Business context and reporting period
This is Leucadia National Corporation’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2016, filed November 2, 2016. Leucadia was a diversified holding company whose principal businesses included Jefferies, National Beef and a range of financial-services and merchant-banking investments. Jefferies’ results are consolidated on a one-month lag. The filing is Leucadia’s, not a standalone Jefferies 10-Q.
Financial results and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net revenues | $2.676 billion | $2.366 billion | $7.317 billion | $8.390 billion |
| Income (loss) before tax | $249.9 million | $(272.2) million | $87.4 million | $315.4 million |
| Net income (loss) attributable to common shareholders | $154.4 million | $(173.2) million | $(11.2) million | $224.0 million |
| Basic and diluted EPS | $0.41 | $(0.47) | $(0.03) | $0.59 |
- Revenue and profitability: Q3 net revenues rose about 13% year over year, while nine-month net revenues fell about 13%. Q3 results improved sharply from the prior-year loss; nine-month common-shareholder results turned to a small loss.
- Cash flow: Operating activities provided $330.9 million in the first nine months, versus $1.180 billion used in the 2015 period. Investing activities used $558.5 million, versus $943.8 million provided in 2015. Cash and cash equivalents fell $359.7 million from year-end to $3.279 billion.
- Balance sheet and liquidity: At September 30, total assets were $46.106 billion, total liabilities $35.397 billion and total equity $10.237 billion. Short-term borrowings were $432.2 million and long-term debt $7.232 billion. Parent-company debt was $987.6 million. Parent available liquidity was $470.2 million, above the stated $426.1 million minimum liquidity reserve.
- Capital: Leucadia shareholders’ equity was $10.060 billion; management-defined tangible capital was $7.465 billion, down from $7.753 billion at year-end 2015.
- Margins and cash conversion: The filing does not present a single consolidated operating-margin measure. Segment profit and loss varied materially; reported cash flows are affected by trading and securities-financing balance movements.
Material changes versus prior comparable periods
- Jefferies: Q3 net revenues increased to $656.5 million from $580.5 million, and pretax income was $83.2 million versus $3.3 million. Nine-month net revenues declined to $1.678 billion from $1.964 billion, and Jefferies recorded a $55.1 million pretax loss versus $107.6 million income. Fixed-income trading improved, but lower equity and debt capital-markets activity weighed on investment banking; year-to-date equities also reflected weaker investment marks and a loss from its Jefferies Finance joint venture.
- National Beef: Q3 revenue declined 6% to $1.747 billion, but pretax income improved to $108.3 million from a $31.7 million loss. Lower cattle costs, higher margins per head and increased processing volume supported record quarterly profitability. Nine-month pretax income was $192.5 million versus a $74.7 million loss.
- FXCM: A September 1 agreement extended Leucadia’s $192.5 million term loan maturity to January 2018 and exchanged participation rights for a 49.9% common membership interest. Leucadia obtained board representation and significant influence, but did not consolidate FXCM. The change moves the equity interest to the equity method and management expected lower volatility in FXCM-related earnings.
- Other investments: A $55.0 million Juneau Energy impairment was recorded in Q3 after development plans for certain acreage were curtailed. HRG’s fair-value investment generated a $91.8 million Q3 gain, versus a $59.2 million loss in the prior-year quarter.
Outlook, commentary, risks and unusual items
- Management provided no quantified consolidated earnings or revenue guidance and cautioned that results are not predictable or necessarily comparable because of the diverse businesses, investment marks, and timing of transactions and distributions.
- Management described improved market conditions supporting Jefferies fixed-income results, while noting subdued equity and debt issuance activity. Jefferies’ results remain exposed to financial-market conditions, trading activity and transaction volumes.
- The filing identifies risks including market, credit, liquidity, commodity and foreign-exchange exposure; oil-and-gas losses; cattle-price and livestock risks; uncertain FXCM performance and valuation; real-estate and investment risks; regulatory and legal matters; and the uncertain effects of the U.K.’s exit from the EU.
- Jefferies reported $5.019 billion of cash and other liquidity sources at September 30, including $1.831 billion of unencumbered liquid financial instruments. Management stated it had sufficient excess liquidity under its modeled stress scenarios. A downgrade below investment grade could trigger collateral demands; estimated additional collateral under specified arrangements was $67.0 million.
- Other notable items: nine-month income-tax expense included a $23.0 million charge related to previously issued stock awards; the effective tax rate for the nine-month period was 67.7%. Unrecognized tax benefits were $195.1 million, with examinations ongoing. Ordinary-course legal and regulatory matters could affect results in the period resolved, although the company did not expect a significant adverse effect on consolidated financial position or liquidity.
- Management reported effective disclosure controls as of September 30, 2016, with no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Reconcile the Q3 profit improvement and nine-month common-shareholder loss to the contribution of business operations, FXCM and other fair-value marks, and the tax charge.
- Review the FXCM amendment, valuation assumptions, remaining loan balance and Leucadia’s exposure; the filing reports a $541.9 million carrying value for its combined FXCM exposure.
- Assess whether National Beef’s exceptional Q3 margins are sustainable given cattle costs, selling prices, volume and seasonality.
- Examine Jefferies’ year-to-date losses, capital-markets pipeline, trading risks, liquidity resources and sensitivity to credit-rating downgrades.
- Monitor Juneau Energy’s acreage impairment and broader oil-and-gas funding needs, as well as the realizability of the company’s deferred tax assets and outcome of tax examinations.