Jefferies Financial Group Inc. (then Leucadia National Corporation) — Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. This is a diversified holding-company filing, not a standalone Jefferies filing. Jefferies results are consolidated on a one-month lag.
Business context and key financial metrics
The company holds businesses and investments spanning investment banking and capital markets (Jefferies), beef processing (National Beef), asset management, commercial real estate finance, vehicle finance, energy, manufacturing and other investments.
| Metric | Q3 2017 | 9M 2017 | Comparable 2016 |
|---|---|---|---|
| Net revenues | $2.897 billion | $8.497 billion | Q3 $2.676 billion; 9M $7.317 billion |
| Income before taxes | $200.0 million | $722.8 million | Q3 $249.9 million; 9M $87.4 million |
| Net income | $136.8 million | $504.8 million | Q3 $176.2 million; 9M $28.2 million |
| Net income attributable to common shareholders | $99.4 million | $439.0 million | Q3 $154.4 million; 9M loss of $11.2 million |
| Basic EPS | $0.27 | $1.19 | Q3 $0.41; 9M loss of $0.03 |
| Operating cash flow | Not separately provided | $1.012 billion | 9M 2016: $330.9 million |
Common-shareholder net income was approximately 3.4% of net revenues in Q3 and 5.2% for nine months. These are simple ratios, not company-reported margin measures. Q3 dividends were $0.10 per share; nine-month dividends were $0.225 per share.
At September 30, 2017, total assets were $47.667 billion, total liabilities $36.512 billion, and total equity $10.642 billion. Cash and cash equivalents were $5.017 billion. Short-term borrowings were $417.1 million and long-term debt $8.093 billion. Parent-company debt was $988.7 million. Parent-company available liquidity was $1.193 billion, versus a stated minimum liquidity target of $531.4 million. Jefferies reported $1.491 billion of net capital and $1.412 billion of excess net capital at its principal U.S. broker-dealer.
For the first nine months, investing activities used $22.0 million and financing activities provided $218.0 million. Cash increased by $1.209 billion to $5.017 billion; operating cash flow included significant changes in trading and secured-financing balances and should not be read as a steady-state cash-generation measure.
Material changes versus prior comparable periods
- Nine-month net revenues rose 16% and common-shareholder earnings improved from a loss to $439.0 million. The prior-year comparison was affected by weak Jefferies markets in early 2016 and losses on associated-company and investment positions.
- Jefferies net revenues rose to $802.9 million in Q3 from $656.5 million and to $2.382 billion for nine months from $1.678 billion. Investment banking revenue reached a record $475.7 million in Q3, up 61%, and increased 59% to $1.236 billion for nine months.
- National Beef nine-month net revenues increased 6% and pretax income rose to $310.0 million from $192.5 million. Q3 included a 14-week period versus 13 weeks in 2016, contributing to the comparison.
- Long-term debt increased from $7.380 billion at year-end 2016 to $8.093 billion. Jefferies issued $750 million of 4.85% senior notes due 2027; National Beef entered a new credit agreement.
- Cash dividends per common share increased from $0.0625 in each of the first two quarters to $0.10 in Q3. The company repurchased 3.883 million shares for $96.9 million during the nine months.
Management commentary, outlook, risks and unusual items
- Management gives no quantitative earnings or revenue guidance. It cautions that results are difficult to predict because business mix, investment values, market conditions, transaction activity and timing of distributions can change. Forward-looking statements are subject to material uncertainty.
- Jefferies’ Q3 investment banking strength was partly offset by lower fixed-income trading revenue amid reduced volatility and volumes. Management noted stronger nine-month capital-markets and advisory activity, but described trading and investment results as nonrecurring or market-sensitive.
- Conwed was sold in January for $295 million cash, plus possible earn-outs up to $40 million. The sale generated a $178.2 million pretax gain in the nine-month period.
- FXCM’s U.S. subsidiary withdrew from business following regulatory settlements; the CFTC settlement included a $7 million fine. Leucadia recorded a $130.2 million impairment of its FXCM equity investment in Q1. Its remaining FXCM exposure was reported at $241.4 million, including the term loan and equity investment; the loan was due January 2018.
- JETX recorded a $10.1 million Q3 impairment for Houston County acreage, following a $55.0 million impairment in Q3 2016. The company cited its decision to focus on higher-return acreage.
- HRG investment fair-value changes were volatile: a $97.9 million Q3 loss compared with a $91.8 million Q3 2016 gain. Nine-month 2017 change was a $2.3 million gain.
- Jefferies LoanCore was sold on October 31, after quarter-end, for approximately $170 million, estimated book value at that date; additional consideration may depend on future returns. The company also reported an expected FGL sale by HRG and CF Corporation in Q4 2017.
- Risks include market, credit, liquidity, valuation and counterparty exposures; commodity-sensitive beef margins; uncertain oil-and-gas outcomes; and legal, regulatory and tax matters. Management said proceedings were not expected to materially affect consolidated financial position or liquidity, though payments could materially affect results in a period. Parent liquidity and subsidiary regulatory or contractual restrictions can limit transfers of funds.
- Uncertain tax benefits were $215.8 million, including $54.8 million of interest; tax audits were ongoing. A $31.9 million repatriation-related tax benefit reduced the nine-month 2017 tax provision.
Important facts investors should verify
- Confirm the issuer and reporting basis: this is Leucadia’s consolidated 10-Q, with Jefferies included on a one-month lag.
- Assess the sustainability of Jefferies’ record investment-banking performance and the effect of lower trading volatility on sales and trading.
- Review the FXCM loan repayment status and realized recovery on the investment after its regulatory withdrawal, impairment and January 2018 loan maturity.
- Separate recurring earnings from the Conwed sale gain, investment fair-value changes, tax benefit and asset impairments.
- Track leverage, refinancing needs, the parent liquidity target, and restrictions on moving cash from regulated or subsidiary entities.
- Review the post-quarter Jefferies LoanCore sale proceeds and any contingent additional consideration, plus the expected HRG/FGL transaction status.