Business context and reporting period
This is Leucadia National Corporation’s unaudited Form 10-Q for the quarter and six months ended June 30, 2016. The filing identifies Leucadia—not Jefferies Financial Group—as the registrant; Jefferies is its wholly owned investment-banking subsidiary and is consolidated using a one-month reporting lag. Leucadia is a diversified holding company, with Jefferies and National Beef among its principal operating businesses. Unless stated otherwise, figures below are in U.S. dollars.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net revenues | $2.625bn | $2.839bn | $4.640bn | $6.024bn |
| Income (loss) before tax | $139.5m | $0.5m | $(162.5)m | $587.6m |
| Net income (loss) attributable to common shareholders | $57.3m | $16.4m | $(165.6)m | $397.2m |
| Basic and diluted EPS | $0.15 | $0.04 | $(0.44) | $1.04 |
Q2 net revenues fell about 8% year over year, while common earnings improved. Six-month net revenues declined about 23%, and the company moved to a common-shareholder loss. Approximate pretax margin was 5.3% in Q2 2016 versus near break-even in Q2 2015, and negative 3.5% for the first half versus positive 9.8% a year earlier.
- Cash flow: First-half operating cash use was $26.1m, versus $1.694bn used in the prior-year period. Investing activities used $479.5m, compared with $410.4m provided; financing activities used $96.1m, compared with $500.1m provided.
- Cash and liquidity: Cash and cash equivalents were $3.031bn at June 30, down from $3.639bn at year-end. Parent-company available liquidity was $481.5m against a stated $426.1m minimum reserve.
- Debt and capital: Long-term debt was $7.170bn and short-term borrowings $397.2m. Total liabilities were $34.419bn; total equity was $10.265bn. Parent-company debt was $987.3m. Leucadia reported parent debt to stressed equity of 0.28, or 0.45 after excluding the net deferred tax asset, against a 0.50 target.
- Operating segments: Q2 Jefferies net revenues were $720.9m and pretax income $107.5m; first-half net revenues were $1.022bn and pretax loss $138.3m. National Beef Q2 pretax income was $62.9m versus a $9.4m loss; first-half pretax income was $84.3m versus a $43.0m loss.
Material changes versus comparable periods
- Jefferies Q2 net revenues declined from $792.4m, primarily because debt and equity capital-markets activity weakened; stronger fixed-income performance partly offset the decline. First-half results also reflected weaker investment banking and equities.
- Jefferies investment-banking revenue was $253.0m in Q2, down from $404.1m. Advisory revenue rose 4%, but capital-markets revenue fell 59%. For the first half, investment-banking revenue was $484.0m, down from $676.1m.
- National Beef revenue declined 10% in Q2 and 11% in the first half, mainly due to lower selling prices. Lower cattle costs, higher volume and improved margin per head supported a substantial turnaround in profitability.
- FXCM valuation losses were $47.9m in Q2 and $101.1m in the first half of 2016, compared with losses of $112.1m in Q2 2015 and gains of $574.5m in the first half of 2015. The year-on-year first-half earnings swing was therefore materially affected by FXCM marks.
- Leucadia repurchased 3.565m shares for $59.2m in the first half (including $24.9m settled after quarter-end) and paid $45.9m in dividends. The quarterly dividend was $0.0625 per share.
Outlook, commentary, risks and unusual items
- Management provided no specific consolidated earnings or revenue guidance and cautioned that results are not predictable because of the changing mix of investments and businesses.
- Management cited the June 23, 2016 Brexit vote as a source of uncertainty for markets, customers and Jefferies’ European business. Jefferies’ investment-banking activity remained subdued, while fixed-income performance improved in Q2 amid better trading conditions.
- FXCM is carried at fair value as a Level 3 investment, valued at $508.4m at June 30; management said valuation changes may materially affect results. A $1 change in FXCM’s share price was estimated to change valuation by about $19m, a 10% volatility change by about $23m, and a three-month change in estimated time to liquidity by about $8m, all else equal. A proposed restructuring remained subject to definitive agreements and FXCM board approval.
- The first-half tax benefit was reduced by a $23.6m charge related to previously issued stock awards; the Q2 tax provision included an adjustment for the projected full-year effective rate. The filing also reports $193.1m of gross unrecognized tax benefits, including interest, and ongoing tax examinations.
- The Sykes consumer class-action settlement became final and the case closed on June 23, 2016; the company had previously accrued approximately $50m. Other legal and regulatory matters were described as routine or not significant to consolidated financial position, though period-specific costs could be significant.
- Management reported no Q2 goodwill impairment, but noted that Jefferies’ valuation depends in part on assumptions about market liquidity, trading volumes, commodity prices and comparable-company multiples. Other disclosed risks include market, credit, funding, counterparty, commodity, regulatory and operational risks.
- Jefferies reported investment-grade ratings with stable outlooks, but warned that a downgrade could increase collateral requirements and affect funding. Management stated Jefferies had sufficient excess liquidity under its stress framework.
Most important facts for investors to verify
- Confirm the registrant and reporting basis: this filing is Leucadia National Corporation’s consolidated 10-Q, with Jefferies included on a one-month lag.
- Assess the sustainability and drivers of the first-half loss, separating recurring business performance from volatile fair-value items—especially FXCM, KCG and other investments.
- Review Jefferies’ capital-markets recovery, compensation ratio, fixed-income risk and exposure to Brexit-related market and regulatory changes.
- Monitor parent-company liquidity against its reserve target, debt maturities, subsidiary distributions and any further share repurchases or investments.
- Recheck National Beef’s cattle-versus-beef price spreads and the assumptions underlying its redeemable minority interests, as profitability and valuation are sensitive to these inputs.
- Review FXCM restructuring status, valuation assumptions, loan maturity and the associated potential earnings volatility.
- Track tax audits, deferred-tax-asset recoverability, commitments, guarantees and contingent collateral needs after any credit-rating changes.