Business context and reporting period
Leucadia National Corporation (the registrant; not a standalone Jefferies filing) filed this unaudited Form 10-Q for the quarter ended March 31, 2017. Leucadia is a diversified holding company. Its consolidated reporting segments include Jefferies, National Beef, and Corporate and other, alongside other financial-services and merchant-banking investments. Jefferies is consolidated using a one-month reporting lag; its reported quarter ended February 28, 2017.
Key financial results
Amounts below are in millions of dollars except per-share data. Comparisons are with the three months ended March 31, 2016.
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Total revenues | $3,080.4 | $2,207.3 |
| Net revenues | $2,868.0 | $2,015.1 |
| Expenses | $2,341.3 | $2,337.1 |
| Income (loss) before income taxes | $398.1 | $(302.0) |
| Net income (loss) | $293.9 | $(218.6) |
| Net income (loss) attributable to common shareholders | $281.4 | $(222.9) |
| Diluted EPS | $0.75 | $(0.60) |
- Net revenues rose about 42%. Jefferies net revenues were $797.4 million versus $300.8 million; National Beef net revenues were $1,561.5 million versus $1,634.5 million.
- Jefferies pretax income was $132.3 million, compared with a $245.8 million loss. National Beef pretax income increased to $57.1 million from $21.4 million.
- Cash and cash equivalents were $4,261.4 million at March 31, up from $3,807.6 million at year-end. Total assets were $46.0 billion and total equity was $10.6 billion.
- Operating cash flow was negative $193.0 million; investing activities provided $124.8 million and financing activities provided $525.7 million. Cash increased $453.9 million during the quarter.
- Long-term debt was $8.20 billion, up from $7.38 billion at December 31, 2016; short-term borrowings were $422.9 million, down from $525.8 million.
Material changes and unusual items
- Jefferies benefited from improved trading conditions and higher transaction volumes. Investment-banking revenues rose 77% to $408.0 million, including $183.8 million in advisory revenue and $224.2 million in equity and debt capital-markets revenue. Sales-and-trading revenues increased to $380.5 million from $60.4 million.
- National Beef’s revenue fell about 4%, but pretax profit improved as live-cattle costs declined more than selling prices. Its 2017 quarter covered 12 weeks versus 13 weeks in the prior-year quarter.
- Leucadia recorded a $179.9 million pretax gain on the January sale of Conwed for $295 million cash, with potential additional earn-outs of up to $40 million. Other merchant-banking results also included a $175.2 million unrealized gain on the HRG investment.
- Leucadia recorded a $130.2 million impairment of its FXCM equity investment after regulatory actions, FXCM’s restructuring and valuation declines. FXCM-related associated-company losses totaled $149.9 million; the term loan generated $10.9 million of gains, including interest-related amounts.
- The income-tax provision was $104.2 million, including a $31.9 million benefit related to repatriation of Jefferies foreign earnings and associated tax credits.
- Jefferies issued $750 million of 4.85% senior notes due 2027 in January. Its reported long-term debt was approximately $6.3 billion.
Liquidity, outlook and risks
- Leucadia reported parent-company available liquidity of $1,122.5 million against a stated minimum reserve target of $426 million. Parent-company debt was $988.2 million; management’s stated parent debt-to-stressed-equity target was a maximum 0.50, versus reported actual ratios of 0.26, or 0.38 after excluding the net deferred tax asset.
- Jefferies reported $5.89 billion of cash and other liquidity sources at quarter-end and said it had sufficient excess liquidity under its modeled maximum-liquidity-outflow scenarios. A downgrade below investment grade could require additional collateral; management estimated $55.7 million under specified arrangements.
- No numerical earnings or revenue guidance is provided. Management cautions that the changing business mix, market conditions, investment dispositions and timing of investee distributions make results and cash flows difficult to predict; interim results are not necessarily indicative of full-year results.
- Key exposures include market, credit, counterparty and liquidity risks at Jefferies; commodity-price and cattle-margin volatility at National Beef; and valuation, funding and operating risks across investments. Level 3 financial assets involve significant unobservable inputs and judgment.
- FXCM’s U.S. business withdrew following regulatory settlements, including a $7 million CFTC fine, and agreed to sell customer accounts; FXCM announced a restructuring involving about 150 job cuts. Leucadia’s disclosed maximum exposure to FXCM was $319.5 million at quarter-end.
- The filing describes ordinary-course legal and regulatory matters and investigations; management did not expect a significant adverse effect on consolidated financial position or liquidity, though payments could materially affect results in a period. It also discloses substantial commitments and guarantees, including $7.23 billion of maximum commitments, much of which relates to forward-starting secured financing transactions.
- Subsequent events noted include FGL’s April 17 termination of its merger agreement with Anbang and an April agreement for Virtu Financial to acquire KCG at $20 per share, expected to close in the third quarter of 2017.
Important facts for investors to verify
- Separate recurring operating performance from the Conwed sale gain, HRG mark-to-market gain, FXCM impairment and tax benefit; assess their effect on reported earnings.
- Review the drivers and sustainability of Jefferies’ strong trading and investment-banking rebound, and account for its one-month reporting lag.
- Monitor FXCM’s post-settlement restructuring, loan repayment, valuation assumptions and Leucadia’s remaining exposure.
- Reconcile parent-company liquidity and debt with consolidated cash and debt, including restrictions on subsidiary distributions and the maturity profile of subsidiary borrowings.
- Assess National Beef’s cattle-cost spreads and the impact of the shorter reporting quarter, and review valuation sensitivity in Level 3 assets and significant commitments or contingencies.