Jefferies Reports Fiscal Second Quarter 2013 Financial Results

Jefferies Group LLC today announced financial results for its fiscal second quarter 2013.

Highlights for the three months ended May 31, 2013:

• Net revenues of $646 million
• Net earnings of $42 million
• Investment banking net revenues of $277 million
• Trading revenues of $359 million

Richard B. Handler, Chairman and Chief Executive Officer of Jefferies, commented: “Our results reflect improved performance in our core equity sales and trading business, and the continued durability of our investment banking efforts. By contrast, there was a significant slowdown in fixed income activity during March and April, that offset better fixed income results in May. Concerns about the tapering of the Federal Reserve's Quantitative Easing programs led to subdued fixed income secondary volumes and opportunities, particularly when compared to our exceptionally strong first quarter performance. There were no meaningful trading losses during the quarter and the fixed income trading environment can best be characterized as 'tepid and cautious'. Our investment in Knight Capital was marked down by $6 million, reflecting the change in the Knight stock price in the second quarter. Second quarter investment banking performance was respectable and momentum appears to be building for our third and fourth quarters, as our backlog is strong and improving.”

Peregrine C. Broadbent, Chief Financial Officer of Jefferies commented: “As the table below shows, every balance sheet, capital, liquidity and other risk metric continues to demonstrate our prudent risk management philosophy. At period end our gross leverage ratio, excluding the impact of the Leucadia purchase accounting, was 9.5¹ times equity and Level 3 assets were $502 million and remain at about 3% of inventory. Without Knight, there was 1 day where a trading loss occurred during the quarter.”

¹ This represents a non-GAAP measure. Refer to the Financial Highlights table on page 5 and related footnotes.
² This measure is reflected on a period basis.

On March 1, 2013, Jefferies Group, Inc. (the “Predecessor Company”), in connection with our merger with Leucadia National Corporation (“Leucadia”), converted into a limited liability company, Jefferies Group LLC (the ”Successor Company”) and became a wholly-owned subsidiary of Leucadia. The acquisition method of accounting, which involves recording all of our assets and liabilities at their fair values on the merger date, has been pushed down to form a new accounting basis for the Successor Company.

Our revenues, expenses and net earnings for the second quarter of 2013 are impacted by the following acquisition accounting related items:

• Revenues include an additional $27 million of positive net interest income due to the amortization of premiums arising upon adjusting our long-term debt to fair value and the assumption of our mandatorily redeemable convertible preferred stock by Leucadia.
• Non Compensation expenses include the following items for an additional cost of $17 million. Rent expense includes additional costs of $2 million upon recognizing existing leases at their current market value. Other expenses include $6 million of incremental amortization expense associated with intangible assets and internally developed software recognized at the merger date and $9 million in merger-related investment banking and filing fees.³
• As required by GAAP, compensation expense includes $5 million of additional amortization cost related to the acquisition-related write-up of the cost of outstanding share-based awards which had future service requirements at the merger date -- they were written up from their initial grant date fair value to the merger date (March 1) share value.

Rent expense for the three months ended May 31, 2013 includes a $7 million charge associated with relocating certain London office space.

The above items have the effect of increasing income tax expense by $1 million. Without the impact of these items, our effective tax would have been 36.1% or 2.2% lower.

Also, the compensation and revenue items above had the effect of reducing the compensation ratio from 59.6% to 57.8%. Our total headcount at May 31, 2013, was 3,785, down slightly from three months before and consistent with our goals of driving operating leverage through growth in our market share, coupled with cost containment. Our total headcount has remained relatively constant since our Bache acquisition in July 2011.

In addition, the three months ended May 31, 2013 is the final period that will reflect third party interests in our High Yield Joint Venture. Mandatorily redeemable preferred interests were redeemed on April 1, 2013 and the interest on mandatorily redeemable preferred interests from the beginning of the quarter until redemption date was $3.4 million. This line item will be eliminated going forward. Non-controlling interests in Jefferies High Yield Holdings LLC were redeemed on March 1, 2013. Our second quarter includes 100% of the results of our high yield business subsequent to these redemptions, but for the aforementioned interest expense.

The financial tables attached should be read in connection with our Quarterly Report on Form 10-Q for the quarter ended February 28, 2013 and our Annual Report on Form 10-K for the year ended November 30, 2012.

Jefferies, the global investment banking firm focused on serving clients for over 50 years, is a leader in providing insight, expertise and execution to investors, companies and governments. The firm provides a full range of investment banking, sales, trading, research and strategy across the spectrum of equities, fixed income, foreign exchange, futures and commodities, and also select asset and wealth management strategies, in the Americas, Europe and Asia. Jefferies Group LLC is a wholly-owned subsidiary of Leucadia National Corporation (NYSE: LUK), a diversified holding company.

³ It was recently determined that pre-tax non-compensation expenses for the first quarter ended 28 February 2013, were overstated by $8.5 million. Professional services expense should have been $24.1 million not $32.6 million, as previously reported. The professional service fees related to the Leucadia merger were incorrectly accrued for in the quarter ended February 28, 2013, and not on March 1, 2013 when the transaction was completed. This had the effect of understating net income by approximately $5.3 million for the three month period ended February 28, 2013 and we have revised first quarter earnings to $80.1 million accordingly. We evaluated the effects of this error and concluded that it is not material to the previously issued Quarterly Report on Form 10Q for the three month period ended February 28, 2013. Nevertheless, we revised our consolidated net income for the three month period ended February 28, 2013 (below) to correct for the effect of this error and appropriately reflected the $8.5 million of professional service fees as an expense in the three month period ended May 31, 2013. We will reflect this revision in future filings. The adjustment had an inconsequential impact on the Statement of Financial Condition as of February 28, 2013.

(1) Our consolidated net income for the three months ended February 28, 2013 reflects an adjustment of $5.3 million, after tax, to correct for the effect of an overstatement of professional service fees of $8.5 million relating to the Leucadia merger. We evaluated the effects of this error and concluded that it is not material to the previously issued Quarterly Report on Form 10Q for the three month period ended February 28, 2013. Nevertheless, we revised our consolidated net income for the three month period ended February 28, 2013 to correct for the effect of this error and appropriately reflected the $8.5 million of professional service fees as an expense in the three month period ended May 31, 2013.

(1) VaR is the potential loss in value of our trading positions due to adverse market movements over a one-day time horizon with a 95% confidence level. For a further discussion of the calculation of VaR, see "Value at Risk" in Part II, Item 7 "Management's Discussion and Analysis" in our Annual Report on Form 10-K for the year ended November 30, 2012.

(A) Our consolidated net income for the three months ended February 28, 2013 reflects an adjustment of $5.3 million, after tax, to correct for the effect of an overstatement of professional service fees of $8.5 million relating to the Leucadia merger. We evaluated the effects of this error and concluded that it is not material to the previously issued Quarterly Report on Form 10Q for the three month period ended February 28, 2013. Nevertheless, we revised our consolidated net income for the three month period ended February 28, 2013 to correct for the effect of this error and appropriately reflected the $8.5 million of professional service fees as an expense in the three month period ended May 31, 2013.