Business context and reporting period
This is Leucadia National Corporation’s Form 10-K for the year ended December 31, 2016, filed February 27, 2017. The filing identifies Leucadia—not Jefferies Financial Group—as the registrant; Jefferies is its wholly owned, largest operating subsidiary and is reported on a one-month lag (its fiscal year ended November 30, 2016). Leucadia is a diversified holding company. Its principal reportable businesses are Jefferies, National Beef, and Corporate and other.
Financial results and liquidity
| Metric | 2016 | 2015 |
|---|---|---|
| Net revenues | $10.063 billion | $10.886 billion |
| Income from continuing operations before tax | $316.4 million | $356.5 million |
| Income from continuing operations | $194.3 million | $246.6 million |
| Net income attributable to Leucadia common shareholders | $125.9 million; $0.34 per share | $279.6 million; $0.74 per share |
| Cash from operating activities | $608.8 million provided | $761.8 million used |
| Cash from investing activities | $639.7 million used | $781.2 million provided |
| Cash from financing activities | $230.9 million provided | $652.0 million used |
| Total assets | $45.071 billion | $46.331 billion |
| Long-term debt | $7.380 billion | $7.401 billion |
| Leucadia shareholders’ equity | $10.128 billion | $10.401 billion |
Net revenue declined about 7.6%; income attributable to common shareholders fell about 55%. The effective tax rate was 38.6%, including a $24.9 million charge related to previously issued stock awards. The filing does not present a single consolidated operating margin as a key measure; results combine businesses with materially different economics.
Year-end cash and cash equivalents were $3.808 billion, but much of the consolidated balance sheet supports Jefferies’ securities and financing activities. Leucadia reported parent-company available liquidity of $543.5 million, above its stated minimum reserve of $426.0 million. Parent-company debt was approximately $987.9 million, with principal maturities of $750 million in 2023 and $250 million in 2043. The company reported parent debt to stressed equity of 0.27, or 0.40 after excluding the net deferred tax asset, against a 0.50 target.
Leucadia paid $0.25 per share in dividends during 2016 and repurchased 3.84 million shares in the open market. Consolidated shareholders’ equity was $10.128 billion; tangible capital, a non-GAAP measure, was $7.614 billion.
Material changes versus the prior comparable period
- Jefferies: Net revenues decreased to $2.421 billion from $2.476 billion, while pretax income declined to $43.5 million from $119.2 million. Equities revenue fell to $553.2 million from $757.8 million; fixed-income revenue rose to $643.0 million from $271.9 million. Investment banking revenue decreased 17% to $1.194 billion: lower equity and debt capital markets activity was partly offset by record advisory revenue.
- National Beef: Revenue decreased about 5% to $7.027 billion, but pretax income recovered to $329.0 million from a $123.9 million loss. Management attributed the turnaround to improved margin per head and higher processing volume, alongside lower fed-cattle costs.
- FXCM and other financial services: Leucadia’s 2015 results included a $491.3 million gain on its FXCM loan and related rights. In 2016, it recorded a $54.6 million loss on that investment before shifting to equity-method accounting for its new FXCM interest. This comparison materially affected the “other” results.
- Other merchant banking: Pretax income was $57.7 million versus a $12.1 million loss. However, oil-and-gas operations reported a $90.8 million pretax loss, including substantial Juneau asset impairments.
- Consolidated net income fell less sharply than common-shareholder income: allocation to redeemable noncontrolling interests was a $65.7 million deduction in 2016, versus a $26.5 million addition in 2015. This allocation, as well as operating results, contributed to the decline in common earnings.
Outlook, commentary, risks and unusual items
- Management provided no specific earnings or revenue guidance. It cautioned that the company’s changing investment mix and exposure to different industries make pretax income unpredictable and not necessarily comparable between periods.
- Jefferies described an exceptionally volatile bear-market environment in the first quarter of 2016, followed by improvement over the remainder of the year. Its first-quarter results and trading losses reflected market conditions more severe than its historical VaR model estimates.
- In September 2016, Leucadia restructured its FXCM investment: it received a 49.9% membership interest, rights to as much as 65% of distributions, and three of six board seats; the $154.5 million term-loan balance was extended to January 2018. At year-end the loan and equity interest together had a carrying value of $500.8 million.
- After year-end, FXCM’s U.S. subsidiary settled NFA and CFTC complaints, agreed to withdraw from U.S. business and sell customer accounts to Gain Capital; the CFTC fine was $7 million. The U.S. unit generated about 20% of FXCM revenue but was not profitable. Proceeds and released regulatory capital are intended to reduce Leucadia’s loan. FXCM leadership also changed in February 2017.
- In January 2017, Leucadia sold Conwed for $295 million cash, with up to $40 million in potential earn-outs. The filing says the approximately $180 million pretax gain will be recognized in first-quarter 2017 results, not 2016.
- Other notable items include $71.1 million of 2016 impairment charges, primarily involving Juneau oil-and-gas assets; $1.5 billion of net deferred tax assets and approximately $3.4 billion of federal NOLs, with significant expirations beginning in 2022; and $29.1 billion of commitments and guarantees, substantially related to Jefferies. The company also has a reimbursement obligation for half of certain losses under a Berkshire Hathaway-supported Berkadia commercial-paper program; $1.47 billion was outstanding at year-end.
- Key risks include financial-market volatility and trading losses; credit, funding and rating risks; extensive financial-services regulation; FXCM’s regulatory and operating transition; commodity, cattle-price and food-safety exposures; oil-and-gas asset valuation; realization of deferred tax assets; and litigation or other contingent obligations. Management said current litigation was not expected to have a significant adverse effect on consolidated financial position or liquidity, while noting outcomes could affect period results.
Important facts for investors to verify
- Confirm the registrant and reporting period: the supplied filing is Leucadia National Corporation’s 2016 Form 10-K, with Jefferies reported on a one-month lag.
- Review the drivers of the sharp decline in common-shareholder earnings, including FXCM valuation changes, redeemable noncontrolling-interest allocations and the unusual first-quarter loss.
- Assess whether National Beef’s improved margins and volume are sustainable given cattle supply, commodity pricing and seasonality.
- Track FXCM’s U.S. exit, customer-account sale, fine, loan repayments, and implications for Leucadia’s $500.8 million carrying exposure.
- Compare parent-company liquidity—not consolidated cash alone—with debt service, investment needs, commitments and the $426 million minimum reserve.
- Evaluate the assumptions supporting deferred tax asset realization and NOL utilization, and the sensitivity of Juneau and other investments to future operating and valuation changes.