Business context and reporting period
This is Leucadia National Corporation’s unaudited Form 10-Q for the quarter ended March 31, 2014. Leucadia was a diversified holding company whose businesses included Jefferies investment banking and capital markets, National Beef, manufacturing, energy projects and asset management. Jefferies’ results are consolidated on a one-month lag. The filing therefore includes Jefferies for two months in Q1 2013 versus three months in Q1 2014, making reported year-over-year comparisons materially non-comparable.
Financial performance and condition
Unless noted otherwise, amounts below are in U.S. dollars; financial statement amounts have been converted from thousands to millions.
| Metric | Q1 2014 / March 31, 2014 | Prior comparable period / December 31, 2013 |
|---|---|---|
| Total revenue | $3,139.9 million | $2,297.6 million in Q1 2013 |
| Net revenue | $2,943.3 million | $2,297.6 million in Q1 2013 |
| Income from continuing operations | $89.6 million | $304.2 million in Q1 2013 |
| Net income attributable to common shareholders | $94.3 million; $0.25 per diluted share | $305.1 million; $1.08 per diluted share in Q1 2013 |
| Operating cash flow | $(1,034.5) million | $(163.0) million in Q1 2013 |
| Investing cash flow | $567.5 million | $3,110.7 million in Q1 2013 |
| Financing cash flow | $145.9 million | $47.0 million in Q1 2013 |
| Cash and cash equivalents | $3,590.5 million | $3,907.6 million at December 31, 2013 |
| Total assets / total liabilities | $51,130.0 million / $40,577.0 million | $47,866.8 million / $37,327.7 million at December 31, 2013 |
| Total long-term debt | $8,331.3 million | $8,180.9 million at December 31, 2013 |
| Total equity | $10,191.3 million | $10,173.1 million at December 31, 2013 |
- Jefferies reported Q1 net revenue of $930.5 million and pre-tax income of $196.4 million. Compensation was 56.6% of Jefferies net revenue. Management said Jefferies’ net revenue was its second-highest quarter on record, with investment banking revenue above $400 million for a second successive quarter.
- National Beef revenue was $1,887.4 million and it reported a pre-tax loss of $28.0 million, versus a $20.5 million loss in Q1 2013. Higher cattle costs compressed margins.
- Other operations reported a $17.5 million pre-tax loss, including $20.4 million of costs to investigate and evaluate energy projects. Corporate reported a $31.1 million pre-tax loss.
- Leucadia reported $20.0 million of income related to associated companies. The consolidated pre-tax result before associated-company income was $119.7 million; income tax expense was $50.2 million.
- Operating cash use reflected, among other factors, Jefferies’ $352.0 million use of funds and working-capital movements in securities and brokerage balances. The 2013 investing cash flow was unusually high, including $3,018.0 million of cash acquired with Jefferies.
Material changes and notable transactions
- Reported revenue increased year over year, while continuing income and common-shareholder earnings declined. These comparisons are substantially affected by the partial-period consolidation of Jefferies in 2013 and by prior-year corporate securities gains, including a $227.6 million gain on the Inmet transaction.
- In March 2014, Leucadia acquired preferred securities exchangeable into 23.0 million Harbinger Group shares for $253.0 million and already held 18.6 million Harbinger shares. The combined exposure was reported at $508.8 million in trading assets. The exchange and voting rights were subject to regulatory approval; Leucadia reported economic exposure but not voting rights pending approval.
- Leucadia transferred substantially all of its real estate operations and properties, most of its Brooklyn Renaissance Plaza interest and $12.5 million cash to HomeFed in exchange for 6,986,337 newly issued HomeFed shares. A further portion of the transaction was expected to close in Q2 2014, subject to lender approval. A stated $22.5 million gain was deferred because the consideration was noncash.
- Conwed acquired an 80% interest in Filtrexx International in March. National Beef’s Brawley, California facility was expected to close in Q2 2014.
Liquidity, outlook, risks and contingencies
- Management identified $5.6 billion of cash, available-for-sale securities and a managed-fund investment as generally relevant to liquidity, but said $3.4 billion was pledged, held at subsidiaries with debt, or otherwise restricted. Reported holding-company available liquidity was approximately $2.2 billion, versus $1.5 billion of parent-company debt; the stated liquidity-to-parent-debt ratio was 1.4x.
- Jefferies reported $4.6 billion of cash and other liquidity sources at quarter-end, including $2.4 billion of cash and cash equivalents. It said 76% of trading assets were readily financeable at haircuts of 10% or less and that it had sufficient excess liquidity for its modeled contingency outflows.
- Jefferies had $6.0 billion of long-term debt excluding $250 million drawn under its revolving credit facility; its debt weighted-average maturity exceeded eight years, excluding that facility. The next scheduled note maturity was $250 million in June 2014. The $950 million committed Jefferies facility matured August 26, 2014; the company was discussing an extension and expected to finalize an amended agreement before maturity. Jefferies reported covenant compliance.
- National Beef had $120.9 million drawn on its revolver and $153.8 million of remaining availability after outstanding borrowings and letters of credit. Management estimated up to $20 million of additional Brawley closure costs in 2014, including $2.1 million recognized in Q1. The loss of Walmart consumer-ready business remained a risk; replacement business might not fully restore cash flow.
- Jefferies’ average daily VaR increased to $16.27 million from $12.61 million in the prior quarter, driven mainly by equity and interest-rate risks. There were no days when aggregate trading losses exceeded the reported 95% one-day VaR during the period described. VaR is a model-based estimate and does not capture all risks.
- Key exposures include trading and fair-value volatility, counterparty and funding risk, market and credit risk, European sovereign positions, commodity and cattle-price volatility, economic conditions, regulatory changes, and potential impairment or tax-asset realizability. Level 3 trading assets were 3% of total trading assets.
- Jefferies had $110.7 million of derivatives with credit-rating triggers in a liability position; a downgrade below investment grade could have required an additional $42.5 million of collateral at quarter-end. Separately, management estimated $93.2 million of additional collateral could be called under certain arrangements following a downgrade.
- Legal matters include merger-related shareholder litigation with loss not estimable, the Sykes consumer class action with a $20 million accrual, and a Jefferies mortgage-backed securities investigation resolved under agreements requiring $25 million in aggregate payments, with approximately $21 million reserved for remaining payments. A Harbinger-related action was filed after quarter-end on May 2, 2014.
- After quarter-end, the $97.6 million parent-company 3.75% convertible notes due 2014 were primarily converted into 4,606,109 common shares in April. No specific earnings or revenue guidance was provided; management emphasized that results, particularly Jefferies and corporate investment results, are inherently unpredictable.
Most important facts for investors to verify
- Use comparable Jefferies results or pro forma figures when assessing year-over-year performance; reported Q1 2013 included only a partial Jefferies consolidation period.
- Track Jefferies’ facility extension and June 2014 note maturity, as well as the availability and restrictions on holding-company liquidity.
- Assess National Beef’s cattle-cost pressures, replacement of Walmart business and Brawley closure costs.
- Monitor regulatory approval and eventual exchange, voting rights and valuation of the Harbinger securities, plus completion of the remaining HomeFed transaction.
- Review litigation reserves and potential outcomes, including Sykes and the post-quarter Harbinger litigation, and the remaining payments under Jefferies’ settlement agreements.
- Evaluate the sensitivity of earnings and equity to fair-value estimates, Level 3 positions, deferred tax assets, and the company’s significant trading and market exposures.