Business context and reporting period
This is Leucadia National Corporation’s unaudited Form 10-Q for the quarter ended June 30, 2014, filed August 7, 2014. The supplied metadata names Jefferies Financial Group, but the 2014 filing registrant is Leucadia. Leucadia was a diversified holding company; its principal businesses included Jefferies investment banking and capital markets and National Beef processing. Jefferies’ results are consolidated on a one-month lag.
Financial results and position
Amounts below are in U.S. dollars; income-statement and cash-flow figures are for the three or six months ended June 30, as indicated.
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net revenues | $2.852 billion | $2.676 billion | $5.795 billion | $4.973 billion |
| Income from continuing operations | $62.8 million | $60.6 million | $152.4 million | $364.7 million |
| Net income attributable to common shareholders | $65.1 million | $52.6 million | $159.4 million | $357.7 million |
| Diluted EPS | $0.17 | $0.14 | $0.42 | $1.10 |
| Cash from (used in) operating activities | Not presented by quarter in the supplied filing | $(1.112) billion | $447.5 million |
- Q2 net revenue rose about 7% and common-shareholder net income rose about 24% year over year. Q2 net income was approximately 2.3% of net revenue, versus 2.0% in 2013 (calculated).
- First-half common-shareholder net income fell about 55%. First-half 2013 included a $227.6 million gain on the Inmet transaction, $182.7 million of pre-acquisition fair-value gains on Jefferies, and tax effects; the reported first-half comparison is also affected by Jefferies’ March 2013 acquisition and is not like-for-like.
- At June 30, cash and cash equivalents were $4.187 billion, versus $3.908 billion at year-end 2013. Total assets were $51.408 billion, total liabilities $40.679 billion, and total equity $10.364 billion.
- Long-term debt was $8.798 billion ($1.444 billion at the parent and $7.354 billion at subsidiaries); parent debt is the key holding-company obligation, while Jefferies subsidiary debt is described as non-recourse to the parent. Long-term debt was $8.181 billion at year-end.
- Management reported $2.225 billion of available corporate liquidity after excluding amounts pledged, held at subsidiaries with debt, or otherwise restricted. This was 1.5 times parent-company debt; management’s stated minimum was 1.0 times.
- Operating cash flow was negative despite positive net income, reflecting trading and financing balance-sheet movements and cash investments, including $253.0 million invested in Harbinger and $307.5 million in the asset-management platform. Investing activities provided $726.5 million; financing activities provided $659.9 million.
Material changes versus the prior comparable period
- Jefferies Q2 net revenue was $689.3 million, with pre-tax income of $85.6 million. Management described investment banking as solid and equities and fixed income as steady despite lower client trading volume; European and Asian revenue was the third-highest quarter on record.
- Jefferies Q2 investment-banking revenue increased to $331.1 million from $277.1 million. Sales and trading revenue was $361.3 million, compared with $363.8 million for the reported 2013 period. Jefferies compensation was 56.0% of net revenue for Q2.
- National Beef Q2 revenue increased to $2.009 billion from $1.920 billion, but pre-tax income fell to $6.5 million from $27.3 million. Higher fed-cattle costs compressed margins; closure of the Brawley facility generated $4.0 million of Q2 costs. First-half segment results were a $21.5 million pre-tax loss versus $6.8 million income.
- First-half 2014 results also reflected lower corporate securities gains than in 2013. Corporate realized securities gains were $17.1 million versus $239.4 million in the prior-year period, which included the Inmet gain.
- Debt issuance and subsidiary borrowings increased financing cash flow. Jefferies issued €500 million of 2.375% notes due 2020 in May; its secured revolving credit facility was amended in June, extended three years, and reduced from $950 million to $750 million.
Outlook, commentary, risks and unusual items
- The filing gives no formal earnings or revenue guidance. Management said Jefferies’ earnings are inherently difficult to predict and depend on financial-market conditions, client activity, positions and trading results. It also noted low volatility and reduced trading demand in several fixed-income markets, alongside stronger investment-banking activity.
- Management said National Beef’s profitability depends on the spread between cattle costs and beef-product selling prices. It may not replace the Walmart consumer-ready business it lost in 2013; further facility closures could lead to impairment charges. Management did not expect significant additional Brawley closure costs.
- Leucadia sold Premier in July 2014 for $250 million, subject to working-capital adjustment, and expected to record an approximately $12.5 million pre-tax gain in Q3. A remaining portion of the real-estate transaction with HomeFed was expected to close in Q3, subject to lender approval. The $27.1 million estimated gain on the earlier noncash HomeFed transaction was deferred.
- Jefferies’ one-day, 95% confidence firmwide VaR averaged $14.94 million in the quarter ended May 31, 2014, versus $16.27 million in the prior quarter. VaR is not a maximum-loss estimate; the filing also identifies market, counterparty, funding and model risks.
- A downgrade below investment grade could trigger additional collateral requirements; management estimated $43.2 million of potential additional collateral under relevant arrangements. Jefferies reported $47.3 million of derivative liabilities with credit-rating triggers and $42.4 million of collateral already posted.
- Material legal matters include a $20 million reserve in the Sykes consumer class action, with potential damages uncertain; a Jefferies mortgage-backed-securities settlement totaling $25 million, with approximately $5.1 million remaining reserved; and litigation concerning the Jefferies merger and Leucadia’s Harbinger transactions. Management could not predict the merger-litigation outcome or estimate a reasonably possible loss.
- Unrecognized tax benefits were $187.6 million, including $32.0 million of interest; tax examinations could affect results when resolved. Other key risks include fair-value estimates, deferred-tax-asset realization, economic conditions, cattle prices and supply, and regulatory and legal developments.
Important facts for investors to verify
- Confirm the correct issuer and period: the filing is Leucadia National Corporation’s Q2 2014 10-Q, not a filing under the Jefferies Financial Group name.
- Assess normalized earnings and the limited comparability of first-half 2014 and 2013, including the Inmet gain, Jefferies acquisition timing, and related tax effects.
- Review the drivers and sustainability of negative operating cash flow, and distinguish consolidated cash from the $2.225 billion management considered available for parent-company liquidity.
- Check debt maturities, subsidiary-versus-parent recourse, facility covenants, and potential collateral calls from a credit downgrade.
- Monitor National Beef margins and efforts to replace Walmart business, along with the status and potential financial impact of the disclosed litigation and tax matters.