Business context and reporting period
Leucadia National Corporation, the registrant named in this filing, was a diversified holding company with major businesses in investment banking and capital markets (Jefferies), beef processing (National Beef), and other financial and merchant-banking investments. This Form 10-K reports the fiscal year ended December 31, 2014; Jefferies’ fiscal year ended November 30 and its results were consolidated with a one-month lag. The company’s changing portfolio and Jefferies’ inclusion for only part of 2013 limit year-over-year comparability.
Key financial metrics
| Metric | 2014 | 2013 |
|---|---|---|
| Net revenues | $11.486 billion | $10.426 billion |
| Income from continuing operations before tax | $381.2 million | $545.6 million |
| Income from continuing operations | $215.3 million | $409.1 million |
| Net income attributable to common shareholders | $204.3 million | $369.2 million |
| Diluted earnings per share | $0.54 | $1.06 |
| Cash from operating activities | $(987.2) million | $702.3 million |
| Total assets | $52.624 billion | $47.867 billion |
| Long-term debt | $8.528 billion | $8.181 billion |
Net income attributable to common shareholders fell about 45%; net revenues rose about 10%. The effective tax rate was about 44%, versus about 25% in 2013. Company-wide pretax income was about 3.3% of net revenues. Cash flow from operations turned negative, reflecting, among other items, trading-balance movements and investment activity; reported cash flows are volatile and not necessarily indicative of recurring trends.
At December 31, cash and cash equivalents were $4.277 billion, including cash held within financial-services operations and not all freely available to the parent. The parent reported $2.148 billion of available liquidity against $1.445 billion of parent-company debt, or 1.5x coverage under management’s stated measure. Parent principal debt included $458.6 million due in 2015, $750 million due in 2023 and $250 million due in 2043. Consolidated contractual cash obligations were $13.151 billion, including estimated interest.
Jefferies reported 2014 net revenues of $2.986 billion and pretax income of $358.4 million. Its compensation expense was 56.8% of net revenues. Investment banking revenues reached a record $1.527 billion; sales and trading revenues were $1.443 billion. National Beef generated $7.832 billion in revenue and a $40.3 million pretax loss, a margin of approximately negative 0.5%. For 2014’s fourth quarter, consolidated net revenues were $2.688 billion; continuing-operations loss was $14.0 million and net loss attributable to common shareholders was $9.8 million, or $0.03 per share.
Material changes versus the prior comparable period
- Jefferies’ full-year revenues increased from the partial post-acquisition period reported for 2013; management cited record investment banking, relatively strong equities, and challenging fixed-income conditions, particularly in the fourth quarter.
- National Beef revenue rose about 5%, mainly on higher selling prices, but cattle costs increased and processing volumes fell. Its consumer-ready facilities continued to operate below capacity after Walmart ended its business in 2013.
- Operating cash flow declined from a $702.3 million inflow to a $987.2 million outflow. Leucadia also invested $345.1 million in asset management, $239.0 million in Vitesse Energy and $184.2 million in Juneau Energy.
- Leucadia sold its Hard Rock Biloxi operation for $250 million, transferred substantially all its real estate operations to HomeFed for shares, and converted $97.6 million of parent convertible notes into shares.
Outlook, risks, contingencies and unusual items
No consolidated earnings or revenue guidance is provided. Management cautioned that results are difficult to predict because of portfolio changes and exposure to financial markets and varied industries. Jefferies was evaluating strategic alternatives for its futures, foreign-exchange and commodities business, with a decision anticipated in the first half of 2015; it also planned to wind down convertible-bond offerings. Linkem expected operating losses during network expansion, while Golden Queen targeted commissioning of its mine in late 2015 and Leucadia had committed up to about $27 million in additional funding.
Unusual items included a $70 million proposed settlement of litigation over the Jefferies acquisition, plus court-approved legal fees, and a $52.3 million Jefferies client receivable associated with a futures client bankruptcy, which drove a bad-debt provision. Jefferies recorded $54 million of goodwill impairment in its standalone accounts for futures and international asset management; Leucadia did not record that impairment on a consolidated basis. The 2014 discontinued-operations loss was $17.9 million, including costs from abandoning the Lake Charles clean-energy project.
Principal risks include market, credit, liquidity and counterparty exposures at Jefferies; regulatory and rating changes; cattle supply, pricing, food safety and customer concentration at National Beef; oil-price risk; the realization of $1.7 billion in net deferred tax assets; and litigation. Leucadia also guaranteed up to half of losses under a $2.5 billion surety policy supporting Berkadia affiliate commercial paper; $2.47 billion was outstanding at year-end.
Most important facts for investors to verify
- Review the audited statements and cash-flow details to understand the operating cash outflow and distinguish freely available parent liquidity from regulated or subsidiary cash.
- Check the 2015 maturity and refinancing plan for parent debt, alongside ratings and covenant developments.
- Track the court’s approval and final cost of the $70 million Jefferies litigation settlement, including legal fees.
- Assess whether Jefferies can improve fixed-income and futures-business performance, and whether strategic alternatives result in a transaction.
- Monitor National Beef’s cattle-cost spreads and ability to replace Walmart-related consumer-ready business, and the valuation assumptions supporting deferred tax assets and other investments.