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Fellow Shareholders:
With a strong M&A market fueled by robust private equity activity, 2006 was a broadly active year for the markets we serve. Globalization meant markets around the world participated in the heightened activity levels. Investment banking experienced a favorable environment for transactions, particularly M&A and leveraged finance. Secondary trading was active in all product areas, but spreads and commissions continued to tighten, with greater transparency and increased pressures on the buy-side.
The year began with strong positive currents in all markets, and then trended downward after mid-May signals from the Federal Reserve that interest rates might continue to move upward. In the fourth quarter, the markets regained their equilibrium and moved to record highs toward the end of the year. Jefferies ended the year with a solid performance across all fronts and an active start to 2007.
Seven years of record results
2006 was another year of record results and tremendous progress for Jefferies. Net revenues increased 21 percent to a record $1.46 billion, net income rose 31 percent to a record $205.8 million and EPS was up 22 percent to a record $1.42. Stockholders' equity increased 23 percent from $1.29 billion to $1.58 billion, and our total book capitalization of equity, preferred stock and long-term debt (much of which matures in 2036) is over $2.9 billion. Jefferies' stock experienced its fourth 2-for-1 split since our initial public offering in 1983. We also announced an increase in our quarterly dividend to $0.125 per post-split share, which represents a 67 percent increase from the previous dividend. Over the past five years, our compound annual growth rate of cash dividends per common share is nearly 60 percent.
Continued expansion
In 2006, we effected a substantial expansion and significant improvements in our sales and trading platforms, continued the building of a major investment bank focused primarily on growing companies, expanded the breadth and scale of our asset management activities, and made considerable strides in establishing ourselves as a truly global, full-service firm. We further solidified our long-term capital base, invested in our internal support structure, realized increased efficiencies in operating expenses and achieved greater financial flexibility for future scalability.
Through voluntary investment plans and the inclusion of long-term, stock-based grants as part of our compensation system, we have sought to make all Jefferies employees partners in our strategy and value creation. Integration efforts of our various acquisitions and the addition of new partners and teams over the past few years have proven highly successful and are bearing fruit. We are acting as "One Firm," building our human capital and our businesses in tandem to represent leadership and quality in delivering for all our clients.
Since 2000, we have been steadfast in our strategy of driving the growth, diversification and value of Jefferies through our expanding team of extremely talented individuals, and our ability to serve growing companies and their investors in the US and increasingly around the world. We can say with pride and confidence that we enter 2007 with every business at Jefferies focused on executing defined growth and profitability initiatives.
A focus on our businesses
After a thorough review of our sales and trading platforms in the second half of 2005, we focused in 2006 on further diversifying our product offering for institutional investors. We recruited nearly 200 new employees to our equity, convertible, high yield and fixed income efforts, increasing the total headcount in these groups to over 800. For the most part, these partners represented new or meaningfully expanded initiatives that leverage our historic strength as a capital markets-based firm and position us well for 2007 and beyond.
Sales and trading-related revenues jumped 26 percent to $749 million in 2006. We marked our official entry into the prime brokerage business, led by a team of outstanding professionals with extensive experience and a successful track record. We significantly expanded our securities finance team, particularly with an emphasis on opportunities beyond the US. We established a broad equity derivatives capability that has already completed some significant transactions, and is poised for continued expansion and success. We consolidated our entire US sector trading effort into our New York headquarters. We strengthened our equity sales coverage team in Boston, with key additions in sales trading and research sales that renew and expand our relationship focus in the second largest institutional market in the US. We also created a 15-person team focused on algorithmic development and trading strategies, which includes five PhDs and seven engineers, and added 20 stock indices to the Jefferies Global Family of Indices.
In our convertible securities group, we added several new sales and trading professionals, further integrated this effort with our high yield group, introduced proprietary trading, and strengthened alignment with our equity capital markets desk and new derivatives capabilities. In high yield, we promoted a new head of US high yield capital markets, cemented our international distribution capabilities with a new head of European high yield and distressed sales and trading, and successfully leveraged our high yield research professionals across all capital markets. In our fixed income group, we consolidated our leadership team and increased expansion efforts, including recruiting a team focused on the securities of emerging markets. Finally, Jefferies Financial Products continues to grow its commodity derivatives business and is an increasing contributor to sales and trading revenues.
Since year-end, we entered into an agreement with a longtime client to create a new broker-dealer to conduct our secondary business in the high yield and distressed markets. When finalized, this joint venture could potentially triple the capital available to support this business.
In securities research, we have added experienced professionals in industries of broad interest to our investor clients. We have continued to enhance the scope of the research product we offer to our buy-side clients, improved our capital markets participation and went further than ever in establishing that Jefferies stands for great investment ideas. Since year-end, we've added a number of new equity research analysts both in the US and internationally, and expanded our coverage of growing companies in India, China and Southeast Asia.
The Jefferies Investment Bank has grown from $91 million in revenues in 2000 to $541 million in 2006. We have accomplished this growth through a coordinated build-out of industry expertise and product knowledge, all leveraging the trademark capital markets strength that has defined Jefferies for nearly 45 years. Our goal, which we believe we are well on the way to achieving, is to be recognized as the premier provider of capital markets and financial advisory services to growing companies around the globe.
Between 2002 and 2005, Jefferies made four strategic acquisitions in the aerospace and defense, technology, energy and fund placement areas; established de novo industrial, media & communications, cleantech, and financial sponsors groups; consolidated our focus on leveraged finance into a coordinated team of origination and execution professionals; with MassMutual, established Jefferies Finance to originate loans directly; and increased the quality, scale, focus and global reach of each of our industry and product efforts.
In 2006, we furthered our efforts to unify the nearly 650 people who comprise the Jefferies Investment Bank. We continued to capitalize on the opportunities available to us, as we focused on maximizing the results of our full-service platform, coordinating across industries, products and geographies. We experienced significant growth in our presence and results in the equity capital markets, with more than 100 equity and equity-linked financings that raised over $21 billion for our clients. Similarly, we originated $15 billion in leveraged financing for our clients, including $4 billion in direct loan origination. Since making its first loan in the second quarter of 2005, Jefferies Finance, as agent, has completed over 30 transactions. As a recognized advisor, we completed a record $30 billion in mergers and acquisitions during the year, and nearly doubled our number of restructuring assignments.
As we look forward to 2007 and beyond, we see additional industries that would benefit from Jefferies' capabilities, as well as opportunities to significantly increase our market share in our existing areas of focus. Since year-end, we added to our New York- and London-based private equity fund placement teams, as well as our energy and financial sponsors investment banking groups.
As we have said many times, building Jefferies Asset Management is an enormous long-term opportunity to capitalize on our relationships and capabilities, as well as further diversify Jefferies' business mix. In 2006, we established four new hedge funds on our platform with distinct strategies that broaden our investment opportunity and product offering. As we build this diversified and balanced platform, we continue to develop our marketing and asset-gathering capabilities, and to attract talented portfolio managers to our team.
Jefferies has operated successfully from our European headquarters in London for over 21 years, and we have maintained long-standing offices in Tokyo, Zurich and Paris, as well as a support office in Hong Kong. Our focus for the bulk of this time has been on global sales of US securities, exceptional global convertible bond trading and asset management efforts, and a focused effort on sales and trading of international equities and bonds. In the past four years, we have acquired or established investment banking capabilities in London, as well as in cities in the Middle East and Asia, such that today nearly 15 percent of the Jefferies Investment Bank is based outside the US.
Our goal is to expand in Europe and Asia to a capability comparable to the comprehensive sales, trading and investment banking offering that we have established in the US. We have a strong foundation in place, and believe that through prudent growth efforts we can transform Jefferies over the next few years to a full-service global firm that is the undisputed leader in the markets we serve. Since year-end, we announced the hiring of an industry veteran to lead our investment banking efforts in Europe, Asia and the Middle East.
Strengthening our platform
Growth and diversification at the pace we have pursued requires constant strengthening of our internal network of support and control functions. While our net revenues grew from $617 million in 2000 to $1.5 billion in 2006, we experienced operating leverage as our number of employee-partners grew from 1,014 to 2,254. During this time, our headcount in our legal, compliance, finance, accounting, people services, operations and technology support groups grew from 325 to 560, enhancing the backbone of our platform that allows us to best serve our clients. We employ 15 attorneys today versus 3 in 2000, and nearly 40 professionals in compliance today versus 12 in 2000. Of particular note is the 2006 addition of a new treasurer who had previously served as the Treasurer of Donaldson, Lufkin & Jenrette, Inc. for 17 years. We also made numerous other additions to strengthen our ability to support and control the expansion and increasing complexity of our business, regulatory and operating environment. We are committed to continually strengthening the functions that allow us to pursue and execute business professionally, ethically and in the best interests of our clients and our Firm.
With regard to corporate governance, we welcomed two terrific new members of our Board of Directors: Bob Joyal, former President of Babson Capital Management LLC, and Mike O'Kane, former Senior Managing Director of TIAA-CREF. Our five independent directors provide us valuable guidance and objectivity, and are a tremendous resource as a sounding board for our strategy and in embracing our challenges and opportunities.
A solid capital base
We increased our long-term capital base substantially in 2006. We raised $125 million in preferred equity from our strategic partner, MassMutual, and issued $500 million in 30-year fixed cost (6.25 percent) debt. At year-end, our balance sheet included over $1 billion in cash, cash equivalents and short-term investments (including required deposits). We continue to focus on improving our credit standing and were pleased to receive an upgrade from Standard & Poor's to BBB+, as well as an initial BBB+ rating from Fitch Ratings, while Moody's Investment Services maintained a Baa1 rating. Preserving our liquidity and maintaining a balanced approach to risk remain priorities for our management team.
Commitment to growing companies and their investors
While many things have changed throughout our platform over the past seven years, one thing has not: Jefferies' unwavering focus on providing growing companies and their investors with specialized services and unparalleled execution on all fronts. This is the market segment that drives us. It has been a natural area of focus since our founding in 1962 and a stated goal for well over a decade. We enjoy working with these companies, and researching and trading their stocks because they tend to grow quickly and can have a great deal of complexity as well as unique challenges. Our clients are the engine of the global economy, and it is our passion to serve them and their growth-centric investors. We assisted 350 companies with their investment banking needs in 2006, and companies with a market capitalization of less than $2 billion represent 60 percent of our research coverage and 85 percent of the stocks in which we make a market.
Maintaining our momentum
Despite all that has been accomplished at Jefferies over the past 44 years, we believe the Jefferies story is still in its early chapters. We are keen to continue to build and grow our Firm, while being mindful of the competitive landscape, and the cyclical nature of the industry in which we operate. We believe continuing to attract the best professional talent, motivating and supporting our employeepartners throughout the world, and focusing all our efforts on our clients will reward Jefferies, our clients, our employees and our shareholders for years to come.
While we take great pride in our accomplishments to date, our focus is always on the future. Going forward, we will all continue fostering our "One Firm" approach, with an emphasis on ownership and above-and-beyond execution. We will conduct ourselves with humility, integrity, and a sense of optimism and urgency, while embracing change and opportunity in the marketplace.
In 2007, we will work as hard as ever in the hopes of maintaining our momentum. We believe our opportunity and potential growth remain vast, and we thank all of our constituents for their continued support.
"2006 was a year of significant investment for Jefferies in all of our businesses. The fact that we were able to achieve record results while investing so heavily for the future of our Firm is a reflection of the quality of our employee-partners and the loyalty of our clients."
Richard B. Handler, Chairman and Chief Executive Officer
An active year in the marketsRichard B. Handler, Chairman and Chief Executive Officer
With a strong M&A market fueled by robust private equity activity, 2006 was a broadly active year for the markets we serve. Globalization meant markets around the world participated in the heightened activity levels. Investment banking experienced a favorable environment for transactions, particularly M&A and leveraged finance. Secondary trading was active in all product areas, but spreads and commissions continued to tighten, with greater transparency and increased pressures on the buy-side.
The year began with strong positive currents in all markets, and then trended downward after mid-May signals from the Federal Reserve that interest rates might continue to move upward. In the fourth quarter, the markets regained their equilibrium and moved to record highs toward the end of the year. Jefferies ended the year with a solid performance across all fronts and an active start to 2007.
Seven years of record results
2006 was another year of record results and tremendous progress for Jefferies. Net revenues increased 21 percent to a record $1.46 billion, net income rose 31 percent to a record $205.8 million and EPS was up 22 percent to a record $1.42. Stockholders' equity increased 23 percent from $1.29 billion to $1.58 billion, and our total book capitalization of equity, preferred stock and long-term debt (much of which matures in 2036) is over $2.9 billion. Jefferies' stock experienced its fourth 2-for-1 split since our initial public offering in 1983. We also announced an increase in our quarterly dividend to $0.125 per post-split share, which represents a 67 percent increase from the previous dividend. Over the past five years, our compound annual growth rate of cash dividends per common share is nearly 60 percent.
Continued expansion
In 2006, we effected a substantial expansion and significant improvements in our sales and trading platforms, continued the building of a major investment bank focused primarily on growing companies, expanded the breadth and scale of our asset management activities, and made considerable strides in establishing ourselves as a truly global, full-service firm. We further solidified our long-term capital base, invested in our internal support structure, realized increased efficiencies in operating expenses and achieved greater financial flexibility for future scalability.
Through voluntary investment plans and the inclusion of long-term, stock-based grants as part of our compensation system, we have sought to make all Jefferies employees partners in our strategy and value creation. Integration efforts of our various acquisitions and the addition of new partners and teams over the past few years have proven highly successful and are bearing fruit. We are acting as "One Firm," building our human capital and our businesses in tandem to represent leadership and quality in delivering for all our clients.
Since 2000, we have been steadfast in our strategy of driving the growth, diversification and value of Jefferies through our expanding team of extremely talented individuals, and our ability to serve growing companies and their investors in the US and increasingly around the world. We can say with pride and confidence that we enter 2007 with every business at Jefferies focused on executing defined growth and profitability initiatives.
A focus on our businesses
After a thorough review of our sales and trading platforms in the second half of 2005, we focused in 2006 on further diversifying our product offering for institutional investors. We recruited nearly 200 new employees to our equity, convertible, high yield and fixed income efforts, increasing the total headcount in these groups to over 800. For the most part, these partners represented new or meaningfully expanded initiatives that leverage our historic strength as a capital markets-based firm and position us well for 2007 and beyond.
Sales and trading-related revenues jumped 26 percent to $749 million in 2006. We marked our official entry into the prime brokerage business, led by a team of outstanding professionals with extensive experience and a successful track record. We significantly expanded our securities finance team, particularly with an emphasis on opportunities beyond the US. We established a broad equity derivatives capability that has already completed some significant transactions, and is poised for continued expansion and success. We consolidated our entire US sector trading effort into our New York headquarters. We strengthened our equity sales coverage team in Boston, with key additions in sales trading and research sales that renew and expand our relationship focus in the second largest institutional market in the US. We also created a 15-person team focused on algorithmic development and trading strategies, which includes five PhDs and seven engineers, and added 20 stock indices to the Jefferies Global Family of Indices.
In our convertible securities group, we added several new sales and trading professionals, further integrated this effort with our high yield group, introduced proprietary trading, and strengthened alignment with our equity capital markets desk and new derivatives capabilities. In high yield, we promoted a new head of US high yield capital markets, cemented our international distribution capabilities with a new head of European high yield and distressed sales and trading, and successfully leveraged our high yield research professionals across all capital markets. In our fixed income group, we consolidated our leadership team and increased expansion efforts, including recruiting a team focused on the securities of emerging markets. Finally, Jefferies Financial Products continues to grow its commodity derivatives business and is an increasing contributor to sales and trading revenues.
Since year-end, we entered into an agreement with a longtime client to create a new broker-dealer to conduct our secondary business in the high yield and distressed markets. When finalized, this joint venture could potentially triple the capital available to support this business.
In securities research, we have added experienced professionals in industries of broad interest to our investor clients. We have continued to enhance the scope of the research product we offer to our buy-side clients, improved our capital markets participation and went further than ever in establishing that Jefferies stands for great investment ideas. Since year-end, we've added a number of new equity research analysts both in the US and internationally, and expanded our coverage of growing companies in India, China and Southeast Asia.
The Jefferies Investment Bank has grown from $91 million in revenues in 2000 to $541 million in 2006. We have accomplished this growth through a coordinated build-out of industry expertise and product knowledge, all leveraging the trademark capital markets strength that has defined Jefferies for nearly 45 years. Our goal, which we believe we are well on the way to achieving, is to be recognized as the premier provider of capital markets and financial advisory services to growing companies around the globe.
Between 2002 and 2005, Jefferies made four strategic acquisitions in the aerospace and defense, technology, energy and fund placement areas; established de novo industrial, media & communications, cleantech, and financial sponsors groups; consolidated our focus on leveraged finance into a coordinated team of origination and execution professionals; with MassMutual, established Jefferies Finance to originate loans directly; and increased the quality, scale, focus and global reach of each of our industry and product efforts.
In 2006, we furthered our efforts to unify the nearly 650 people who comprise the Jefferies Investment Bank. We continued to capitalize on the opportunities available to us, as we focused on maximizing the results of our full-service platform, coordinating across industries, products and geographies. We experienced significant growth in our presence and results in the equity capital markets, with more than 100 equity and equity-linked financings that raised over $21 billion for our clients. Similarly, we originated $15 billion in leveraged financing for our clients, including $4 billion in direct loan origination. Since making its first loan in the second quarter of 2005, Jefferies Finance, as agent, has completed over 30 transactions. As a recognized advisor, we completed a record $30 billion in mergers and acquisitions during the year, and nearly doubled our number of restructuring assignments.
As we look forward to 2007 and beyond, we see additional industries that would benefit from Jefferies' capabilities, as well as opportunities to significantly increase our market share in our existing areas of focus. Since year-end, we added to our New York- and London-based private equity fund placement teams, as well as our energy and financial sponsors investment banking groups.
As we have said many times, building Jefferies Asset Management is an enormous long-term opportunity to capitalize on our relationships and capabilities, as well as further diversify Jefferies' business mix. In 2006, we established four new hedge funds on our platform with distinct strategies that broaden our investment opportunity and product offering. As we build this diversified and balanced platform, we continue to develop our marketing and asset-gathering capabilities, and to attract talented portfolio managers to our team.
"Jefferies has never had a stronger capital base, a more diversified business platform or a more qualified group of employee-owners. After seven consecutive years of growth and record financial performance, we are excited for the future as we look to further serve growing companies and their investors."
Brian P. Friedman, Chairman of the Executive Committee
Pursuing opportunities worldwideBrian P. Friedman, Chairman of the Executive Committee
Jefferies has operated successfully from our European headquarters in London for over 21 years, and we have maintained long-standing offices in Tokyo, Zurich and Paris, as well as a support office in Hong Kong. Our focus for the bulk of this time has been on global sales of US securities, exceptional global convertible bond trading and asset management efforts, and a focused effort on sales and trading of international equities and bonds. In the past four years, we have acquired or established investment banking capabilities in London, as well as in cities in the Middle East and Asia, such that today nearly 15 percent of the Jefferies Investment Bank is based outside the US.
Our goal is to expand in Europe and Asia to a capability comparable to the comprehensive sales, trading and investment banking offering that we have established in the US. We have a strong foundation in place, and believe that through prudent growth efforts we can transform Jefferies over the next few years to a full-service global firm that is the undisputed leader in the markets we serve. Since year-end, we announced the hiring of an industry veteran to lead our investment banking efforts in Europe, Asia and the Middle East.
Strengthening our platform
Growth and diversification at the pace we have pursued requires constant strengthening of our internal network of support and control functions. While our net revenues grew from $617 million in 2000 to $1.5 billion in 2006, we experienced operating leverage as our number of employee-partners grew from 1,014 to 2,254. During this time, our headcount in our legal, compliance, finance, accounting, people services, operations and technology support groups grew from 325 to 560, enhancing the backbone of our platform that allows us to best serve our clients. We employ 15 attorneys today versus 3 in 2000, and nearly 40 professionals in compliance today versus 12 in 2000. Of particular note is the 2006 addition of a new treasurer who had previously served as the Treasurer of Donaldson, Lufkin & Jenrette, Inc. for 17 years. We also made numerous other additions to strengthen our ability to support and control the expansion and increasing complexity of our business, regulatory and operating environment. We are committed to continually strengthening the functions that allow us to pursue and execute business professionally, ethically and in the best interests of our clients and our Firm.
With regard to corporate governance, we welcomed two terrific new members of our Board of Directors: Bob Joyal, former President of Babson Capital Management LLC, and Mike O'Kane, former Senior Managing Director of TIAA-CREF. Our five independent directors provide us valuable guidance and objectivity, and are a tremendous resource as a sounding board for our strategy and in embracing our challenges and opportunities.
A solid capital base
We increased our long-term capital base substantially in 2006. We raised $125 million in preferred equity from our strategic partner, MassMutual, and issued $500 million in 30-year fixed cost (6.25 percent) debt. At year-end, our balance sheet included over $1 billion in cash, cash equivalents and short-term investments (including required deposits). We continue to focus on improving our credit standing and were pleased to receive an upgrade from Standard & Poor's to BBB+, as well as an initial BBB+ rating from Fitch Ratings, while Moody's Investment Services maintained a Baa1 rating. Preserving our liquidity and maintaining a balanced approach to risk remain priorities for our management team.
Commitment to growing companies and their investors
While many things have changed throughout our platform over the past seven years, one thing has not: Jefferies' unwavering focus on providing growing companies and their investors with specialized services and unparalleled execution on all fronts. This is the market segment that drives us. It has been a natural area of focus since our founding in 1962 and a stated goal for well over a decade. We enjoy working with these companies, and researching and trading their stocks because they tend to grow quickly and can have a great deal of complexity as well as unique challenges. Our clients are the engine of the global economy, and it is our passion to serve them and their growth-centric investors. We assisted 350 companies with their investment banking needs in 2006, and companies with a market capitalization of less than $2 billion represent 60 percent of our research coverage and 85 percent of the stocks in which we make a market.
Maintaining our momentum
Despite all that has been accomplished at Jefferies over the past 44 years, we believe the Jefferies story is still in its early chapters. We are keen to continue to build and grow our Firm, while being mindful of the competitive landscape, and the cyclical nature of the industry in which we operate. We believe continuing to attract the best professional talent, motivating and supporting our employeepartners throughout the world, and focusing all our efforts on our clients will reward Jefferies, our clients, our employees and our shareholders for years to come.
While we take great pride in our accomplishments to date, our focus is always on the future. Going forward, we will all continue fostering our "One Firm" approach, with an emphasis on ownership and above-and-beyond execution. We will conduct ourselves with humility, integrity, and a sense of optimism and urgency, while embracing change and opportunity in the marketplace.
In 2007, we will work as hard as ever in the hopes of maintaining our momentum. We believe our opportunity and potential growth remain vast, and we thank all of our constituents for their continued support.
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Richard B. Handler Chairman of the Board and Chief Executive Officer |
Brian P. Friedman Chairman, Executive Committee |
Jefferies Group, Inc.
2006 Annual Report Growth is Our Mission copyright 2006