Jefferies Financial Group Inc. quarterly report, Q2 FY2012

Jefferies Financial Group Inc. — 2012 Q2 Form 10-Q summary

Filing identity: The supplied filing is for Leucadia National Corporation, not a registrant named Jefferies Financial Group Inc. Leucadia reported its results on a consolidated basis and held an approximately 28.5% investment in Jefferies Group, Inc.; the two companies should not be treated as the same reporting entity.

Business context and reporting period

This unaudited Form 10-Q covers the three and six months ended June 30, 2012, with balance-sheet comparisons to December 31, 2011. Leucadia operated a diversified portfolio that included beef processing, manufacturing, oil and gas drilling, gaming, real estate, medical-product development and investments. National Beef, acquired in December 2011, contributed substantially to 2012 reported revenue, so reported revenue comparisons with 2011 are not directly comparable.

Financial performance and position

Amounts below are in millions of dollars unless stated otherwise.

Metric	Q2 2012	Q2 2011	Six months 2012	Six months 2011
Total revenues and other income	$2,141.6	$753.4	$4,565.9	$1,037.5
Income (loss) from continuing operations before tax and associated-company results	$71.6	$519.2	$430.0	$598.7
Income (loss) from associated companies, before tax	$(350.2)	$(225.9)	$51.7	$(270.1)
Net income (loss) attributable to Leucadia common shareholders	$(197.3)	$186.3	$293.6	$196.8
Diluted earnings (loss) per share	$(0.81)	$0.75	$1.18	$0.80
Operating cash flow	Not separately presented by quarter	$63.2	$1.9

The revenue totals include investment income and securities gains, and are not a clean measure of operating sales. For the six-month period, reported net securities gains were $427.5 million, including a $417.9 million gain on Fortescue share sales. In Q2, the sharp deterioration in associated-company results was driven principally by a $335.0 million loss attributed to Leucadia’s Jefferies investment; that investment was carried at fair value.

National Beef generated $1.914 billion of revenue and $46.9 million of pretax income in Q2; for the six-month period it generated $3.706 billion of revenue and $29.3 million of pretax income. Its approximate pretax margins were 2.5% and 0.8%, respectively. Management said cattle prices rose to record levels while beef revenue per head did not keep pace, compressing first-half margins; margins improved seasonally beginning in May.

Cash and liquidity: Cash and cash equivalents were $186.7 million at June 30, versus $168.5 million at year-end 2011. Leucadia identified $1.238 billion as available liquidity, after excluding $684.5 million of investments that were pledged, restricted, non-public or otherwise unavailable for general use.
Cash flow: Six-month investing activities provided $508.4 million, principally reflecting investment sales; financing activities used $553.4 million, including debt repayments and redemptions. Cash increased by $18.2 million during the period.
Debt: Current liabilities included $371.3 million of repurchase agreements and $39.8 million of debt due within one year. Long-term debt was $1.371 billion, versus $1.876 billion at year-end. In March, Leucadia redeemed specified notes and debentures for $528.3 million, recognizing a $24.0 million pretax loss.
Balance sheet and equity: Total assets were $8.603 billion, total liabilities $2.262 billion and total equity $6.095 billion at June 30. Accumulated other comprehensive income fell to $541.7 million from $912.4 million at year-end, reflecting a $370.7 million first-half other comprehensive loss.

Material changes versus the prior comparable period

National Beef’s acquisition explains much of the increase in reported revenue. Leucadia’s unaudited 2011 pro forma figures, assuming the acquisition had occurred earlier, showed first-half 2011 revenue of $4.464 billion and net income attributable to common shareholders of $248.4 million; these are not the reported GAAP comparative figures.
Q2 common-shareholder results swung from $186.3 million of net income to a $197.3 million loss, chiefly due to the larger loss from associated companies, particularly the Jefferies fair-value investment. First-half common-shareholder income rose to $293.6 million from $196.8 million, despite differing investment and securities results.
Leucadia sold 100 million Fortescue shares in January, realizing $506.5 million of net proceeds and a $417.9 million gain. After quarter-end, it sold its remaining Fortescue shares for $152.9 million and expected to record a $125.8 million gain in Q3.
Debt declined following the March redemptions and other repayments. Leucadia also invested a further $50 million in Sangart in May, increasing its ownership to approximately 97.2%.

Outlook, commentary, risks and contingencies

The filing provides no consolidated earnings or revenue guidance. Management cautioned that interim results are not necessarily indicative of full-year results and that investment gains, losses and market values can be volatile.
Leucadia said adverse economic conditions had affected many operations and investments; a worsening downturn or prolonged recession could further reduce demand, pricing and asset cash flows. Other cited risks include market-price volatility, real-estate and housing weakness, commodity and raw-material costs, livestock disease or contamination, labor issues, energy-market conditions, drought, regulation and access to capital.
Beef-processing results depend on the spread between cattle costs and beef-product selling prices. Management said drought-related feed costs and potential herd contraction could raise cattle costs faster than National Beef can pass them through.
Leucadia was in litigation with Fortescue and FMG over whether additional notes could dilute the 4% net-revenue interest under the FMG Note. An adverse outcome and issuance of additional notes could materially reduce future cash flows and potentially require impairment of the prepaid mining interest. Future FMG interest also depends on iron-ore volumes and prices.
Leucadia had agreed to reimburse Berkshire Hathaway for up to half of losses under a $2.5 billion surety policy supporting Berkadia-affiliate commercial paper; $2.47 billion was outstanding at June 30. The filing also states that management did not believe current litigation would materially adversely affect consolidated financial position, results or liquidity, though any excess over recorded reserves could be significant for a period.
The net deferred tax asset was $1.550 billion. Management estimated that approximately $4.7 billion of future U.S. pretax income, in addition to reversals of deferred tax liabilities related to unrealized gains, would be needed to realize it fully; actual taxable income could differ from projections.
Other notable items include a $21.3 million first-half pretax loss at Sangart, which had no product-sales revenue and was conducting a Phase 2 clinical study expected to finish in Q4 2012. Completion of later-stage trials and commercialization would require substantial time and expense.

Important facts for investors to verify

Confirm the filing entity and reporting scope: this is Leucadia’s consolidated 10-Q, while Jefferies is an associated-company investment, not the registrant.
Review the Jefferies investment’s fair-value treatment and the drivers of the $335.0 million Q2 loss attributed to it; distinguish that mark from Jefferies’ own reported operating results.
Check the Fortescue share-sale proceeds and gains, the subsequent Q3 sale, and the status and potential financial effect of the FMG Note litigation.
Assess how much of the stated $1.238 billion available liquidity is readily deployable, alongside debt maturities, repurchase agreements and the Berkadia surety reimbursement exposure.
Track National Beef’s cattle-to-beef spread, drought and herd effects, and whether seasonal margin improvement continued after June.
Evaluate the assumptions underlying the $1.550 billion deferred tax asset and the future taxable income required for realization.