Business context and reporting period
Leucadia National Corporation (the filing registrant; now Jefferies Financial Group Inc.) filed this unaudited Form 10-Q for the quarter ended June 30, 2017. It is a diversified holding company; Jefferies and National Beef are its principal reportable segments. Jefferies results are consolidated on a one-month lag.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenues | $2.990bn | $2.841bn | $6.070bn | $5.049bn |
| Net revenues | $2.732bn | $2.625bn | $5.600bn | $4.640bn |
| Income (loss) before tax | $124.7m | $139.5m | $522.8m | $(162.5)m |
| Net income (loss) | $74.1m | $70.6m | $368.0m | $(148.0)m |
| Net income (loss) attributable to common shareholders | $58.2m | $57.3m | $339.6m | $(165.6)m |
| Diluted EPS | $0.16 | $0.15 | $0.91 | $(0.44) |
- Cash flow: Six-month operating cash flow was $409.1m, versus $(26.1)m in 2016; investing cash flow was $200.9m versus $(479.5)m; financing cash flow was $243.3m versus $(96.1)m. Cash and cash equivalents rose to $4.662bn from $3.808bn at year-end.
- Balance sheet and debt: Total assets were $48.376bn and total liabilities $37.263bn at June 30, 2017. Long-term debt was $8.085bn, up from $7.380bn at year-end; short-term borrowings were $439.1m, down from $525.8m. Shareholders’ equity was $10.491bn.
- Holding-company liquidity: Leucadia reported $1.147bn of available liquidity against a $533.2m minimum under its internal 24-month reserve target. Parent-company debt was $988.4m; the next parent maturity was in 2023. These measures and targets are management-defined.
- Margins and segment performance: The filing does not present a single consolidated operating-margin measure. Q2 pretax income was $122.7m at Jefferies and $78.4m at National Beef. For six months, Jefferies pretax income was $255.0m versus a loss of $138.3m in 2016; National Beef earned $135.5m versus $84.3m.
Material changes versus prior comparable periods
- Q2 net revenues rose 4%; common-shareholder earnings increased modestly. Jefferies net revenues rose to $781.7m from $720.9m, led by equities and investment banking, partly offset by weaker fixed income. Its Q2 investment banking revenue increased 39% to $351.9m.
- For the first half, net revenues rose 21% and common shareholders’ results swung to profit. Jefferies investment banking revenue increased 57% to $759.9m, reflecting stronger issuance and advisory activity; improved trading conditions also supported first-half fixed-income results.
- National Beef’s Q2 revenue increased 4% and pretax income rose to $78.4m from $62.9m, as higher per-head margins and processing volume helped. First-half pretax income increased despite a one-week-shorter reporting period.
- First-half results included a $178.2m pretax gain on the January sale of Conwed. They also included a $130.2m first-quarter impairment of the FXCM equity investment. These and other investment marks make period comparisons less indicative of recurring performance.
Outlook, management commentary, risks and unusual items
- No specific earnings or revenue guidance is provided. Management cautions that the company’s diverse, changing portfolio makes pretax income unpredictable and results may not be comparable between periods; interim results are not necessarily indicative of full-year results.
- Leucadia sold Conwed for $295m cash, with potential earn-outs of up to $40m over five years. KCG’s $20-per-share cash acquisition by Virtu closed July 20, 2017, after quarter-end.
- FXCM settled regulatory matters in February 2017: its U.S. subsidiary exited the business and agreed to sell customer accounts; the CFTC settlement included a $7m fine. FXCM announced workforce reductions of about 170 employees. Leucadia recorded a $130.2m impairment of its FXCM equity investment; its term loan was due January 2018, with $122.1m principal outstanding before subsequent receipts and a $129.1m fair-value carrying amount at quarter-end.
- Jefferies faces market, credit, counterparty, funding and liquidity risks. A downgrade below investment grade could trigger additional collateral demands; management estimated $56.3m of additional collateral under specified downgrade provisions. Certain derivative agreements also have downgrade-related collateral features.
- Legal and regulatory matters are described as ordinary or not significant to consolidated financial position, but management notes that payments could be significant to results in the period. Tax examinations remain ongoing; management does not expect a significant consolidated financial-position effect but says resolution could materially affect results in the period.
- National Beef’s earnings depend on cattle costs, beef selling prices, volume and seasonal spreads. Jefferies trading and investment-banking results are sensitive to market volatility, trading volumes and issuance activity. HRG was carried at $825.3m; the filing estimates a 10% share-price decline would reduce its value by about $82.5m.
Important facts for investors to verify
- Separate recurring operating performance from the Conwed disposal gain, KCG and other fair-value movements, and the FXCM impairment; review the detailed segment reconciliation.
- Confirm the status and recovery prospects of FXCM, including the January 2018 loan maturity, equity valuation and effects of the U.S. exit and restructuring.
- Assess Jefferies’ liquidity, secured funding and collateral exposure under stress, including any effects of ratings changes and its regulatory-capital restrictions.
- Review debt maturities, subsidiary-level and non-recourse debt, and the extent to which subsidiary cash can be distributed to the parent.
- Track National Beef margins and cattle availability, and the outcome of the FGL transaction noted as expected to close in fourth-quarter 2017.