Business Context and Reporting Period
The supplied filing is Leucadia National Corporation’s Form 10-K for the fiscal year ended December 31, 2013, filed February 28, 2014. It is not a filing by Jefferies Financial Group Inc.; the issuer named in the document is Leucadia National Corporation (NYSE: LUK). Leucadia was a diversified holding company. Jefferies became a wholly owned subsidiary on March 1, 2013, so its results are included only from the acquisition date and on a one-month reporting lag; comparisons with 2012 are therefore not like-for-like.
Businesses included investment banking and capital markets (Jefferies), beef processing (78.9%-owned National Beef), manufacturing, energy projects, asset management and real estate, alongside equity-method investments including Berkadia, Garcadia and Linkem.
Financial Performance and Key Metrics
| Metric | 2013 | 2012 |
|---|---|---|
| Net revenues | $10.429 billion | $9.405 billion |
| Expenses | $10.076 billion | $8.076 billion |
| Continuing-operations income before tax | $472.0 million | $1.418 billion |
| Continuing-operations income | $361.3 million | $887.1 million |
| Net income attributable to common shareholders | $369.2 million | $854.5 million |
| Diluted EPS | $1.06 | $3.44 |
| Operating cash flow | $702.3 million | $645.4 million |
| Total assets | $47.867 billion | $9.349 billion |
| Parent-company long-term debt | $1.541 billion | $954.9 million |
| Subsidiary long-term debt | $6.640 billion | $403.8 million |
| Leucadia shareholders’ equity | $10.102 billion | $6.767 billion |
Revenue increased 10.9%, while common-shareholder net income fell 56.8% and diluted EPS declined from $3.44 to $1.06. The filing attributes the dramatic balance-sheet growth and much of the revenue and expense change to consolidating Jefferies; acquisitions, investment gains and accounting effects also limit comparability. Consolidated long-term debt carrying value was $8.181 billion at year-end.
- Cash flow: Operating activities provided $702.3 million; investing activities provided $3.324 billion; financing activities used $270.5 million. Cash and cash equivalents rose to $3.908 billion from $146.0 million, substantially reflecting the Jefferies acquisition and acquired cash.
- Liquidity: Leucadia reported $3.1 billion of available holding-company liquidity at year-end. Of $6.8 billion in cash and available-for-sale securities, $3.7 billion was pledged, held by indebted subsidiaries or otherwise restricted. Holding-company liquidity was 2.0 times parent-company debt.
- Jefferies: From acquisition through year-end, Jefferies reported $2.134 billion in net revenue and $261.0 million in pretax income. Compensation and benefits were 56.9% of net revenue. Investment banking revenue was $1.008 billion; sales and trading revenue was $1.085 billion.
- National Beef: 2013 revenue was $7.488 billion, approximately flat year over year, but the segment recorded a $42.4 million pretax loss versus $59.0 million pretax income in 2012. Higher cattle costs, compressed margins and lost consumer-ready business weighed on results.
- Other operations: Reported a $108.4 million pretax loss, including $91.3 million of energy-project investigation and evaluation costs. Idaho Timber reported $205.4 million revenue and $9.6 million pretax income; Conwed Plastics reported $105.4 million revenue and $15.3 million pretax income.
- Quarterly context: In the fourth quarter of 2013, consolidated net revenue was $2.922 billion, continuing operations recorded a $15.1 million loss, and net income was $8.6 million. The filing presents quarterly EPS of $0.02 for the quarter.
- Dividends: Leucadia paid $0.25 per common share in 2013 and stated its intention to continue an annual rate of $0.25, subject to board discretion.
Material Changes Versus the Prior Comparable Period
- Jefferies’ acquisition transformed the scale, asset mix, leverage and earnings profile of the consolidated company. It was acquired for an aggregate purchase price of approximately $4.771 billion, primarily through share issuance and assumption of preferred equity.
- Leucadia’s 2013 results included $243.5 million of corporate realized securities gains, including a $227.6 million gain related to the Inmet/First Quantum transaction. 2012 included a $526.2 million gain on redemption of the Fortescue note and substantial Fortescue share-sale gains. These items make annual earnings comparisons especially uneven.
- National Beef recorded a $63.3 million impairment for its Brawley facility and decided to close it in April 2014. The plant’s carrying value was reduced from $93.2 million to estimated fair value of $29.9 million.
- Walmart discontinued National Beef’s consumer-ready business in 2013. Consumer-ready products represented about 7% of National Beef revenue in 2012 but a historically larger share of gross margin; replacement business may not fully offset the lost contribution.
- Leucadia distributed Crimson Wine Group to shareholders in February 2013. It also classified gaming operations as discontinued after agreeing to sell the Hard Rock Biloxi for $250 million, subject to approvals and closing conditions.
- Leucadia sold $1.0 billion principal amount of new senior notes in October 2013. National Beef amended and extended its credit facility, increasing term debt to $375 million and its revolver to $300 million, with maturity extended to October 2018.
Outlook, Commentary, Risks and Unusual Items
- Outlook: The filing gives no consolidated earnings or revenue guidance. Management cautions that results are difficult to predict because of Jefferies’ market-sensitive business, investment gains and losses, and possible acquisitions or dispositions.
- Energy projects: Leucadia had expensed $91.7 million in 2013 investigating and evaluating energy projects. The Lake Charles project was estimated to cost $2.3–$2.6 billion; financing had not been arranged, and project awards and grants remained conditional. Management stated it was not obligated to fund development before further investigation, board approval and significant third-party financing.
- Additional Brawley costs: National Beef estimated up to $20 million of 2014 closure-related costs, including employee, contractual and decommissioning expenses; these were not accrued until incurred.
- Other unusual items: Leucadia recorded $20.0 million of real-estate impairments, including a $15.4 million out-of-period adjustment relating to prior periods. Jefferies recorded $38.4 million in litigation expenses. The filing also reports a $16.4 million out-of-period adjustment to Berkadia income in 2013.
- Contingencies: A proposed Jefferies mortgage-backed-securities resolution involved $25.0 million of payments; Jefferies had reserved $22.4 million for estimated remaining amounts. Leucadia also disclosed a consumer class action involving purchased consumer debt and merger-related shareholder litigation; the filing could not estimate the merger-litigation loss. The company had accrued a $20.0 million reserve for the consumer action.
- Principal risks: Jefferies faces trading, market, counterparty, funding, regulatory and operational risks, including evolving derivatives rules and possible rating downgrades. National Beef faces cattle-price and supply volatility, customer concentration, food-safety, labor and environmental risks. Other risks include execution and financing of energy projects, real-estate impairment, and the realization of a $1.810 billion net deferred tax asset. The filing also discloses $3.4 billion of federal NOLs, subject to limitations and future taxable income.
- Liquidity and guarantees: Leucadia had agreed to reimburse Berkshire Hathaway for half of losses under a $2.5 billion surety policy supporting Berkadia affiliate commercial paper; $2.47 billion was outstanding. Jefferies’ derivative guarantee disclosures include very large notional amounts, which management says overstate expected payout; the reported fair value of those guarantee-defined contracts was approximately $229.5 million.
Most Important Facts an Investor Should Verify
- Confirm the issuer and filing match the intended company: this is Leucadia National Corporation’s 2013 10-K, not a Jefferies Financial Group filing.
- Review Jefferies’ standalone filings and the acquisition accounting, including the one-month reporting lag and the resulting impact on year-over-year comparability.
- Reconcile parent-company liquidity with restricted subsidiary cash, Jefferies’ separate funding needs, and the company’s consolidated debt and contractual maturities.
- Assess National Beef’s ability to replace Walmart consumer-ready business, the effect of the Brawley closure, and the final closure costs.
- Check the status, financing, permits and conditional incentives for the Lake Charles and other energy projects, alongside continued investigation spending.
- Review the outcomes and any subsequent changes in the disclosed litigation, regulatory settlements, Berkadia guarantee exposure and tax-asset realizability.