Business context and reporting period
Jefferies Financial Group Inc. (formerly Leucadia National Corporation) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2018. The diversified company operates investment banking and capital markets, alternative asset management, commercial mortgage banking, vehicle finance, real estate, and merchant banking businesses. Jefferies Group results are consolidated on a one-month lag.
Financial performance and position
Amounts below are in millions of dollars unless stated otherwise.
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenues | $1,243.8 | $1,114.2 | $2,404.9 | $2,633.1 |
| Net revenues | $911.2 | $856.9 | $1,806.6 | $2,163.4 |
| Continuing-operations pretax income | $37.5 | $46.3 | $75.3 | $387.3 |
| Continuing-operations income | $27.9 | $20.1 | $114.1 | $269.8 |
| Net income | $748.9 | $74.1 | $888.1 | $368.0 |
| Net income attributable to common shareholders | $725.5 | $58.2 | $850.1 | $339.6 |
- Q2 diluted EPS was $2.03, including a $1.80 per-share gain on disposal of discontinued operations; diluted EPS from continuing operations was $0.08. Six-month diluted EPS was $2.33, including a $1.77 disposal gain.
- Q2 net revenues rose 6.3% year over year; first-half net revenues fell 16.5%. Q2 compensation and benefits were $478.5 million, or 53.9% of net revenues, versus 57.6% a year earlier.
- Cash and cash equivalents were $4.741 billion; cash, cash equivalents and restricted cash totaled $5.448 billion. Six-month operating cash flow was negative $524.1 million, versus positive $473.5 million in 2017. Continuing operations used $688.8 million of operating cash; discontinued operations provided $164.7 million.
- At June 30, total assets were $49.402 billion, total liabilities $38.695 billion, and total equity $10.567 billion. Short-term borrowings were $506.2 million and long-term debt $7.715 billion. Parent-company debt was $989.6 million.
- Parent-company liquidity was $1.789 billion, against a stated minimum reserve target of $597.2 million. Jefferies Group reported $5.850 billion of cash and other liquidity sources and $12.0 billion of long-term capital, which exceeded its cash capital requirements.
Material changes versus prior comparable periods
- On June 5, Jefferies sold 48% of National Beef to Marfrig for $907.7 million cash, reducing its ownership from 79% to 31%. It deconsolidated National Beef, classified pre-sale results as discontinued operations, and recorded an $873.5 million pretax disposal gain ($643.9 million after tax), including remeasurement of the retained interest.
- Jefferies Group investment banking revenues were $506.7 million in Q2, up 42.4% year over year; strong advisory, leveraged finance and equity capital markets activity supported growth. Fixed-income revenues declined, and sales and trading overall was lower. Q2 investment banking revenue includes a $32.3 million presentation increase from the new revenue standard; the corresponding expense increase had no pretax-income effect.
- Jefferies reported a $158.4 million Q2 and $179.9 million first-half mark-to-market loss on its HRG investment, versus losses of $75.0 million in Q2 2017 and a $100.2 million gain in the first half of 2017. HRG merged into Spectrum Brands on July 13; Jefferies’ approximately 23% HRG holding converted to approximately 14% of Spectrum Brands.
- The six-month comparison also reflects the prior-year $178.2 million pretax Conwed sale gain and a $130.2 million FXCM impairment in Q1 2017, neither of which recurred in 2018. First-half 2018 included losses in Leucadia Asset Management, while Berkadia performed strongly.
- Jefferies repurchased 24.084 million shares during the first half for $582.2 million, at an average $24.17 per share. The quarterly common dividend was $0.10; in July the board declared $0.125 per share.
Outlook, commentary, risks and unusual items
- No numerical earnings or revenue guidance is provided. Management described Jefferies Group’s results as inherently variable with financial-market and economic conditions and stated that cash flows may not follow a consistent pattern.
- Management expected the Garcadia sale to close in Q3 2018. The announced terms provide $435 million cash and $50 million preferred equity, with approximately $52 million to be used to retire property mortgage debt.
- Jefferies invested $250 million in a Weiss Multi-Strategy Advisers strategy and agreed to invest a further $250 million in a combined Schonfeld/Folger Hill strategy, subject to the announced arrangement. Vitesse acquired Bakken assets for $190 million, including approximately $144 million funded by Jefferies equity.
- Key risks include market, credit, liquidity, valuation and counterparty exposures; management cautions that VaR and stress tests have limitations. Jefferies Group’s average daily VaR was $6.78 million in Q2, with one trading day when loss exceeded the 95% one-day VaR estimate.
- A downgrade below investment grade could trigger collateral requirements. The filing estimates $58.6 million of potential additional collateral under certain arrangements; a separate disclosure for derivatives with credit-rating contingent features reports $249.5 million of potential collateral return and additional posting.
- Gross unrecognized tax benefits were $233.4 million, including interest. Tax examinations and other legal or regulatory matters are ongoing; management did not expect them to materially harm consolidated financial position or liquidity, though payments could materially affect results in a period. The filing also reports $8.029 billion of maximum commitments, including forward-starting repos and reverse repos.
Important facts for investors to verify
- Separate recurring continuing-business performance from the National Beef disposal gain and discontinued-operation earnings.
- Assess the sustainability of investment banking strength against weaker fixed income and trading results, and account for the revenue-standard presentation change.
- Review the valuation and potential volatility of the HRG/Spectrum Brands investment and other fair-value positions, including Level 3 estimates.
- Confirm the closing, proceeds and final accounting for the planned Garcadia sale, and monitor the use of National Beef proceeds, buybacks, dividends and new investments.
- Track operating cash flow, liquidity buffers, debt maturities, refinancing access and collateral exposure under potential credit downgrades.