Business context and reporting period
Leucadia National Corporation filed this unaudited Form 10-Q for the quarter ended March 31, 2015. Leucadia is a diversified holding company; Jefferies is a wholly owned subsidiary and is included in Leucadia’s results using a one-month reporting lag. The filing is by Leucadia, notwithstanding the request metadata identifying Jefferies Financial Group.
Key financial metrics
Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions where appropriate.
| Metric | Q1 2015 / March 31, 2015 | Comparable period / December 31, 2014 |
|---|---|---|
| Total revenue | $3,376.5 million | $3,139.1 million in Q1 2014 |
| Net revenue | $3,184.7 million | $2,942.5 million in Q1 2014 |
| Income from continuing operations before tax | $587.1 million | $157.1 million in Q1 2014 |
| Net income attributable to Leucadia common shareholders | $380.8 million; diluted EPS $0.99 | $94.3 million; diluted EPS $0.25 in Q1 2014 |
| Cash flow from operating activities | Use of $1,727.4 million | Use of $1,034.5 million in Q1 2014 |
| Cash and cash equivalents | $3,524.5 million | $4,276.8 million at December 31, 2014 |
| Total assets / total liabilities | $52,322.7 million / $41,308.8 million | $52,623.9 million / $41,942.2 million at December 31, 2014 |
| Long-term debt / short-term borrowings | $8,558.8 million / $412.0 million | $8,527.9 million / $12.0 million at December 31, 2014 |
| Total equity | $10,720.4 million | $10,370.0 million at December 31, 2014 |
Net revenue increased about 8% year over year. Net income was substantially boosted by $686.6 million of realized and unrealized gains and interest income associated with the FXCM investment. The filing does not provide a consolidated operating-margin measure; reported earnings are affected by investment marks and varied business mix.
Material changes versus the prior comparable period
- Jefferies net revenue fell to $591.4 million from $930.5 million, and pretax income declined to $12.9 million from $196.4 million. Management cited weaker fixed-income and investment-banking activity, tight trading conditions, and fewer leveraged-finance issuances.
- Jefferies investment-banking revenue decreased to $272.0 million from $414.3 million; sales-and-trading revenue decreased to $329.5 million from $506.2 million. Compensation and benefits were $366.2 million, or 61.9% of net revenue, versus $526.8 million, or 56.6%, in Q1 2014.
- National Beef reported a pretax loss of $33.6 million, compared with a $28.0 million loss. Lower processing volumes and higher cattle costs compressed margins, partly offset by higher selling prices.
- The $686.6 million FXCM-related gain drove the sharp increase in other financial-services results. Conversely, Leucadia recorded a $78.3 million loss from the fair-value decline in its HRG investment, compared with a $12.7 million gain in Q1 2014.
- Operating cash outflow increased year over year. Management attributes cash-flow variability to securities and other working-capital movements, investments, and the timing of distributions; it cautions that quarterly cash-flow patterns may not recur.
Liquidity, outlook, risks and unusual items
- Leucadia reported parent-company available liquidity of $1,441.7 million, above its stated $953 million minimum reserve. Its parent-company debt-to-stressed-equity ratio was 0.37x, but 0.51x when excluding the net deferred tax asset, above its 0.50x stated target; management described the excess as temporary. Parent debt principal included $458.6 million due in 2015.
- Jefferies reported $4,646.9 million of cash and other liquidity sources at March 31, including $3,340.0 million of cash and cash equivalents. Jefferies stated that it had sufficient excess liquidity under its modeled stress outflows and was in compliance with its credit-facility covenants. Its broker-dealer net capital was $954.3 million, with $837.4 million excess.
- FXCM’s $947.0 million carrying value is a Level 3 fair-value estimate, materially sensitive to FXCM’s share price and volatility. The filing estimates a roughly $51 million valuation change from a $0.30 share-price change and a roughly $29 million change from a 10% volatility change, all else equal. FXCM exposure follows the Swiss National Bank’s January 2015 currency move, which resulted in customer losses and approximately $276 million of debit balances owed to FXCM.
- Subsequent to quarter-end, Jefferies agreed to transfer certain futures-business client transactions and began exiting the remaining business. Estimated pretax exit costs are $91.2 million, including $68.2 million expected future cash expenditures; the estimated after-tax impact is $65.8 million. Completion was anticipated in Q2 2015, and the filing says the assets and liabilities to be transferred could not yet be estimated.
- Other subsequent events include National Beef increasing its revolving credit facility from $300 million to $375 million in April, and Jefferies agreeing to acquire FXCM’s agency foreign-exchange business on consideration contingent on future net profits.
- Contingencies include an accrued $70 million settlement in the Jefferies acquisition litigation, with plaintiffs also seeking $27.5 million in legal fees and $1.1 million in expenses; the court had approved the settlement but had not set fees. In the Sykes consumer litigation, the company disclosed a settlement agreement subject to court approval, in addition to a $20 million accrual, $22.8 million of deferred revenue, and $3.2 million expensed in Q4 2014.
- No formal earnings guidance is provided. Management emphasizes that results are difficult to predict because of the diversified business mix, market conditions, investment valuations, and potential acquisitions or dispositions. Disclosed risks include financial-market volatility, FXCM valuation and operating risks, beef cattle and product-market exposure, energy and real-estate investments, credit and liquidity conditions, regulation, and legal proceedings.
Important facts for investors to verify
- How much of reported earnings is attributable to the FXCM fair-value gain, and how sensitive is that valuation to changing inputs?
- Whether Jefferies’ futures-business exit proceeds as expected, and whether the estimated $91.2 million costs change or exceed the disclosed estimate.
- Near-term debt maturities and refinancing: Leucadia parent notes due in September 2015 and Jefferies notes due in November 2015.
- Progress and final resolution of the Jefferies acquisition and Sykes litigation settlements, including any additional legal-fee awards or court approval conditions.
- Whether parent liquidity remains above the stated reserve and how the stressed-equity leverage measure develops, particularly excluding deferred tax assets.
- Jefferies’ revenue recovery, compensation ratio, and trading and investment-banking performance amid the market conditions described by management.