022 2024 Later Payout
______ _______ _____________
______
Equity commitments (1) . . . . . . . . . . . . . . . . . $ 322.4 $21.8 $ 1.3 $ – $10.5 $ 356.0
Loan commitments (1) . . . . . . . . . . . . . . . . . . 250.0 7.5 54.0 3.5 – 315.0
Underwriting commitments . . . . . . . . . . . . . . . 377.5 – – – – 377.5
Forward starting reverse repos (2) . . . . . . . . . . 4,262.7 – – – – 4,262.7
Forward starting repos (2) . . . . . . . . . . . . . . . . 2,931.8 – – – – 2,931.8
Other unfunded commitments (1) . . . . . . . . . . 194.8 – 69.4 4.9 – 269.1
______ ________ ______________
$8,339.2 $29.3 $124.7 $8.4 $10.5 $8,512.1
______ ________ ______________
______ ________ ______________
_____________ ________ __________
_____________ ________ __________
_____________ ________ __________
______
______
(1) Equity commitments, loan commitments and other unfunded commitments are presented by contractual maturity
date. The amounts are however mostly available on demand.
(2) At November 30, 2018, $4,232.8 million within forward starting securities purchased under agreements to resell
and all of the securities sold under agreements to repurchase settled within three business days.
Equity Commitments. Equity commitments include a commitment to invest in Jefferies Group’s joint venture, Jefferies
Finance, and commitments to invest in private equity funds and in Jefferies Capital Partners, LLC, which consists of
a team led by our President and a Director. As of November 30, 2018, Jefferies Group’s outstanding commitments
relating to Jefferies Capital Partners, LLC and its private equity funds were $18.1 million.
See Note 11 for additional information regarding Jefferies Group’s investment in Jefferies Finance.
Additionally, as of November 30, 2018, we have other equity commitments to invest up to $282.6 million in various
other investments, which include $250.0 million as part of the further development of our alternative asset management
platforms.
Loan Commitments. From time to time Jefferies Group makes commitments to extend credit to investment banking
and other clients in loan syndication, acquisition finance and securities transactions and to SPE sponsors in connection
with the funding of CLO and other asset- backed transactions. These commitments and any related drawdowns of these
facilities typically have fixed maturity dates and are contingent on certain representations, warranties and contractual
conditions applicable to the borrower. At November 30, 2018, Jefferies Group had $57.5 million of outstanding loan
commitments to clients.
Loan commitments outstanding at November 30, 2018, also include Jefferies Group’s portion of the outstanding secured
revolving credit facility provided to Jefferies Finance, to support loan underwritings by Jefferies Finance. At
November 30, 2018, none of Jefferies $250.0 million commitment was funded.
Underwriting Commitments. In connection with investment banking activities, Jefferies Group may from time to time
provide underwriting commitments to its clients in connection with capital raising transactions.
Forward Starting Reverse Repos and Repos. Jefferies Group enters into commitments to take possession of securities
with agreements to resell on a forward starting basis and to sell securities with agreements to repurchase on a forward
starting basis that are primarily secured by U.S. government and agency securities.
Other Unfunded Commitments. Other unfunded commitments include obligations in the form of revolving notes to
provide financing to asset- backed and CLO vehicles. Upon advancing funds, drawn amounts are collateralized by the
assets of an entity.
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Notes to Consolidated Financial Statements, continued
Note 24. Commitments, Contingencies and Guarantees, continued
Contingencies
We and our subsidiaries are parties to legal and regulatory proceedings that are considered to be either ordinary, routine
litigation incidental to their business or not significant to our consolidated financial position. We and our subsidiaries
are also involved, from time to time, in other exams, investigations and similar reviews (both formal and informal) by
governmental and self- regulatory agencies regarding our businesses, certain of which may result in judgments,
settlements, fines, penalties or other injunctions. We do not believe that any of these actions will have a significant
adverse effect on our consolidated financial position or liquidity, but any amounts paid could be significant to results
of operations for the period.
Guarantees
Derivative Contracts. Jefferies Group dealer activities cause it to make markets and trade in a variety of derivative
instruments. Certain derivative contracts that Jefferies Group has entered into meet the accounting definition of a
guarantee under GAAP, including credit default swaps, written foreign currency options and written equity put
options. On certain of these contracts, such as written interest rate caps and foreign currency options, the maximum
payout cannot be quantified since the increase in interest or foreign exchange rates are not contractually limited by the
terms of the contract. As such, we have disclosed notional values as a measure of Jefferies Group’s maximum potential
payout under these contracts.
The following table summarizes the notional amounts associated with our derivative contracts meeting the definition
of a guarantee under GAAP as of November 30, 2018 (in millions):
Expected Maturity Date
________________________________________________________________________________
2021 2023 2025 Notional/
and and and Maximum
Guarantee Type 2019 2020 2022 2024 Later Payout
______ _______ _____________
______
_____________________
Derivative contracts – non- credit related . . . . . $12,024.2 $2,372.3 $2,976.1 $281.1 $330.3 $17,984.0
Written derivative contracts – credit related . . – 32.4 – 112.8 – 145.2
_______________ _____________ _____________ __________ __________ ________________
Total derivative contracts . . . . . . . . . . . . . $12,024.2 $2,404.7 $2,976.1 $393.9 $330.3 $18,129.2
_______________ _____________ _____________ __________ __________ ________________
_______________ _____________ _____________ __________ __________ ________________
______ ______
The derivative contracts deemed to meet the definition of a guarantee under GAAP are before consideration of hedging
transactions and only reflect a partial or “one- sided” component of any risk exposure. Written equity options and written
credit default swaps are often executed in a strategy that is in tandem with long cash instruments (e.g., equity and debt
securities). Jefferies Group substantially mitigates its exposure to market risk on these contracts through hedges, such
as other derivative contracts and/or cash instruments, and Jefferies Group manages the risk associated with these contracts
in the context of its overall risk management framework. Jefferies Group believes notional amounts overstate its expected
payout and that fair value of these contracts is a more relevant measure of its obligations. The fair value of derivative
contracts meeting the definition of a guarantee is approximately $277.5 million at November 30, 2018.
Berkadia. We have agreed to reimburse Berkshire Hathaway for up to one- half of any losses incurred under a $1.5
billion surety policy securing outstanding commercial paper issued by an affiliate of Berkadia. At November 30, 2018,
the aggregate amount of commercial paper outstanding was $1.47 billion.
Other Guarantees. Jefferies Group is a member of various exchanges and clearing houses. In the normal course of
business, Jefferies Group provides guarantees to securities clearing houses and exchanges. These guarantees generally
are required under the standard membership agreements, such that members are required to guarantee the performance
of other members. Additionally, if a member becomes unable to satisfy its obligations to the clearing house, other
members would be required to meet these shortfalls. To mitigate these performance risks, the exchanges and clearing
houses often require members to post collateral. Jefferies Group’s obligations under such guarantees could exceed the
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Notes to Consolidated Financial Statements, continued
Note 24. Commitments, Contingencies and Guarantees, continued
collateral amounts posted. Jefferies Group’s maximum potential liability under these arrangements cannot be quantified;
however, the potential for Jefferies Group to be required to make payments under such guarantees is deemed remote.
Accordingly, no liability has been recognized for these arrangements.
Standby Letters of Credit. At November 30, 2018, Jefferies Group provided guarantees to certain counterparties in the
form of standby letters of credit in the amount of $52.6 million. Standby letters of credit commit Jefferies Group to
make payment to the beneficiary if the guaranteed party fails to fulfill its obligation under a contractual arrangement
with that beneficiary. Since commitments associated with these collateral instruments may expire unused, the amount
shown does not necessarily reflect the actual future cash funding requirement. Other subsidiaries of ours have
outstanding letters of credit aggregating $1.6 million at November 30, 2018. Primarily all letters of credit expire within
one year.
Note 25. Net Capital Requirements
Jefferies LLC operates as a broker- dealer registered with the SEC and member firms of the Financial Industry
Regulatory Authority (“FINRA”). Jefferies LLC is subject to the Securities and Exchange Commission Uniform Net
Capital Rule (“Rule 15c3-1”), which requires the maintenance of minimum net capital and has elected to calculate
minimum capital requirements using the alternative method permitted by Rule 15c3-1 in calculating net capital. Jefferies
LLC, as a dually- registered U.S. broker- dealer and futures commission merchant (“FCM”), is also subject to Rule 1.17
of the CFTC, which sets forth minimum financial requirements. The minimum net capital requirement in determining
excess net capital for a dually- registered U.S. broker- dealer and FCM is equal to the greater of the requirement under
Rule 15c3-1 or CFTC Rule 1.17.
Jefferies LLC’s net capital and excess net capital as of November 30, 2018 were $1,739.4 million and $1,636.0 million,
respectively.
FINRA is the designated examining authority for Jefferies Group’s U.S. broker- dealer and the National Futures
Association is the designated self- regulatory organization for Jefferies LLC as an FCM.
Certain other U.S. and non- U.S. subsidiaries of Jefferies Group are subject to capital adequacy requirements as
prescribed by the regulatory authorities in their respective jurisdictions, including Jefferies International Limited, which
is authorized and regulated by the Financial Conduct Authority in the United Kingdom.
The regulatory capital requirements referred to above may restrict our ability to withdraw capital from Jefferies Group’s
regulated subsidiaries. Some of our other consolidated subsidiaries also have credit agreements which may restrict the
payment of cash dividends, or the ability to make loans or advances to the parent company.
Note 26. Other Fair Value Information
The carrying amounts and estimated fair values of our principal financial instruments that are not recognized at fair
value on a recurring basis are as follows (in thousands):
November 30, 2018 December 31, 2017
_________________________________________________ __________________________________________________
Carrying Fair Carrying Fair
Amount Value Amount Value
________________ _________ ______________ ________
Other Assets:
Notes and loans receivable (1) . . . . . . . . . . . . . . . . . $ 680,015 $ 676,152 $ 579,071 $ 565,285
Financial Liabilities:
Short- term borrowings (2) . . . . . . . . . . . . . . . . . . . . 387,492 387,492 412,891 412,891
Long- term debt (3) . . . . . . . . . . . . . . . . . . . . . . . . . 6,931,393 6,826,503 7,278,827 7,678,210
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Notes to Consolidated Financial Statements, continued
Note 26. Other Fair Value Information, continued
(1) Notes and loans receivable: The fair values are estimated principally based on a discounted future cash flows
model using market interest rates for similar instruments. If measured at fair value in the financial statements,
these financial instruments would be classified as Level 3 in the fair value hierarchy.
(2) Short- term borrowings: The fair values of short- term borrowings are estimated to be the carrying amount due
to their short maturities. If measured at fair value in the financial statements, these financial instruments would
be classified as Level 3 in the fair value hierarchy.
(3) Long- term debt: The fair values are estimated using quoted prices, pricing information obtained from external
data providers and, for certain variable rate debt, is estimated to be the carrying amount. If measured at fair value
in the financial statements, these financial instruments would be classified as Level 2 and Level 3 in the fair value
hierarchy.
Note 27. Related Party Transactions
Jefferies Capital Partners Related Funds. Jefferies Group has equity investments in the JCP Manager and in private
equity funds, which are managed by a team led by our President and a Director (“Private Equity Related Funds”).
Reflected in our Consolidated Statements of Financial Condition at November 30, 2018 and December 31, 2017 are
Jefferies Group’s equity investments in Private Equity Related Funds of $35.5 million and $23.7 million,
respectively. Net gains (losses) aggregating $11.8 million, $(11.7) million and $(2.3) million were recorded in Other
revenues related to the Private Equity Related Funds for the eleven months ended November 30, 2018 and the twelve
months ended December 31, 2017 and 2016, respectively. For further information regarding our commitments and
funded amounts to the Private Equity Related Funds, see Notes 10 and 24.
Berkadia. At November 30, 2018 and December 31, 2017, Jefferies Group has commitments to purchase $723.8 million
and $864.1 million, respectively, in agency commercial mortgage- backed securities from Berkadia.
HRG. Jefferies Group recognized investment banking revenues of $3.0 million for the eleven months ended November
30, 2018 in connection with the merger of HRG into Spectrum Brands.
FXCM. Jefferies Group entered into OTC foreign exchange contracts with FXCM. In connection with these contracts,
Jefferies Group had $9.9 million and $17.0 million at November 30, 2018 and December 31, 2017, respectively,
included in Payables, expense accruals and other liabilities in our Consolidated Statements of Financial Condition.
Officers, Directors and Employees. We have $49.3 million and $45.6 million of loans outstanding to certain officers
and employees (none of whom are an executive officer or director of the Company) at November 30, 2018 and
December 31, 2017, respectively. Receivables from and payables to customers include balances arising from officers,
directors and employees’ individual security transactions. These transactions are subject to the same regulations as all
customer transactions and are provided on substantially the same terms.
See Note 11 for information on transactions with Jefferies Finance.
Note 28. Discontinued Operations
On June 5, 2018, we sold 48% of National Beef to Marfrig for $907.7 million in cash, reducing our ownership in
National Beef to 31%. Marfrig also acquired an additional 3% of National Beef from other equity owners and now
owns 51% of National Beef. We have the right to designate two board members and have a series of other rights in
respect of our continuing equity interest, with a lockup period of five years and thereafter fair market value liquidity
protections. As of the closing of the sale on June 5, 2018, we deconsolidated our investment in National Beef and
account for our remaining interest under the equity method of accounting.
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Notes to Consolidated Financial Statements, continued
Note 28. Discontinued Operations, continued
The sale of National Beef meets the accounting criteria to be classified as a discontinued operation as the sale represents
a strategic shift that has a major effect in our operations and financial results. As such, we have classified the results
of National Beef prior to June 5, 2018 as a discontinued operation and reported those results in Income from
discontinued operations, net of income tax provision in the Consolidated Statements of Operations.
A summary of the results of discontinued operations for National Beef is as follows (in thousands):
Twelve Months Twelve Months
Period Ended Ended Ended
June 4, 2018 December 31, December 31,
(1) 2017 2016
_______________________ _______________________ _______________________
Revenues:
Beef processing services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,137,611 $7,353,663 $7,021,902
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131 339 166
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,329 4,946 5,175
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,142,071 7,358,948 7,027,243
Expenses:
Compensation and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,414 39,884 39,271
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,884,983 6,764,055 6,513,768
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,316 6,657 12,946
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,959 98,515 94,482
Selling, general and other expenses . . . . . . . . . . . . . . . . . . . . . . . 14,291 42,525 37,754
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,964,963 6,951,636 6,698,221
Income from discontinued operations before
income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177,108 407,312 329,022
Income tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47,045 118,681 96,336
Income from discontinued operations, net of income
tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 130,063 $ 288,631 $ 232,686
_________________ _________________ _________________
_________________ _________________ _________________
_________________ _________________ _________________
_________________ _________________ _________________
_________________ _________________ _________________
_________________ _________________ _________________
_________________ _________________ _________________
(1) The operations of National Beef from January 1, 2018 through June 4, 2018, are included in discontinued
operations for our eleven months ended November 30, 2018.
Net income attributable to the redeemable noncontrolling interests in the Consolidated Statements of Operations
includes $37.1 million, $85.3 million and $68.8 million for the eleven months ended November 30, 2018 and the twelve
months ended December 31, 2017 and 2016, respectively, related to National Beef’s noncontrolling interests. Pre- tax
income from discontinued operations attributable to Jefferies Financial Group Inc. common shareholders was $140.0
million, $322.0 million and $260.2 million for the eleven months ended November 30, 2018 and the twelve months
ended December 31, 2017 and 2016, respectively.
As discussed above, we account for our retained 31% ownership of National Beef subsequent to the sale to Marfrig
under the equity method. From June 5, 2018 through November 30, 2018, we recorded $110.0 million in Income (loss)
related to associated companies from our 31% ownership in National Beef and we received distributions from National
Beef of $48.7 million. The pre- tax income of 100% National Beef from June 5, 2018 through November 30, 2018 was
$367.2 million.
During the eleven months ended November 30, 2018, we also recorded a pre- tax gain on the National Beef transaction
of $873.5 million ($643.9 million after- tax) which is reported in Gain on disposal of discontinued operations, net of
income tax provision in the Consolidated Statements of Operations. Included in the $873.5 million pre- tax gain on the
sale of National Beef was approximately $352.4 million related to the remeasurement of our retained 31% interest in
National Beef to fair value. The $592.3 million fair value of our retained 31% interest in National Beef was based on
the implied equity value of 100% of National Beef from the transaction with Marfrig and is considered a Level 3 input.
The transaction with Marfrig was based on a $1.9 billion equity valuation and a $2.3 billion enterprise valuation.
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Notes to Consolidated Financial Statements, continued
Note 29. Segment Information
We are a diversified financial services company engaged in investment banking and capital markets, asset management
and direct investing. Prior to 2018, we had three reportable segments consisting of Jefferies Group, National Beef and
Corporate.
In 2018, we made a number of strategic changes including the sale of 48% of National Beef and 100% of our interest
in Garcadia. During the fourth quarter of 2018, we transferred to Jefferies Group our 50% interest in Berkadia and our
LAM seed investments, thereby amalgamating our primary financial services operating businesses into one platform.
Culminating with the fourth quarter reorganization, we began managing our business across three reportable operating
segments consisting of Jefferies Group, Merchant Banking and Corporate. In connection with this change, we have
reclassified the prior periods to conform to our current presentation.
Jefferies Group is the largest independent U.S. headquartered global full- service integrated investment banking and
securities firm.
Merchant Banking consists of our various merchant banking businesses and investments, including National Beef,
Spectrum Brands, Linkem, Vitesse Energy Finance and JETX Energy, WeWork, HomeFed, Idaho Timber, FXCM,
Foursight Capital and Golden Queen. Our Merchant Banking businesses and investments also include LAM and
Berkadia, prior to their transfer to Jefferies Group in the fourth quarter of 2018, and Garcadia, prior to its sale in August
2018.
Corporate assets primarily consist of financial instruments owned, the deferred tax asset (exclusive of Jefferies Group’s
deferred tax asset), cash and cash equivalents. Corporate revenues primarily include interest income. We do not allocate
Corporate revenues or overhead expenses to the operating units.
As discussed further in Notes 1 and 28, on June 5, 2018, we sold 48% of National Beef to Marfrig and deconsolidated
our investment in National Beef. Results prior to June 5, 2018 are classified in discontinued operations and are not
included in the table below. Our retained 31% interest in National Beef is accounted for under the equity method and
results subsequent to the June 5, 2018 closing are included in Merchant Banking in the table below.
Certain information concerning our segments is presented in the following table. Consolidated subsidiaries are reflected
as of the date a majority controlling interest was acquired. As discussed above, Jefferies Group is reflected in our
consolidated financial statements utilizing a one month lag for the twelve months ended December 31, 2017 and 2016.
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Notes to Consolidated Financial Statements, continued
Note 29. Segment Information, continued
Eleven Months Twelve Months Twelve Months
Ended Ended Ended
November 30, December 31, December 31,
2018 2017 2016
________________________ ________________________ ________________________
(In thousands)
Net revenues:
Reportable Segments:
Jefferies Group (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,183,376 $ 3,198,109 $ 2,414,614
Merchant Banking (1) (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 571,831 876,180 621,804
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,300 6,306 2,689
____________________ ____________________ ____________________
Total net revenues related to reportable segments . . . . . . . . . . . 3,777,507 4,080,595 3,039,107
Consolidation adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (13,473) (3,150) (3,733)
____________________ ____________________ ____________________
Total consolidated net revenues . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,764,034 $ 4,077,445 $ 3,035,374
____________________ ____________________ ____________________
____________________ ____________________ ____________________
Income (loss) from continuing operations before income taxes:
Reportable Segments:
Jefferies Group (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 409,667 $ 504,924 $ 29,972
Merchant Banking (1) (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,488 228,373 85,188
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (66,140) (78,802) (72,344)
____________________ ____________________ ____________________
Income from continuing operations before income taxes
related to reportable segments . . . . . . . . . . . . . . . . . . . . . . . . 354,015 654,495 42,816
Parent Company interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (54,090) (58,943) (58,881)
Consolidation adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,825) 10,950 3,473
____________________ ____________________ ____________________
Total consolidated income (loss) from continuing operations
before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 296,100 $ 606,502 $ (12,592)
____________________ ____________________ ____________________
____________________ ____________________ ____________________
Depreciation and amortization expenses:
Reportable Segments:
Jefferies Group (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 68,296 $ 62,668 $ 60,206
Merchant Banking (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48,852 44,257 53,286
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,169 3,470 3,619
____________________ ____________________ ____________________
Total consolidated depreciation and amortization expenses . . . . $ 120,317 $ 110,395 $ 117,111
____________________ ____________________ ____________________
____________________ ____________________ ____________________
November 30, December 31, December 31,
2018 2017 2016
________________________ ________________________ ________________________
Identifiable assets employed:
Reportable Segments:
Jefferies Group (1) (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $41,224,984 $39,575,732 $36,992,096
Merchant Banking (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,190,484 4,903,530 5,120,337
National Beef . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . – 1,460,539 1,498,317
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,838,037 1,299,628 1,543,238
____________________ ____________________ ____________________
Identifiable assets employed related to reportable segments . . . 47,253,505 47,239,429 45,153,988
Consolidation adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (122,410) (70,321) (82,681)
____________________ ____________________ ____________________
Total consolidated assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $47,131,095 $47,169,108 $45,071,307
____________________ ____________________ ____________________
____________________ ____________________ ____________________
(1) Amounts related to LAM and Berkadia are included in Merchant Banking prior to their transfer to Jefferies Group
in the fourth quarter of 2018. Revenues related to the net assets transferred were $6.7 million, $49.6 million and
$26.5 million for the eleven months ended November 30, 2018 and the twelve months ended December 31, 2017
and 2016, respectively. Income from continuing operations before income taxes related to the net assets transferred
were $47.7 million, $118.4 million and $109.4 million for the eleven months ended November 30, 2018 and the
twelve months ended December 31, 2017 and 2016, respectively. Identifiable assets employed related to the net
assets transferred were $662.2 million and $238.1 million at December 31, 2017 and 2016, respectively.
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Notes to Consolidated Financial Statements, continued
Note 29. Segment Information, continued
(2) Merchant Banking Net revenues and Income (loss) from continuing operations before income taxes include realized
and unrealized gains (losses) relating to our investment in FXCM of $18.6 million and $(64.6) million, respectively,
for the eleven months ended November 30, 2018; $23.2 million and $(154.5) million, respectively, for the twelve
months ended December 31, 2017; and $(54.6) million and $(52.7) million , respectively, for the twelve months
ended December 31, 2016.
(3) At November 30, 2018 and December 31, 2017 and 2016, includes $243.2 million, $213.0 million and $337.6
million, respectively, of Jefferies Group’s deferred tax asset, net.
Net revenues for Jefferies Group are recorded in the geographic region in which the position was risk- managed, in the
case of investment banking, in which the senior coverage banker is located, or for asset management, according to the
location of the investment adviser. Net revenues by geographic region for Jefferies Group were as follows (in thousands):
Eleven Months Twelve Months Twelve Months
Ended Ended Ended
November 30, December 31, December 31,
2018 2017 2016
_______________________ _______________________ _______________________
Americas (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,652,917 $2,602,741 $1,870,355
Europe (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 434,895 489,583 458,046
Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95,564 105,785 86,213
$3,183,376 $3,198,109 $2,414,614
_________________ _________________ _________________
_________________ _________________ _________________
_________________ _________________ _________________
(1) Substantially all relates to U.S. results.
(2) Substantially all relates to U.K. results.
Consolidated Net revenues exclusive of Jefferies Group principally relate to the U.S. for the eleven months ended
November 30, 2018 and the twelve months ended December 31, 2017 and 2016.
Interest expense classified as a component of Net revenues relates to Jefferies Group. For the eleven months ended
November 30, 2018 and the twelve months ended December 31, 2017 and 2016, interest expense classified as a
component of Expenses was primarily comprised of parent company interest ($54.1 million, $58.9 million and $58.9
million, respectively) and Merchant Banking ($35.2 million, $42.3 million and $36.9 million, respectively).
As discussed above, during the third quarter of 2018, we sold 100% of our equity interests in Garcadia and our associated
real estate to our former partners, the Garff family and recognized a pre- tax gain of $221.7 million for the eleven months
ended November 30, 2018 in Other revenues. The gain on the sale is included within Merchant Banking above.
Conwed was our consolidated subsidiary that manufactured and marketed lightweight plastic netting. In January 2017,
we sold 100% of Conwed to Schweitzer- Mauduit International, Inc., (NYSE: SWM) for $295 million in cash plus
potential earn- out payments in 2019, 2020 and 2021 totaling up to $40 million in cash to the extent the results of
Conwed’s subsidiary, Filtrexx International, exceed certain performance thresholds. We recognized a $178.2 million
pre- tax gain on the sale of Conwed in Other revenues primarily during the twelve months ended December 31, 2017.
The gain on the sale of Conwed is included within Merchant Banking above.
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Notes to Consolidated Financial Statements, continued
Note 30. Selected Quarterly Financial Data (Unaudited)
First Second Third Fourth
Quarter (1) Quarter (2) Quarter (3) Quarter (4)
__________________ __________________ __________________ __________________
(In thousands, except per share amounts)
2018
Net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 895,435 $ 911,159 $1,150,846 $ 806,594
Income (loss) from continuing operations . . . . . . . . . 86,192 27,917 182,301 (19,318)
Income from discontinued operations, net of taxes . . . 52,957 77,106 – –
Gain on disposal of discontinued operations,
net of taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . – 643,921 – –
Net (income) loss attributable to the noncontrolling
interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,344 (136) 12,000 (233)
Net (income) loss attributable to the redeemable
noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . (14,796) (22,108) (390) 31
Preferred stock dividends . . . . . . . . . . . . . . . . . . . . . . (1,172) (1,171) (1,276) (851)
Net income (loss) attributable to Jefferies Financial
Group Inc. common shareholders . . . . . . . . . . . . 124,525 725,529 192,635 (20,371)
Basic earnings (loss) per common share attributable
to Jefferies Financial Group Inc. common
shareholders:
Income (loss) from continuing operations . . . . . . . $0.23 $0.08 $0.56 $(0.06)
Income from discontinued operations . . . . . . . . . . . 0.11 0.15 – –
Gain on disposal of discontinued operations . . . . . . – 1.82 – –
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . $0.34 $2.05 $0.56 $(0.06)
________ ________
________ ________
________ ________
Number of shares used in calculation . . . . . . . . . . . 366,427 352,049 341,434 329,101
____________
____________
____________
____________
________ _________
________ _________
________ _________
____________ ____________
____________ ____________
Diluted earnings (loss) per common share attributable
to Jefferies Financial Group Inc. common
shareholders:
Income (loss) from continuing operations . . . . . . . $0.23 $0.08 $0.55 $(0.06)
Income from discontinued operations . . . . . . . . . . . 0.11 0.15 – –
Gain on disposal of discontinued operations . . . . . . – 1.80 – –
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . $0.34 $2.03 $0.55 $(0.06)
________ ________
________ ________
________ ________
Number of shares used in calculation . . . . . . . . . . . 373,461 356,075 350,307 329,101
____________
____________
____________
____________
________ _________
________ _________
________ _________
____________ ____________
____________ ____________
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Notes to Consolidated Financial Statements, continued
Note 30. Selected Quarterly Financial Data (Unaudited), continued
First Second Third Fourth
Quarter (1) Quarter (2) Quarter (3) Quarter (4)
__________________ __________________ __________________ __________________
(In thousands, except per share amounts)
2017
Net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,306,526 $ 856,861 $ 857,223 $1,056,835
Income (loss) from continuing operations . . . . . . . . . 249,751 20,072 15,778 (321,385)
Income from discontinued operations, net of taxes . . . 44,172 53,990 120,989 69,480
Net (income) loss attributable to the noncontrolling
interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 523 1,446 (28) 1,514
Net income attributable to the redeemable
noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . (12,022) (16,300) (36,216) (20,038)
Preferred stock dividends . . . . . . . . . . . . . . . . . . . . . . (1,016) (1,015) (1,172) (1,172)
Net income (loss) attributable to Jefferies Financial
Group Inc. common shareholders . . . . . . . . . . . . 281,408 58,193 99,351 (271,601)
Basic earnings (loss) per common share attributable
to Jefferies Financial Group Inc. common
shareholders:
Income (loss) from continuing operations . . . . . . . $0.67 $0.06 $0.04 $(0.88)
Income from discontinued operations . . . . . . . . . . . 0.09 0.10 0.23 0.14
________ ________ ________ _________
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . $0.76 $0.16 $0.27 $(0.74)
________ ________ ________ _________
________ ________ ________ _________
Number of shares used in calculation . . . . . . . . . . . 369,267 369,212 367,828 366,000
____________ ____________ ____________ ____________
____________ ____________ ____________ ____________
Diluted earnings (loss) per common share attributable
to Jefferies Financial Group Inc. common
shareholders:
Income (loss) from continuing operations . . . . . . . $0.66 $0.06 $0.04 $(0.88)
Income from discontinued operations . . . . . . . . . . . 0.09 0.10 0.23 0.14
________ ________ ________ _________
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . $0.75 $0.16 $0.27 $(0.74)
________ ________ ________ _________
________ ________ ________ _________
Number of shares used in calculation . . . . . . . . . . . 375,721 371,552 370,198 366,000
____________ ____________ ____________ ____________
____________ ____________ ____________ ____________
(1) The first quarter of 2018 includes losses of $21.4 million from a decrease in the fair value of our investment in
HRG.
The first quarter of 2017 includes a pre- tax gain of $179.9 million related to the sale of Conwed, revenue of
$175.2 million related to the increase in the fair value of our investment in HRG and a pre- tax charge of $130.2
million related to an impairment of our equity investment in FXCM.
(2) The second quarter of 2018 includes the after- tax gain on disposal of discontinued operations of $643.9 million
from the National Beef transaction and losses of $158.4 million from a decrease in the fair value of our
investment in HRG.
The second quarter of 2017 includes losses of $75.0 million from a decrease in the fair value of our investment
in HRG and revenue of $95.8 million from an increase in the fair value of Jefferies Group’s investment in KCG.
(3) The third quarter of 2018 includes a $221.7 million pre- tax gain on the sale of our Garcadia interests and $58.9
million of income related to our remaining interest in National Beef. These increases were partially offset by a
$47.9 million impairment loss related to Golden Queen and losses of $48.5 million from a decrease in the fair
value of our investment in Spectrum Brands.
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Notes to Consolidated Financial Statements, continued
Note 30. Selected Quarterly Financial Data (Unaudited), continued
The third quarter of 2017 includes losses of $97.9 million from a decrease in the fair value of our investment
in HRG.
(4) The fourth quarter of 2018 is comprised of the two months ended November 30, 2018 and the fourth quarter
of 2017 is comprised of the three months ended December 31, 2017.
The fourth quarter of 2018 includes a $62.1 million impairment loss related to FXCM and losses of $190.4
million from a decrease in the fair value of our investment in Spectrum Brands. These decreases were partially
offset by revenues of $70.9 million related to the increase in the fair value of our investment in WeWork and
$26.8 million of income related to our remaining interest in National Beef.
As discussed further in Note 21, the fourth quarter of 2017 includes a discrete tax charge of $450.5 million as
a provisional estimate of the impact of the Tax Act. This provisional estimate primarily consists of a $415.0
million expense related to the revaluation of our deferred tax assets and a $35.5 million expense related to the
deemed repatriation of foreign earnings.
In 2018 and 2017, the totals of quarterly per share amounts may not equal annual per share amounts because of changes
in outstanding shares during the year.
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Schedule I – Condensed Financial Information of Registrant
Jefferies Financial Group Inc.
(Parent Company Only)
Condensed Statements of Financial Condition
November 30, 2018 and December 31, 2017
(Dollars in thousands, except par value)
November 30, December 31,
2018 2017
__________________
Assets
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 48,540 $ 12,317
Financial instruments owned:
Trading assets, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 338,067 200,804
Available for sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . – 16,378
___________________ ___________________
Total financial instruments owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 338,067 217,182
___________________ ___________________
Investments in subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,774,541 18,615,819
Advances to subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 224,653 542,976
Investments in associated companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 929,477 288,382
Deferred tax asset, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63,211 205,773
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,186 8,815
___________________ ___________________
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11,388,675 $19,891,264
___________________ ___________________
___________________ ___________________
__________________
Liabilities
Accrued interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,629 $ 11,447
Pension liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,721 52,841
Other payables, expense accruals and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160,339 31,919
Advances from subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 8,575,079
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 990,116 989,021
___________________ ___________________
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,202,809 9,660,307
___________________ ___________________
Commitments and contingencies
Mezzanine Equity
Mandatorily redeemable convertible preferred shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125,000 125,000
Equity
Common shares, par value $1 per share, authorized 600,000,000 shares; 307,515,472
and 356,227,038 shares issued and outstanding, after deducting 109,460,774 and
60,165,980 shares held in treasury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 307,515 356,227
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,854,847 4,676,038
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 288,286 372,724
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,610,218 4,700,968
___________________ ___________________
Total Jefferies Financial Group Inc. shareholders’ equity . . . . . . . . . . . . . . . . . . . . . 10,060,866 10,105,957
___________________ ___________________
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11,388,675 $19,891,264
___________________ ___________________
___________________ ___________________
See accompanying notes to condensed financial statements.
S-1
92472_02_Leucadia_AR _Notes.qxp 2/6/19 7:30 PM Page S-2
Schedule I – Condensed Financial Information of Registrant, continued
Jefferies Financial Group Inc.
(Parent Company Only)
Condensed Statements of Operations
For the eleven months ended November 30, 2018 and the twelve months ended December 31, 2017 and 2016
(In thousands, except per share amounts)
Eleven Months Twelve Months Twelve Months
Ended Ended Ended
November 30, December 31, December 31,
2018 2017 2016
______________________ ______________________ ______________________
Revenues:
Principal transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 120,886 $ (9,754) $ 16,735
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 663 277 2,300
_____
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121,549 (9,477) 19,035
_____
Expenses:
Compensation and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,955 47,462 39,693
WilTel pension expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,659 2,957 2,989
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,090 58,943 58,881
Intercompany interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,642 361,446 293,527
Selling, general and other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,664 20,821 19,244
_____
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132,010 491,629 414,334
_____
_________________ _______________ __________
_________________ _______________ __________
_________________ _______________ __________
_________________ _______________ __________
Loss from continuing operations before income taxes, income
related to associated companies and equity in earnings of
subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10,461) (501,106) (395,299)
Income related to associated companies . . . . . . . . . . . . . . . . . . . . . . . . . 96,808 3,183 21,195
_____
_________________ _______________ __________
Income (loss) from continuing operations before income taxes and
equity in earnings of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . 86,347 (497,923) (374,104)
Income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,281) (47,329) (117,699)
_____
_________________ _______________ __________
Income (loss) from continuing operations before equity in earnings
of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91,628 (450,594) (256,405)
Equity in earnings from continuing operations of subsidiaries,
net of taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 198,317 418,966 222,531
_____
Income (loss) from continuing operations . . . . . . . . . . . . . . . . . . . . 289,945 (31,628) (33,874)
_________________ _______________ __________
Equity in earnings from discontinued operations of subsidiaries,
net of taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92,922 203,354 163,875
Gain on disposal of discontinued operations, net of taxes . . . . . . . . . . . . 643,921 – –
_____
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,026,788 171,726 130,001
Preferred stock dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,470) (4,375) (4,063)
_____
_________________ _______________ __________
_________________ _______________ __________
Net income attributable to Jefferies Financial Group Inc. common
shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,022,318 $ 167,351 $125,938
_____
_____
_________________ _______________ __________
_________________ _______________ __________
Basic earnings per common share attributable to Jefferies
Financial Group Inc. common shareholders:
Income (loss) from continuing operations . . . . . . . . . . . . . . . . . . . . $0.82 $(0.10) $(0.10)
Income from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . 0.27 0.55 0.44
Gain on disposal of discontinued operations . . . . . . . . . . . . . . . . . . 1.84 – –
_____ _____
_____
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2.93 $ 0.45 $ 0.34
_____ _________
_____ _________
_________ _____
_________ _____
_________ _____
Diluted earnings per common share attributable to Jefferies
Financial Group Inc. common shareholders:
Income (loss) from continuing operations . . . . . . . . . . . . . . . . . . . . $0.81 $(0.10) $(0.10)
Income from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . 0.26 0.55 0.44
Gain on disposal of discontinued operations . . . . . . . . . . . . . . . . . . 1.83 – –
_____
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2.90 $ 0.45 $ 0.34
_____
_____
_________ _____
_________ _____
_________ _____
_____ _____
_____ _____
_____ _____
See accompanying notes to condensed financial statements.
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Schedule I – Condensed Financial Information of Registrant, continued
Jefferies Financial Group Inc.
(Parent Company Only)
Condensed Statements of Comprehensive Income (Loss)
For the eleven months ended November 30, 2018 and the twelve months ended December 31, 2017 and 2016
(In thousands)
Eleven Months Twelve Months Twelve Months
Ended Ended Ended
November 30, December 31, December 31,
2018 2017 2016
______________________ ______________________ ______________________
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,026,788 $ 171,726 $ 130,001
_______________ _________________
__________________
_________________
Other comprehensive income (loss):
Net unrealized holding gains (losses) on investments arising during
the period, net of income tax provision (benefit) of $(551), $3,450
and $2,262 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,560) 5,923 3,900
Less: reclassification adjustment for net (gains) losses included in net
income, net of income tax provision (benefit) of $37, $124 and $2 . . (109) (212) (4)
_______________ _________________
Net change in unrealized holding gains (losses) on investments, net of
income tax provision (benefit) of $(588), $3,326 and $2,260 . . . . . . (1,669) 5,711 3,896
_______________ _________________
Net unrealized foreign exchange gains (losses) arising during the
period, net of income tax provision (benefit) of $(11,089), $14,616
and $(3,530) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (71,543) 78,493 (121,581)
Less: reclassification adjustment for foreign exchange (gains) losses
included in net income, net of income tax provision (benefit) of
$(16), $1,086 and $0 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (20,459) 5,310 –
Net change in unrealized foreign exchange gains (losses), net of
income tax provision (benefit) of $(11,073), $13,530 and $(3,530) . . (92,002) 83,803 (121,581)
_______________ _________________
Net unrealized gains (losses) on instrument specific credit risk arising
during the period, net of income tax provision (benefit) of $9,289,
$(13,215) and $(4,251) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,620 (21,394) (6,494)
Less: reclassification adjustment for instrument specific credit risk
_______________ _________________
_________________
_________________
_________________
(gains) losses included in net income, net of income tax provision
(benefit) of $311, $0 and $0 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (916) – –
_________________
_______________ _________________
_________________
Net change in unrealized instrument specific credit risk gains (losses),
net of income tax provision (benefit) of $8,978, $(13,215)
and $(4,251) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,704 (21,394) (6,494)
_______________ _________________
Net unrealized gains (losses) on cash flow hedges arising during the
period, net of income tax provision (benefit) of $552, $(593)
and $0 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,608 (936) –
Less: reclassification adjustment for cash flow hedges (gains) losses
included in net income, net of income tax provision (benefit) of
$0, $0 and $0 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . – – –
Net change in unrealized cash flow hedges gains (losses), net of
income tax provision (benefit) of $552, $(593) and $0 . . . . . . . . . . . 1,608 (936) –
Net pension gains (losses) arising during the period, net of income tax
provision (benefit) of $(297), $2,018 and $(2,516) . . . . . . . . . . . . . . (844) 3,526 (5,451)
Less: reclassification adjustment for pension (gains) losses included
in net income, net of income tax provision (benefit) of $(697),
$(2,042) and $(700) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,349 517 1,534
_______________ _________________
Net change in pension liability benefits, net of income tax provision
(benefit) of $400, $4,060 and $(1,816) . . . . . . . . . . . . . . . . . . . . . . . 6,505 4,043 (3,917)
_______________ _________________
Other comprehensive income (loss), net of income taxes . . . . . . . . . . . . . (56,854) 71,227 (128,096)
_______________ _________________
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 969,934 242,953 1,905
Preferred stock dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,470) (4,375) (4,063)
_______________ _________________
_________________
_________________
_______________ _________________
_______________ _________________
_________________
_________________
_________________
_________________
Comprehensive income (loss) attributable to Jefferies Financial
Group Inc. common shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 965,464 $ 238,578 $ (2,158)
_______________ _________________
_______________ _________________
See accompanying notes to condensed financial statements.
__________________
__________________
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Schedule I – Condensed Financial Information of Registrant, continued
Jefferies Financial Group Inc.
(Parent Company Only)
Condensed Statements of Cash Flows
For the eleven months ended November 30, 2018 and the twelve months ended December 31, 2017 and 2016
(In thousands)
Eleven Months Twelve Months Twelve Months
Ended Ended Ended
November 30, December 31, December 31,
2018 2017 2016
______________________ ______________________ ______________________
Net cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,026,788 $ 171,726 $ 130,001
Adjustments to reconcile net income to net cash provided by
(used for) operations:
Deferred income tax provision (benefit) . . . . . . . . . . . . . . . . . . . . . . . . 142,085 116,942 (12,220)
Accretion of interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 944 975 921
Share-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48,249 48,384 33,597
Equity in earnings of subsidiaries, including equity in earnings of
discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (291,239) (622,320) (386,406)
Gain on disposal of discontinued operation . . . . . . . . . . . . . . . . . . . . . . (873,474) – –
Income related to associated companies . . . . . . . . . . . . . . . . . . . . . . . . (96,808) (3,183) (21,195)
Distributions from associated companies . . . . . . . . . . . . . . . . . . . . . . . . 24,711 5,641 1,861
Net change in:
Trading assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (120,886) 22,415 (40,235)
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129 1,250 (708)
Accrued interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,818) – –
Pension liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,231) (8,461) (13,111)
Other payables, expense accruals and other liabilities . . . . . . . . . . . . (1,712) (7,763) (73,663)
Income taxes receivable/payable, net . . . . . . . . . . . . . . . . . . . . . . . . . 242,637 (164,684) (90,898)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,315 2,316 1,262
__________________ ________________ __________________
_
Net cash provided by (used for) operating activities . . . . . . . . . . . . . . . 97,690 (436,762) (470,794)
__________________ ________________ __________________
_
Net cash flows from investing activities:
Distributions from subsidiaries, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,304 50,122 239,297
Collections on notes, loans and other receivables . . . . . . . . . . . . . . . . . . . – – 16,233
Investments in associated companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,228) (45,457) (11,611)
Capital distributions from associated companies . . . . . . . . . . . . . . . . . . . . 24,442 2,796 1,501
Purchases of investments (other than short-term) . . . . . . . . . . . . . . . . . . . (1,500) (1,316) (2,242)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . – 1,886 –
__________________ ________________ __________________
_
Net cash provided by investing activities – continuing operations . . . . 60,018 8,031 243,178
Net cash provided by investing activities – discontinued operations . . . 1,158,655 337,690 201,382
__________________ ________________ __________________
_
Net cash provided by investing activities . . . . . . . . . . . . . . . . . . . . . . 1,218,673 345,721 444,560
__________________ ________________ __________________
_
Net cash flows from financing activities:
Advances from (to) subsidiaries, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,139) 214,519 265,762
Issuance of common shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,611 1,501 1,062
Purchase of common shares for treasury . . . . . . . . . . . . . . . . . . . . . . . . . . (1,130,854) (100,477) (95,020)
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (151,758) (117,407) (91,296)
__________________ ________________ __________________
_
Net cash provided by (used for) financing activities . . . . . . . . . . . . . . . (1,280,140) (1,864) 80,508
__________________ ________________ __________________
_
Net increase (decrease) in cash, cash equivalents and restricted cash . . 36,223 (92,905) 54,274
Cash, cash equivalents and restricted cash at beginning of period . . . . . . 12,317 105,222 50,948
__________________ ________________ __________________
_
Cash, cash equivalents and restricted cash at end of period . . . . . . . . . . . . $ 48,540 $ 12,317 $ 105,222
__________________ ________________ __________________
_
__________________ ________________ __________________
_
See accompanying notes to condensed financial statements.
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92472_02_Leucadia_AR _Notes.qxp 2/6/19 7:30 PM Page S-5
Schedule I - Condensed Financial Information of Registrant, continued
Jefferies Financial Group Inc.
(Parent Company Only)
Notes to Condensed Financial Statements
1. Introduction and Basis of Presentation
The notes to the consolidated financial statements of Jefferies Financial Group Inc. and Subsidiaries (the “Company”)
are incorporated by reference into this schedule. For purposes of these condensed non-consolidated financial statements,
the Company’s wholly-owned and majority owned subsidiaries are accounted for using the equity method of accounting
(“equity method subsidiaries”).
The Parent Company Financial Statements have been prepared in accordance with accounting principles generally
accepted in the United States of America (“GAAP”). The significant accounting policies of the Parent Company Financial
Statements are those used by the Company on a consolidated basis, to the extent applicable. For further information
regarding the significant accounting policies refer to Note 2, Significant Accounting Policies, in the Company’s
consolidated financial statements included in the 2018 10-K.
The Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these financial statements in conformity with GAAP. The most
important of these estimates and assumptions relate to fair value measurements, goodwill and intangible assets, the
ability to realize deferred tax assets and the recognition and measurement of uncertain tax positions. Although these and
other estimates and assumptions are based on the best available information, actual results could be materially different
from these estimates.
2. Cash Flows
Supplemental cash flow information related to the Parent Company is as follows (in thousands):
Eleven Months Twelve Months Twelve Months
Ended Ended Ended
November 30, December 31, December 31,
2018 2017 2016
__________________ __________________
__________________
Cash paid for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 57,813 $ 57,813 $ 57,813
Income tax payments (refunds), net . . . . . . . . . . . . . . . . . . . . . . . . . . 32,576 1,440 (10,199)
Non-cash investing activities:
Investments contributed to subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . $ – $ 25,328 $ 423,009
Investments transferred from subsidiary . . . . . . . . . . . . . . . . . . . . . . . – – 2,022
Dividends received from subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . 8,450,147 32,792 –
During the eleven months ended November 30, 2018, the Parent Company had $17.6 million in non-cash financing
activities related to purchases of common shares for treasury which settled subsequent to November 30, 2018.
Cash, cash equivalents and restricted cash is included in Cash and cash equivalents in the Condensed Statements of
Financial Condition.
3. Transactions with Subsidiaries
The Parent Company has transactions with its equity method subsidiaries, many of which are structured as interest
bearing advances to/from its subsidiaries. Intercompany interest expense primarily reflects the interest on funding
advances incurred by the Parent to its wholly-owned subsidiary which holds assets related to its treasury function. Interest
is incurred on funding advances based on the prime rate plus .125%. Although there is frequent cash movement between
these subsidiaries and the Parent, they do not generally represent cash dividends. The Parent Company received $48.7
million of cash dividends from Jefferies Group during the eleven months ended November 30, 2018 and no cash dividends
from its subsidiaries during the twelve months ended December 31, 2017 and 2016.
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92472_02_Leucadia_AR _Notes.qxp 2/6/19 7:30 PM Page S-6
Notes to Condensed Financial Statements, continued
3. Transactions with Subsidiaries, continued
Historically, excess cash was provided to the Parent Company by its subsidiaries in the form of loans rather than as
distributions. Through a series of steps, the Parent Company has reduced these intercompany loans. During the eleven
months ended November 30, 2018, the Parent Company received non-cash dividends totaling $8.5 billion from its
subsidiaries. Of this amount, $8.5 billion was reflected as a decrease in our Investment in subsidiaries, $0.2 billion was
reflected as a decrease to Advances to subsidiaries and $8.6 billion was reflected as a decrease to Advances from
subsidiaries.
4. Commitments, Contingencies and Guarantees
In the normal course of its business, the Parent Company has various commitments, contingencies and guarantees as
described in Note 24, Commitments, Contingencies and Guarantees, and Note 16, Mezzanine Equity, in the Company’s
consolidated financial statements.
In the fourth quarter of 2018, the Company transferred its Leucadia Asset Management seed investments, as well as
its interest in Berkadia Commercial Mortgage Holding LLC, to Jefferies Group. In connection with these transfers,
related deferred tax liabilities of approximately $50.9 million were transferred to Jefferies Group, for which the Parent
Company indemnified Jefferies Group. Such indemnification is reflected in Other payables, expense accruals and other
liabilities in the Condensed Statement of Financial Condition at November 30, 2018.
5. Restricted Net Assets
For a discussion of the Company’s regulatory requirements, see Note 25, Net Capital Requirements, in the Company’s
consolidated financial statements. Some of the Company’s consolidated subsidiaries also have credit agreements which
may restrict the payment of cash dividends, or the ability to make loans or advances to the Parent Company.
At November 30, 2018 and December 31, 2017, $5.3 billion and $6.1 billion, respectively, of net assets of the Parent
Company’s consolidated subsidiaries are restricted as to the payment of cash dividends, or the ability to make loans or
advances to the Parent Company. At November 30, 2018 and December 31, 2017, $4.7 billion and $5.1 billion,
respectively, of these net assets are restricted as they reflect regulatory capital requirements or require regulatory
approval prior to the payment of cash dividends and advances to the Parent Company.
Included in retained earnings of the Parent Company at November 30, 2018 are $252.9 million of undistributed earnings
of unconsolidated associated companies. For further information, see Note 11, Loans to and Investments in Associated
Companies, in the Company’s consolidated financial statements.
S-6
Officers
Richard B. Handler
Chief Executive Officer
Brian P. Friedman
President
Joseph S. Steinberg
Chairman
Michael J. Sharp
Executive Vice President and General Counsel
Teresa S. Gendron
Vice President and Chief Financial Officer
John M. Dalton
Vice President, Controller and
Chief Accounting Officer
Rocco J. Nittoli
Vice President and
Chief Compliance Officer
Auditors
Deloitte & Touche LLP
30 Rockefeller Plaza
New York, New York 10112-0015
Our common stock is listed on the New York
Stock Exchange (NYSE: JEF)
1 Audit Committee
2 Compensation Committee
3 Nominating and Corporate Governance Committee
4 Risk and Liquidity Oversight Committee
5 Valuation Oversight Committee
6 Retired effective February 1, 2019
Jefferies Financial Group
Directors
Joseph S. Steinberg
Chairman
Richard B. Handler
Chief Executive Officer
Brian P. Friedman
President
Linda L. Adamany 1, 3, 4, 5
Retired Group Vice President of BP plc
Barry J. Alperin 1, 2, 3, 5
Retired Vice Chairman of Hasbro, Inc.
Robert D. Beyer 1, 2
Chairman of Chaparal Investments LLC
Francisco L. Borges 1, 3
Chairman of Landmark Partners, LLC
W. Patrick Campbell 6
Retired Independent Consultant,
Former Chairman and CEO of Magex Limited
MaryAnne Gilmartin 3, 4
Co-Founder and Chief Executive Officer of L&L MAG
Robert E. Joyal 2, 3
Retired President of Babson Capital Management LLC
Jacob M. Katz 1, 4, 5
Retired Chairman and Global Leader of Financial
Services of Grant Thornton LLP
Jeffrey C. Keil 6
Retired President of Republic New York Corporation
Michael T. O’Kane 2, 3, 5
Retired Senior Managing Director of TIAA-CREF
Stuart H. Reese 1, 4
Retired CEO, Chairman and President of MassMutual
Registrar and Transfer Agent
American Stock Transfer & Trust Company, LLC
6201 15th Avenue
Brooklyn, New York 11219-9821
(800) 937-5449
www.astfinancial.com
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Jefferies Financial Group Inc.
520 Madison Avenue
New York, New York 10022