Company Quick10K Filing
Quick10K
Jefferies
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$20.06 298 $5,970
10-Q 2019-02-28 Quarter: 2019-02-28
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-04-12 Other Events, Exhibits
8-K 2019-02-06 Officers
8-K 2019-02-01 Officers
8-K 2019-01-10 Earnings, Exhibits
8-K 2019-01-10 Regulation FD, Exhibits
8-K 2018-11-26 Officers
8-K 2018-11-15 Other Events
8-K 2018-10-25 Earnings, Exhibits
8-K 2018-10-04 Regulation FD
8-K 2018-10-03 Regulation FD, Exhibits
8-K 2018-10-02 Earnings, Amend Bylaw, Exhibits
8-K 2018-09-21 Earnings, Exhibits
8-K 2018-07-26 Earnings, Exhibits
8-K 2018-06-19 Earnings, Exhibits
8-K 2018-06-05 Enter Agreement, M&A, Exhibits
8-K 2018-05-23 Amend Bylaw, Shareholder Vote
8-K 2018-04-26 Earnings, Exhibits
8-K 2018-04-09 Regulation FD, Exhibits
8-K 2018-04-05 Enter Agreement, Earnings, Exhibits
8-K 2018-03-20 Earnings, Exhibits
8-K 2018-02-22 Earnings, Regulation FD, Exhibits
8-K 2018-02-16 Officers
8-K 2018-01-24 Officers
8-K 2018-01-16 Other Events
RNR Renaissancere Holdings 6,520
FLO Flowers Foods 4,560
EQC Equity Commonwealth 3,820
EIDX Eidos Therapeutics 919
GLDD Great Lakes Dredge & Dock 604
ASM Avino Silver & Gold Mines 35
CHUBA CommerceHub 0
ARCK ARC Group 0
DCSA Docasa 0
OPTI Opti 0
JEF 2019-02-28
Part I. Financial Information
Item 1. Financial Statements.
Note 1. Nature of Operations
Note 2. Basis of Presentation and Significant Accounting Policies
Note 3. Fair Value Disclosures
Note 4. Derivative Financial Instruments
Note 5. Collateralized Transactions
Note 6. Securitization Activities
Note 7. Available for Sale Securities and Other Investments
Note 8. Variable Interest Entities
Note 9. Loans To and Investments in Associated Companies
Note 10. Financial Statement Offsetting
Note 11. Intangible Assets, Net and Goodwill
Note 12. Short-Term Borrowings
Note 13. Long-Term Debt
Note 14. Mezzanine Equity
Note 15. Compensation Plans
Note 16. Accumulated Other Comprehensive Income
Note 17. Revenues From Contracts with Customers
Note 18. Income Taxes
Note 19. Common Share and Earnings per Common Share
Note 20. Commitments, Contingencies and Guarantees
Note 21. Net Capital Requirements
Note 22. Other Fair Value Information
Note 23. Related Party Transactions
Note 25. Segment Information
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures.
Part II - Other Information
Item 1. Legal Proceedings.
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds.
Item 6. Exhibits.
EX-31.1 jfg2282019exhibit311.htm
EX-31.2 jfg2282019exhibit312.htm
EX-32.1 jfg2282019exhibit321.htm
EX-32.2 jfg2282019exhibit322.htm

Jefferies Earnings 2019-02-28

JEF 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 jfg10q2282019.htm JEFFERIES FINANCIAL GROUP 1ST QUARTER 2019 FORM 10-Q Document


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
__________
FORM 10-Q
 
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 28, 2019

OR
 
[  ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                        to

Commission File Number 1-5721
JEFFERIES FINANCIAL GROUP INC.
(Exact name of registrant as specified in its Charter)
New York
(State or other jurisdiction of
incorporation or organization)
13-2615557
(I.R.S. Employer
Identification Number)
 
 
520 Madison Avenue, New York, New York
(Address of principal executive offices)
10022
(Zip Code)
(212) 460-1900
(Registrant’s telephone number, including area code)

N/A
(Former name, former address and former fiscal year, if changed since last report)
______________________

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. Yes x No o

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 such files).
Yes x No o

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. (Check one):
Large accelerated filer  x
Accelerated filer o
Non-accelerated filer    o
 
 
 
Smaller reporting company  o
Emerging growth company  o
 
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. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x

The number of shares outstanding of each of the issuer’s classes of common stock at April 2, 2019 was 297,826,222.




PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.
 
JEFFERIES FINANCIAL GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
February 28, 2019 and November 30, 2018
(Dollars in thousands, except par value)
(Unaudited)
 
February 28, 2019
 
November 30, 2018
ASSETS
 
 
 
Cash and cash equivalents
$
5,517,121

 
$
5,258,809

Cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations
763,213

 
707,960

Financial instruments owned, at fair value (including securities pledged of $14,322,307 and $13,059,802):
 

 
 

Trading assets, at fair value
17,925,044

 
17,463,256

Available for sale securities
24,049

 
1,409,886

Total financial instruments owned
17,949,093


18,873,142

Loans to and investments in associated companies
2,381,026

 
2,417,332

Securities borrowed
7,231,073

 
6,538,212

Securities purchased under agreements to resell
3,496,570

 
2,785,758

Receivables
7,228,766

 
6,287,401

Intangible assets, net and goodwill
1,890,948

 
1,890,131

Deferred tax asset, net
499,827

 
512,789

Other assets
2,001,708

 
1,859,561

Total assets (1)
$
48,959,345


$
47,131,095

 
 
 
 
LIABILITIES
 

 
 

Short-term borrowings
$
530,484

 
$
387,492

Trading liabilities, at fair value
10,278,412

 
9,478,946

Securities loaned
2,234,700

 
1,838,688

Securities sold under agreements to repurchase
9,307,283

 
8,643,069

Other secured financings
1,527,393

 
1,534,271

Payables, expense accruals and other liabilities
7,293,843

 
7,407,030

Long-term debt
7,685,908

 
7,617,563

Total liabilities (1)
38,858,023


36,907,059

 
 
 
 
Commitments and contingencies


 


 
 
 
 
MEZZANINE EQUITY
 

 
 

Redeemable noncontrolling interests
20,189

 
19,779

Mandatorily redeemable convertible preferred shares
125,000

 
125,000

 
 
 
 
EQUITY
 

 
 

Common shares, par value $1 per share, authorized 600,000,000 shares; 298,312,821 and 307,515,472 shares issued and outstanding, after deducting 18,663,425 and 109,460,774 shares held in treasury
298,313

 
307,515

Additional paid-in capital
3,681,085

 
3,854,847

Accumulated other comprehensive income
338,619

 
288,286

Retained earnings
5,614,935

 
5,610,218

Total Jefferies Financial Group Inc. shareholders’ equity
9,932,952


10,060,866

Noncontrolling interests
23,181

 
18,391

Total equity
9,956,133


10,079,257

 
 
 
 
Total
$
48,959,345

 
$
47,131,095


(1)
Total assets include assets related to variable interest entities of $971.5 million and $704.4 million at February 28, 2019 and November 30, 2018, respectively, and Total liabilities include liabilities related to variable interest entities of $1,528.2 million and $1,535.8 million at February 28, 2019 and November 30, 2018, respectively. See Note 8 for additional information related to variable interest entities.
See notes to interim consolidated financial statements.

2



JEFFERIES FINANCIAL GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the periods ended February 28, 2019 and March 31, 2018
(In thousands, except per share amounts)
(Unaudited)
 
 
For the Three Months Ended
 
 
February 28, 2019
 
March 31, 2018
Revenues:
 
 
 
 
Commissions and other fees
 
$
147,134

 
$
147,902

Principal transactions
 
246,182

 
145,663

Investment banking
 
285,596

 
439,991

Interest income
 
386,844

 
275,222

Manufacturing revenues
 
75,425

 
98,365

Other
 
53,831

 
53,968

Total revenues
 
1,195,012

 
1,161,111

Interest expense of Jefferies Group
 
366,569

 
265,676

Net revenues
 
828,443

 
895,435

 
 
 
 
 
Expenses:
 
 

 
 

Compensation and benefits
 
409,592

 
489,659

Cost of sales
 
66,921

 
81,935

Floor brokerage and clearing fees
 
51,868

 
42,176

Interest expense
 
23,018

 
21,498

Depreciation and amortization
 
33,934

 
28,160

Selling, general and other expenses
 
221,106

 
226,344

Total expenses
 
806,439

 
889,772

 
 
 
 
 
Income from continuing operations before income taxes and income related to associated companies
 
22,004

 
5,663

Income related to associated companies
 
27,313

 
32,100

Income from continuing operations before income taxes
 
49,317

 
37,763

Income tax provision (benefit)
 
2,302

 
(48,429
)
Income from continuing operations
 
47,015

 
86,192

Income from discontinued operations, net of income tax provision of $0 and $15,934
 

 
52,957

Net income
 
47,015

 
139,149

Net (income) loss attributable to the noncontrolling interests
 
(1,066
)
 
1,344

Net (income) loss attributable to the redeemable noncontrolling interests
 
138

 
(14,796
)
Preferred stock dividends
 
(1,276
)
 
(1,172
)
 
 
 

 
 

Net income attributable to Jefferies Financial Group Inc. common shareholders
 
$
44,811

 
$
124,525

 
 
 
 
 

(continued)














See notes to interim consolidated financial statements.


3



JEFFERIES FINANCIAL GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Operations, continued
For the periods ended February 28, 2019 and March 31, 2018
(In thousands, except per share amounts)
(Unaudited)
 
 
For the Three Months Ended
 
 
February 28, 2019
 
March 31, 2018
 
 
 
 
 
Basic earnings per common share attributable to Jefferies Financial Group Inc. common shareholders:
 
 
 
 
Income from continuing operations
 
$
0.14

 
$
0.23

Income from discontinued operations
 

 
0.11

Net income
 
$
0.14

 
$
0.34

 
 
 
 
 
Diluted earnings per common share attributable to Jefferies Financial Group Inc. common shareholders:
 
 
 
 
Income from continuing operations
 
$
0.14

 
$
0.23

Income from discontinued operations
 

 
0.11

Net income
 
$
0.14

 
$
0.34

 
 
 
 
 
Amounts attributable to Jefferies Financial Group Inc. common shareholders:
 
 
 
 
Income from continuing operations, net of taxes
 
$
44,811

 
$
86,018

Income from discontinued operations, net of taxes
 

 
38,507

Net income
 
$
44,811

 
$
124,525
































See notes to interim consolidated financial statements.

4



JEFFERIES FINANCIAL GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
For the periods ended February 28, 2019 and March 31, 2018
(In thousands)
(Unaudited)
 
 
For the Three Months Ended
 
 
February 28, 2019
 
March 31, 2018
 
 
 
 
 
Net income
 
$
47,015

 
$
139,149

Other comprehensive income (loss):
 
 

 
 

Net unrealized holding gains (losses) on investments arising during the period, net of income tax provision (benefit) of $107 and $(370)
 
317

 
(1,226
)
Less: reclassification adjustment for net (gains) losses included in net income, net of income tax provision (benefit) of $(377) and $(5)
 
1,129

 
15

Net change in unrealized holding gains (losses) on investments, net of income tax provision (benefit) of $484 and $(365)
 
1,446

 
(1,211
)
 
 
 
 
 
Net unrealized foreign exchange gains (losses) arising during the period, net of income tax provision (benefit) of $7,722 and $1,926
 
30,954

 
17,903

Less: reclassification adjustment for foreign exchange (gains) losses included in net income, net of income tax provision (benefit) of $0 and $0
 

 

Net change in unrealized foreign exchange gains (losses), net of income tax provision (benefit) of $7,722 and $1,926
 
30,954

 
17,903

 
 
 
 
 
Net unrealized gains (losses) on instrument specific credit risk arising during the period, net of income tax provision (benefit) of $5,949 and $(4,634)
 
17,535

 
(11,569
)
Less: reclassification adjustment for instrument specific credit risk (gains) losses included in net income, net of income tax provision (benefit) of $(99) and $0
 
294

 

Net change in unrealized instrument specific credit risk gains (losses), net of income tax provision (benefit) of $6,048 and $(4,634)
 
17,829

 
(11,569
)
 
 
 
 
 
Net unrealized gains (losses) on cash flow hedges arising during the period, net of income tax provision (benefit) of $(86) and $1,234
 
(251
)
 
1,248

Less: reclassification adjustment for cash flow hedges (gains) losses included in net income (loss), net of income tax provision (benefit) of $0 and $0
 

 

Net change in unrealized cash flow hedges gains (losses), net of income tax provision (benefit) of $(86) and $1,234
 
(251
)
 
1,248

 
 
 
 
 
Net pension gains (losses) arising during the period, net of income tax provision (benefit) of $0 and $0
 

 

Reclassification adjustment for pension (gains) losses included in net income, net of income tax provision (benefit) of $(119) and $(151)
 
355

 
5,806

Net change in pension liability, net of income tax provision (benefit) of $119 and $151
 
355

 
5,806

 
 
 
 
 
Other comprehensive income (loss), net of income taxes
 
50,333

 
12,177

 
 
 
 
 
Comprehensive income
 
97,348

 
151,326

Comprehensive (income) loss attributable to the noncontrolling interests
 
(1,066
)
 
1,344

Comprehensive (income) loss attributable to the redeemable noncontrolling interests
 
138

 
(14,796
)
Preferred stock dividends
 
(1,276
)
 
(1,172
)
 
 
 
 
 
Comprehensive income attributable to Jefferies Financial Group Inc. common shareholders
 
$
95,144

 
$
136,702





See notes to interim consolidated financial statements.

5



JEFFERIES FINANCIAL GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the three months ended February 28, 2019 and March 31, 2018
(In thousands)
(Unaudited)
 
For the Three Months Ended
 
February 28, 2019
 
March 31, 2018
Net cash flows from operating activities:
 
 
 
Net income
$
47,015

 
$
139,149

Adjustments to reconcile net income to net cash used for operations:
 

 
 

Pre-tax income from discontinued operations

 
(68,891
)
Deferred income tax provision (benefit)
1,948

 
(28,494
)
Depreciation and amortization of property, equipment and leasehold improvements
30,671

 
24,503

Other amortization
(9,225
)
 
(8,108
)
Share-based compensation
11,813

 
12,431

Provision for doubtful accounts
9,672

 
10,078

Income related to associated companies
(38,650
)
 
(37,705
)
Distributions from associated companies
120,573

 
26,546

Net losses related to property and equipment, and other assets
1,784

 
8,359

Net change in:
 
 
 
Securities deposited with clearing and depository organizations
12

 
64,861

Trading assets
(358,751
)
 
(1,161,274
)
Securities borrowed
(674,484
)
 
427,310

Securities purchased under agreements to resell
(660,842
)
 
716,157

Receivables from brokers, dealers and clearing organizations
(1,094,082
)
 
(1,320,380
)
Receivables from customers of securities operations
417,327

 
(37,552
)
Other receivables
(27,067
)
 
28,926

Other assets
(173,435
)
 
(131,706
)
Trading liabilities
705,164

 
1,517,714

Securities loaned
378,261

 
(476,725
)
Securities sold under agreements to repurchase
632,686

 
(418,052
)
Payables to brokers, dealers and clearing organizations
301,741

 
812,757

Payables to customers of securities operations
212,895

 
222,603

Trade payables, expense accruals and other liabilities
(652,490
)
 
(682,364
)
Other
33,509

 
(33,644
)
Net cash used for operating activities - continuing operations
(783,955
)

(393,501
)
Net cash used for operating activities - discontinued operations

 
(11,752
)
Net cash used for operating activities
(783,955
)
 
(405,253
)
 
 
 
 
Net cash flows from investing activities:
 

 
 

Acquisitions of property, equipment and leasehold improvements, and other assets
(46,059
)
 
(42,336
)
Proceeds from disposals of property and equipment, and other assets
2,313

 
3,597

Advances on notes, loans and other receivables
(87,019
)
 

Collections on notes, loans and other receivables
57,013

 
8,197

Loans to and investments in associated companies
(45,448
)
 
(1,790,110
)
Capital distributions and loan repayments from associated companies
802

 
1,643,665

Purchases of investments (other than short-term)
(1,386
)
 
(653,392
)
Proceeds from maturities of investments
527,148

 
293,550

Proceeds from sales of investments
667,488

 
296,606

Other

 
4

Net cash provided by (used for) investing activities - continuing operations
1,074,852


(240,219
)
Net cash used for investing activities - discontinued operations

 
(16,542
)
Net cash provided by (used for) investing activities
1,074,852

 
(256,761
)
(continued)


See notes to interim consolidated financial statements.

6



JEFFERIES FINANCIAL GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, continued
For the three months ended February 28, 2019 and March 31, 2018
(In thousands)
(Unaudited)
 
For the Three Months Ended
 
February 28, 2019
 
March 31, 2018
Net cash flows from financing activities:
 
 
 
Issuance of debt, net of issuance costs
$
533,435

 
$
1,477,741

Repayment of debt
(307,695
)
 
(816,249
)
Net change in other secured financings
(7,450
)
 
225,020

Net change in bank overdrafts
(8,360
)
 
2,360

Purchase of common shares for treasury
(214,661
)
 
(2,700
)
Dividends paid
(37,817
)
 
(35,990
)
Other
4,211

 
1,013

Net cash provided by (used for) financing activities - continuing operations
(38,337
)
 
851,195

Net cash provided by financing activities - discontinued operations

 
23,313

Net cash provided by (used for) financing activities
(38,337
)
 
874,508

 
 
 
 
Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash
13,194

 
2,583

 
 
 
 
Net increase in cash, cash equivalents and restricted cash
265,754

 
215,077

 
 

 
 

Cash, cash equivalents and restricted cash at beginning of period
6,012,662

 
5,774,505

 
 

 
 

Cash, cash equivalents and restricted cash at end of period
$
6,278,416

 
$
5,989,582


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):
 
February 28, 2019
 
March 31, 2018
Cash and cash equivalents
$
5,517,121

 
$
5,144,625

Cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations
728,406

 
767,824

Other assets
32,889

 
77,133

Total cash, cash equivalents and restricted cash
$
6,278,416

 
$
5,989,582


















See notes to interim consolidated financial statements.

7



JEFFERIES FINANCIAL GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Equity
For the three months ended February 28, 2019 and March 31, 2018
(In thousands, except par value and per share amounts)
(Unaudited)

 
Jefferies Financial Group Inc. Common Shareholders
 
 
 
 
 
Common
Shares
$1 Par
Value
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained
Earnings
 
Subtotal
 
Noncontrolling
Interests
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2018
$
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
 

 
 

 
 

 
124,525

 
124,525

 
(1,344
)
 
123,181

Other comprehensive income, net of taxes
 

 
 

 
12,177

 
 

 
12,177

 
 

 
12,177

Change in interest in consolidated subsidiary
 

 
2,677

 
 

 
 

 
2,677

 
(2,677
)
 

Share-based compensation expense
 

 
12,431

 
 

 
 

 
12,431

 
 

 
12,431

Change in fair value of redeemable noncontrolling interests
 

 
17,067

 
 

 
 

 
17,067

 
 

 
17,067

Purchase of common shares for treasury
(100
)
 
(2,600
)
 
 

 
 

 
(2,700
)
 
 

 
(2,700
)
Dividends ($0.10 per common share)
 

 
 

 
 

 
(37,560
)
 
(37,560
)
 
 

 
(37,560
)
Other
1,089

 
5,605

 
 

 
 

 
6,694

 
47

 
6,741

Balance, March 31, 2018
$
357,216


$
4,711,218


$
357,317


$
4,833,329


$
10,259,080


$
29,048


$
10,288,128

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 1, 2018
$
307,515

 
$
3,854,847

 
$
288,286

 
$
5,610,218

 
$
10,060,866

 
$
18,391

 
$
10,079,257

Net income
 

 
 

 
 

 
44,811

 
44,811

 
1,066

 
45,877

Other comprehensive income, net of taxes
 

 
 

 
50,333

 
 

 
50,333

 
 

 
50,333

Contributions from noncontrolling interests
 

 
 

 
 

 
 

 

 
4,705

 
4,705

Distributions to noncontrolling interests
 

 
 

 
 

 
 

 

 
(981
)
 
(981
)
Share-based compensation expense
 

 
11,813

 
 

 
 

 
11,813

 
 

 
11,813

Change in fair value of redeemable noncontrolling interests
 

 
(536
)
 
 

 
 

 
(536
)
 
 

 
(536
)
Purchase of common shares for treasury
(9,728
)
 
(187,365
)
 
 

 
 

 
(197,093
)
 
 

 
(197,093
)
Dividends ($0.125 per common share)
 

 
 

 
 

 
(40,094
)
 
(40,094
)
 
 

 
(40,094
)
Other
526

 
2,326

 
 

 
 

 
2,852

 

 
2,852

Balance, February 28, 2019
$
298,313


$
3,681,085


$
338,619


$
5,614,935


$
9,932,952


$
23,181


$
9,956,133


















See notes to interim consolidated financial statements.

8



JEFFERIES FINANCIAL GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements


Note 1.  Nature of Operations

Jefferies Financial Group Inc. ("Jefferies" or the "Company") 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 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. 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. 
Merchant Banking is where we invest in unique long-term opportunities. Our current Merchant Banking businesses and investments include National Beef Packing Company, LLC ("National Beef") (beef processing), Spectrum Brands Holdings, Inc. ("Spectrum Brands") (consumer products), Linkem (fixed wireless 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) and FXCM Group, LLC ("FXCM") (provider of online foreign exchange trading services). Our Merchant Banking businesses and investments also included Leucadia Asset Management ("LAM") (asset management) and Berkadia Commercial Mortgage Holding LLC ("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 now 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") reducing our ownership in National Beef from 79% 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 31% interest in National Beef under the equity method of accounting. We classified the results of National Beef prior to June 5, 2018 as discontinued operations in the Consolidated Statements of Operations. See Note 24 for more information.

We own approximately 15% 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.

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 February 28, 2019. 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. 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.

9



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 Over-the-Counter Bulletin Board. During the first quarter of 2019, we proposed to acquire the remaining common stock of HomeFed (the "Proposed Transaction"). The Proposed Transaction would entail issuing two shares of our common stock for each share of HomeFed’s common stock. The proposal includes a condition that the Proposed Transaction will require the approval of a majority of the outstanding shares of HomeFed’s common stock not already owned by us (or our affiliates), in addition to approval of HomeFed's board of directors upon the recommendation of a special committee of independent directors and any other vote required by applicable law. As an offset to these potentially issued shares, our Board of Directors has, conditioned on the closing of the Proposed Transaction, authorized the repurchase of these shares in the open market. This share-repurchase approval is incremental to the $500.0 million share repurchase previously approved by our Board of Directors, approximately $305.3 million of which remains to be purchased as of February 28, 2019. The Proposed Transaction is currently being evaluated by a special committee of independent directors of HomeFed.

Idaho Timber is our consolidated subsidiary engaged in the manufacture and distribution of various wood products.

Our investment in FXCM and associated companies consists of a senior secured term loan due in the second quarter of 2019, ($71.4 million principal outstanding at February 28, 2019); a 50% voting interest in FXCM and the right to receive up to 75% of all distributions in respect of the equity of FXCM.

Note 2.  Basis of Presentation and Significant Accounting Policies

Our unaudited interim consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all information and footnotes which are normally included in our Form 10-K. These financial statements reflect all adjustments (consisting of normal recurring items or items discussed herein) that management believes are necessary to fairly state results for the interim periods presented. Results of operations for interim periods are not necessarily indicative of annual results of operations. For a detailed discussion about the Company’s significant accounting policies, see Note 2, Significant Accounting Policies, included in our Transition Report on Form 10-K for the year ended November 30, 2018 ("2018 10-K").

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.

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. Jefferies Group has a November 30 year-end, which it retains for standalone reporting purposes. 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.

Receivables

At February 28, 2019 and November 30, 2018, Receivables include receivables from brokers, dealers and clearing organizations of $4,537.2 million and $3,223.7 million, respectively, and receivables from customers of securities operations of $1,597.0 million and $2,017.1 million, respectively.

Our subsidiary, Foursight Capital, had auto loan receivables of $668.6 million and $648.7 million at February 28, 2019 and November 30, 2018, respectively. Based primarily on Beacon credit scores, Foursight Capital classifies its auto loan receivables as prime, near-prime and sub-prime based on the perceived credit risk at origination and generally considers prime receivables as those with a Beacon score of 680 and above, near-prime with scores of 620 and 679 and sub-prime with scores below 620. The credit quality classification at February 28, 2019 and November 30, 2018 was approximately 14% and 13% prime, 57% and 57% near-prime and 29% and 30% sub-prime, respectively.

10



Payables, expense accruals and other liabilities

At February 28, 2019 and November 30, 2018, Payables, expense accruals and other liabilities include payables to brokers, dealers and clearing organizations of $2,767.6 million and $2,465.6 million, respectively, and payables to customers of securities operations of $3,389.6 million and $3,176.7 million, respectively.

Supplemental Cash Flow Information
 
For the Three Months Ended
 
February 28, 2019
 
March 31, 2018
 
(In thousands)
Cash paid during the year for:
 
Interest
$
399,350

 
$
322,769

Income tax payments (refunds), net
$
7,205

 
$
(1,918
)
Accounting Developments - Accounting Standards to be Adopted in Future Periods

Leases. In February 2016, the Financial Accounting Standards Board ("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.

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.

11



Note 3.  Fair Value Disclosures

The following is a summary of our financial instruments, trading liabilities and long-term debt that are accounted for at fair value on a recurring basis, excluding Investments at fair value based on net asset value ("NAV") (within trading assets) of $633.0 million and $394.4 million at February 28, 2019 and November 30, 2018, respectively, by level within the fair value hierarchy (in thousands):
 
February 28, 2019
 
Level 1
 
Level 2
 
Level 3
 
Counterparty
and
Cash
Collateral
Netting (1)
 
Total
Assets:
 
 
 
 
 
 
 
 
 
Trading assets, at fair value:
 
 
 
 
 
 
 
 
 
Corporate equity securities
$
2,848,134

 
$
132,546

 
$
55,576

 
$

 
$
3,036,256

Corporate debt securities

 
2,574,258

 
10,930

 

 
2,585,188

Collateralized debt obligations and
collateralized loan obligations

 
87,414

 
43,144

 

 
130,558

U.S. government and federal agency securities
1,726,076

 
92,128

 

 

 
1,818,204

Municipal securities

 
647,475

 

 

 
647,475

Sovereign obligations
1,653,015

 
1,311,179

 

 

 
2,964,194

Residential mortgage-backed securities

 
1,994,309

 
20,963

 

 
2,015,272

Commercial mortgage-backed securities

 
860,865

 
12,820

 

 
873,685

Other asset-backed securities

 
254,870

 
35,886

 

 
290,756

Loans and other receivables

 
2,145,486

 
78,051

 

 
2,223,537

Derivatives
11,301

 
2,488,759

 
8,211

 
(2,296,080
)
 
212,191

Investments at fair value

 

 
421,098

 

 
421,098

FXCM term loan

 

 
73,600

 

 
73,600

Total trading assets, excluding investments at fair value based on NAV
$
6,238,526


$
12,589,289


$
760,279


$
(2,296,080
)

$
17,292,014

 
 
 
 
 
 
 
 
 
 
Available for sale securities:
 

 
 

 
 

 
 

 
 

Residential mortgage-backed securities
$

 
$
24,049

 
$

 
$

 
$
24,049

Total available for sale securities
$


$
24,049


$


$


$
24,049

 
 
 
 
 
 
 
 
 
 
Liabilities:
 

 
 

 
 

 
 

 
 

Trading liabilities:
 

 
 

 
 

 
 

 
 

Corporate equity securities
$
2,806,579

 
$
1,383

 
$
78

 
$

 
$
2,808,040

Corporate debt securities

 
1,741,692

 
730

 

 
1,742,422

U.S. government and federal agency securities
855,042

 

 

 

 
855,042

Sovereign obligations
1,770,566

 
1,164,066

 

 

 
2,934,632

Commercial mortgage-backed securities

 

 
70

 

 
70

Loans

 
1,572,077

 
3,420

 

 
1,575,497

Derivatives
14,018

 
2,695,257

 
37,186

 
(2,383,752
)
 
362,709

Total trading liabilities
$
5,446,205


$
7,174,475


$
41,484


$
(2,383,752
)

$
10,278,412

Long-term debt
$

 
$
467,839

 
$
283,139

 
$

 
$
750,978


12



 
November 30, 2018
 
Level 1
 
Level 2
 
Level 3
 
Counterparty
and
Cash
Collateral
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
$

 
$
485,425

 
$
200,745

 
$

 
$
686,170


(1)
Represents counterparty and cash collateral netting across the levels of the fair value hierarchy for positions with the same counterparty.

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, 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

13



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

Investment Grade Corporate Bonds:  Investment grade 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.
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 obtained from external pricing services 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.



14



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 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 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.

15



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 observables 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 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

16



capital issuance by the company. Direct equity investments in private companies are categorized within Level 2 or 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):
 
Fair Value (1)
 
Unfunded
Commitments
February 28, 2019
 
 
 
Equity Long/Short Hedge Funds (2)
$
349,128

 
$

Equity Funds (3)
35,719

 
20,036

Commodity Funds (4)
15,382

 

Multi-asset Funds (5)
232,465

 

Other funds (6)
336

 

Total
$
633,030

 
$
20,036

 
 
 
 
November 30, 2018
 

 
 

Equity Long/Short Hedge Funds (2)
$
86,788

 
$

Equity Funds (3)
40,070

 
20,996

Commodity Funds (4)
10,129

 

Multi-asset Funds (5)
256,972

 

Other funds (6)
400

 

Total
$
394,359

 
$
20,996

 
(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, primarily in equity securities in domestic and international markets in both the public and private sectors. At February 28, 2019 and November 30, 2018, approximately 74% and 0%, respectively, of the fair value of investments in this category cannot be redeemed because these investments include restrictions that do not allow for redemption in the first 36 months after acquisition. At the end of this restriction period, which is in approximately 34 months, these investments are redeemable monthly with 45 to 90 days prior written notice. At February 28, 2019 and November 30, 2018, 22% and 82%, respectively, of these investments are redeemable in 2020. At February 28, 2019 and November 30, 2018, 4% and 17%, respectively, of these investments are redeemable quarterly 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 be liquidated in approximately one to ten years. 
(4)
This category includes investments in a hedge fund that invests, 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 February 28, 2019 and November 30, 2018, investments representing approximately 6% and 15%, respectively, of the fair value of investments in this category are redeemable monthly with 30 days prior written notice.
(6)
This category includes investments in a fund that invests 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 a fund of funds that invests in various private equity funds that are managed by Jefferies Group and have no redemption provisions. Investments in the fund of funds are gradually being liquidated, however, the timing of when the proceeds will be received is uncertain.
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 $258.9 million and $254.4 million at February 28, 2019 and November 30, 2018, respectively.

17



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. $71.4 million of principal remained outstanding under the term loan as of February 28, 2019. During the three months ended February 28, 2019, interest accrued at 20.5% per annum. Through February 28, 2019, 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. We recorded income related to the term loan in Principal transactions revenues of $0.5 million during the three months ended February 28, 2019 and $8.6 million during the three months ended March 31, 2018.

We classify our equity investment in FXCM in our February 28, 2019 and November 30, 2018 Consolidated Statements of Financial Condition as Loans to and investments in associated companies, as we have the ability to significantly influence FXCM through our seats on the board of directors. We account for our equity interest on a one month lag.

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 ($73.6 million) and the investment in associated company ($72.5 million), which totaled $146.1 million at February 28, 2019.

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.

Long-term Debt

Long-term debt includes variable rate, fixed-to-floating rate, 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.


18



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 three months ended February 28, 2019 (in thousands):
Three Months Ended February 28, 2019
 
Balance, November 30, 2018
 
Total gains/ losses
(realized and unrealized) (1)
 
Purchases
 
Sales
 
Settlements
 
Issuances
 
Net transfers
into (out of)
Level 3
 
Balance, February 28, 2019
 
Changes in
unrealized gains/losses included in earnings relating to instruments still held at
February 28, 2019 (1)
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate equity securities
$
52,192

 
$
4,488

 
$
1,410

 
$
(2,411
)
 
$
(66
)
 
$

 
$
(37
)
 
$
55,576

 
$
4,603

Corporate debt securities
9,484

 
466

 
3,568

 
(3,233
)
 
(834
)
 

 
1,479

 
10,930

 
498

CDOs and CLOs
36,105

 
(6,726
)
 
49,201

 
(32,759
)
 
(1,139
)
 

 
(1,538
)
 
43,144

 
(3,526
)
Residential mortgage-backed securities
19,603

 
462

 
975

 

 
(27
)
 

 
(50
)
 
20,963

 
494

Commercial mortgage-backed securities
10,886

 
136

 
12

 

 
(41
)
 

 
1,827

 
12,820

 
96

Other asset-backed securities
53,175

 
(2,290
)
 
29,195

 
(30,060
)
 
(12,320
)
 

 
(1,814
)
 
35,886

 
(1,763
)
Loans and other receivables
46,985

 
814

 
40,061

 
(27,142
)
 
(1,990
)
 

 
19,323

 
78,051

 
130

Investments at fair value
396,254

 
(2,923
)
 
27,767

 

 

 

 

 
421,098

 
(2,923
)
FXCM term loan
73,150

 
450

 

 

 

 

 

 
73,600

 
450

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Trading liabilities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Corporate equity securities
$

 
$
(2
)
 
$

 
$
80

 
$

 
$

 
$

 
$
78

 
$
2

Corporate debt securities
522

 
(241
)
 

 

 

 

 
449

 
730

 
241

Commercial mortgage-backed securities

 
70

 

 

 

 

 

 
70

 
(70
)
Loans
6,376

 
(229
)
 
(1,411
)
 
504

 

 

 
(1,820
)
 
3,420

 
338

Net derivatives (2)
21,614

 
(5,348
)
 
(2,804
)
 
3,084

 
169

 

 
12,260

 
28,975

 
3,333

Long-term debt (1)
200,745

 
(16,701
)
 

 

 
(5,665
)
 
92,016

 
12,744

 
283,139

 
4,045


(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 February 28, 2019 were gains of $12.7 million.
(2)
Net derivatives represent Trading assets - Derivatives and Trading liabilities - Derivatives.

Analysis of Level 3 Assets and Liabilities for the three months ended February 28, 2019

During the three months ended February 28, 2019, transfers of assets of $60.4 million from Level 2 to Level 3 of the fair value hierarchy are primarily attributed to:
Loans and other receivables of $25.8 million, CDOs and CLOs of $14.1 million and other asset-backed securities of $10.8 million due to reduced pricing transparency.

During the three months ended February 28, 2019, transfers of assets of $41.2 million from Level 3 to Level 2 are primarily attributed to:
CDOs and CLOs of $15.7 million, other asset-backed securities of $12.6 million and loans and other receivables of $6.5 million due to greater pricing transparency supporting classification into Level 2.

During the three months ended February 28, 2019, transfers of liabilities of $36.6 million from Level 2 to Level 3 of the fair value hierarchy are primarily attributed to:
Structured notes of $22.2 million and net derivatives of $13.9 million due to reduced market and pricing transparency.
During the three months ended February 28, 2019, transfers of liabilities of $12.9 million from Level 3 to Level 2 of the fair value hierarchy are primarily attributed to:
Structured notes of $9.4 million due to greater market transparency.

19



Net losses on Level 3 assets were $5.1 million and net gains on Level 3 liabilities were $22.5 million for the three months ended February 28, 2019. Net losses on Level 3 assets were primarily due to decreased market values across CDOs and CLOs, other asset-backed securities and investments at fair value, partially offset by increased market values across corporate equity securities. 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 three months ended March 31, 2018 (in thousands):
Three Months Ended March 31, 2018
 
Balance, December 31, 2017
 
Total gains/ losses
(realized and unrealized) (1)
 
Purchases
 
Sales
 
Settlements
 
Issuances
 
Net transfers
into (out of)
Level 3
 
Balance, March 31, 2018
 
Changes in
unrealized gains/ losses relating to instruments still held at
March 31, 2018 (1)
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate equity securities
$
22,270

 
$
11,764

 
$
2,733

 
$
(1,381
)
 
$
(1,687
)
 
$

 
$
2,054

 
$
35,753

 
$
10,754

Corporate debt securities
26,036

 
(9
)
 
928

 
(346
)
 
(2,049
)
 

 
1,543

 
26,103

 
(1,086
)
CDOs and CLOs
42,184

 
(3,782
)
 
43,796

 
(34,168
)
 
(3,838
)
 

 
(5,579
)
 
38,613

 
(3,006
)
Residential mortgage-backed securities
26,077

 
(3,212
)
 

 

 
(3
)
 

 
(1,100
)
 
21,762

 
(2,366
)
Commercial mortgage-backed securities
12,419

 
(231
)
 
1,260

 
(508
)
 
(1,285
)
 

 
3,448

 
15,103

 
(622
)
Other asset-backed securities
61,129

 
(1,385
)
 
57,095

 
(53,459
)
 
(3,776
)
 

 
(8,316
)
 
51,288

 
127

Loans and other receivables
47,304

 
1,598

 
15,635

 
(803
)
 
(9,730
)
 

 
8,039

 
62,043

 
(190
)
Investments at fair value
329,944