Business context and reporting period
Leucadia National Corporation (the registrant in this filing; Jefferies was a consolidated subsidiary) reported the quarter and six months ended June 30, 2015. Leucadia is a diversified holding company with principal reportable businesses Jefferies and National Beef. Jefferies results are consolidated with a one-month reporting lag. Dollar amounts below are in millions unless stated otherwise.
Key financial metrics
| Metric | Three months ended June 30, 2015 | Six months ended June 30, 2015 |
|---|---|---|
| Total revenues | $3,055.1 | $6,431.6 |
| Net revenues | $2,839.5 | $6,024.1 |
| Pre-tax income from continuing operations | $0.5 | $587.6 |
| Net income attributable to common shareholders | $16.4 | $397.2 |
| Diluted EPS | $0.04 | $1.04 |
| Net cash used in operating activities | Not separately reported by quarter | $(1,693.9) |
At June 30, 2015, total assets were $52,556.0, total liabilities $41,532.8, and total equity $10,724.5. Cash and cash equivalents were $3,491.0; an additional $2,396.1 was segregated or deposited for regulatory and clearing purposes. Short-term borrowings were $362.0 and long-term debt was $8,454.5.
Material changes versus prior comparable periods
- Q2 net revenues edged down to $2,839.5 from $2,852.0, while common-shareholder net income fell to $16.4 from $65.1. Q2 pre-tax income was nearly break-even, versus $117.9 a year earlier.
- For the first half, net revenues rose to $6,024.1 from $5,794.5 and common-shareholder net income increased to $397.2 from $159.4. The improvement was heavily influenced by a $574.5 net gain on the FXCM investment and related rights, recorded in principal transactions; the investment generated a $112.1 loss in Q2 alone.
- Jefferies Q2 net revenues rose to $792.4 from $689.3 and pre-tax income to $91.3 from $85.6. First-half Jefferies net revenues fell to $1,383.9 from $1,619.8 and pre-tax income to $104.3 from $281.9, reflecting weaker fixed income and debt capital-markets activity, particularly earlier in the year.
- National Beef reported Q2 pre-tax loss of $9.4 versus income of $6.5; its first-half pre-tax loss widened to $43.0 from $21.5. Lower cattle-processing volumes, higher cattle prices and compressed margins were cited.
- Cash and cash equivalents declined $785.7 from year-end. Operating activities used $1,693.9, partly offset by $410.4 provided by investing activities and $500.1 provided by financing activities.
- Shareholders’ equity attributable to Leucadia increased to $10,655.0 from $10,302.2 at year-end; accumulated other comprehensive income declined by $22.0 during the first half.
Outlook, risks, contingencies and unusual items
- Management gave no consolidated earnings guidance and cautioned that results are difficult to predict because businesses and investments span different industries and the portfolio mix can change. Jefferies earnings are also exposed to market conditions and trading activity.
- Jefferies was exiting its Bache futures business. About half of client accounts had been transferred by quarter-end; substantial completion was expected in Q3 2015. Jefferies recorded $28.6 of Q2 restructuring and impairment costs and expected approximately $48.6 more through year-end, including estimated compensation-related costs and further contract and software costs.
- Leucadia had $1,377.8 of parent-company available liquidity against a stated minimum reserve of $953.0. Parent-company debt included $458.6 principal due September 2015. The filing reported parent-company debt of $1,446.5 and a stressed-equity leverage ratio of 0.37x, or 0.53x excluding the net deferred tax asset; the latter exceeded the stated 0.50x target.
- FXCM was carried at fair value of $759.0, including a $300.0 original two-year secured loan and associated rights. The valuation is Level 3 and sensitive to FXCM’s share price and volatility; management estimated that a $0.20 share-price change could alter value by about $36 and a 10% volatility change by about $27, all else equal.
- Leucadia recorded a $12.8 tax benefit for state and local net operating losses in Q2. First-half income-tax provision was $198.1; the filing also disclosed $191.9 of unrecognized tax benefits, including interest, and ongoing tax examinations that could affect results when resolved.
- Contingencies include the Sykes consumer class action settlement, which remained subject to court approval, and a Delaware court’s rejection of a proposed settlement in the Haverhill matter. Management said it did not expect other proceedings to materially harm consolidated financial position or liquidity, but payments could be significant to a period’s results.
- Key operating and market risks include cattle costs and availability, beef pricing and disease/product-liability risks; financial-market, credit, counterparty, derivative and funding risks; FXCM valuation volatility; oil-and-gas exposure; and potential credit-rating downgrades. Jefferies reported $58.0 of estimated additional collateral calls if its long-term rating fell below investment grade.
Investor verification priorities
- Confirm the FXCM fair-value gain and Q2 loss, valuation assumptions, cash receipts, and concentration of first-half earnings in this Level 3 investment.
- Review the September 2015 parent debt maturity, available parent liquidity, and the funding plan for repayment or refinancing.
- Track Bache exit execution, remaining restructuring costs, and the stated Q3 completion expectation.
- Assess National Beef’s cattle-cost, volume and margin trends, alongside the potential exercise of minority-interest put rights beginning in 2016.
- Check court approval and subsequent developments for the Sykes settlement and Haverhill litigation, as well as outcomes of tax audits and uncertain tax positions.
- Reconcile the substantial first-half operating cash outflow with investment activity, distributions from associated companies and financing needs.