Business context and reporting period
This is Leucadia National Corporation’s unaudited Form 10-Q for the quarter ended March 31, 2013, the issuer identified in the request as Jefferies Financial Group Inc. Leucadia completed its acquisition of Jefferies Group LLC on March 1, 2013, issuing about 119.4 million common shares and $125 million of mandatorily redeemable convertible preferred shares. The purchase price was preliminarily allocated at $4.762 billion. Leucadia consolidated Jefferies’ March 31 balance sheet but, using a one-month reporting lag, did not consolidate Jefferies’ March results in its income statement. The filing reports Jefferies separately for the three months ended February 28.
Leucadia also spun off Crimson Wine Group to shareholders on February 25, recording a $197 million distribution. Richard Handler became Leucadia’s CEO and Brian Friedman its President.
Financial performance and position
Unless stated otherwise, amounts are in U.S. dollars. Figures below are in millions except per-share data.
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Total revenues | $2,144.0 | $2,385.3 |
| Income from continuing operations | $300.8 | $485.5 |
| Net income attributable to common shareholders | $305.1 | $490.9 |
| Basic / diluted EPS | $1.10 / $1.08 | $2.01 / $1.97 |
| Cash from operating activities | $(163.3) | $(42.7) |
| Cash from investing activities | $3,110.7 | $539.7 |
| Cash from financing activities | $47.0 | $(460.2) |
Revenue fell about 10%, and common-shareholder net income fell about 38% year over year. Results include substantial realized investment gains; consolidated operating margins are not a clear measure of underlying performance given the company’s diverse businesses and material changes in consolidation.
- Q1 2013 realized securities gains were $229.9 million, including a $227.6 million gain on the Inmet exchange offer. The 2012 comparison included a $417.9 million gain on sales of Fortescue shares.
- Income related to associated companies, net of tax, was $233.1 million versus $262.5 million. Before tax, associated-company income declined to $213.5 million from $401.9 million. Jefferies contributed $182.7 million of 2013 equity-method income before acquisition; its standalone revenue for the three months ended February 28 was $1,006.8 million and net income was $74.8 million.
- Operating cash use increased year over year. Investing cash inflow included $3,018.0 million of cash acquired with Jefferies. Cash and cash equivalents ended the quarter at $3,140.4 million.
- At March 31, total assets were $47,349.3 million, total liabilities $36,606.6 million, and total equity $10,398.0 million. Short-term borrowing was $100.0 million and long-term debt $7,753.9 million.
- Leucadia reported $2,797.6 million of corporate available liquidity; it excluded approximately $3.5 billion of cash and securities considered restricted, pledged, or held in subsidiaries where access was limited. Jefferies separately reported $4,725.7 million of cash and other liquidity sources. These measures are distinct.
- Jefferies reported $6.1 billion of long-term debt, excluding $260 million drawn under its revolving credit facility, with average maturity exceeding nine years. It was in compliance with facility covenants. Broker-dealer excess net capital included $688.4 million at Jefferies LLC and $85.4 million at Jefferies Bache.
- Jefferies’ point-in-time one-day trading VaR was $7.2 million at 95% confidence. The filing cautions that VaR is model-dependent and may not capture losses beyond its assumptions.
Material changes versus the prior comparable period
- The acquisition transformed the balance sheet: total assets increased from $9.3 billion at year-end 2012 to $47.3 billion at March 31, 2013, and reported long-term debt increased from $1.4 billion to $7.8 billion. Jefferies made up $39.8 billion of consolidated assets.
- Common shares issued and outstanding rose to 363.9 million from 244.6 million at year-end, principally reflecting acquisition consideration.
- Q1’s investment gains were lower than in 2012, while beef processing revenue was broadly flat. National Beef reported a $20.5 million pre-tax loss, compared with a $17.6 million loss.
- Other comprehensive loss was $198.3 million, mainly reflecting a reduction in unrealized investment gains. A $23.0 million common dividend was paid in March.
Outlook, risks, contingencies, and unusual items
- No formal earnings or revenue guidance is provided. Management stated an intention to continue dividends at an annual rate of $0.25 per common share, paid quarterly, subject to Board discretion; a second quarterly dividend of $0.0625 per share was declared for payment in June 2013.
- Leucadia’s stated corporate liquidity and leverage targets were met at quarter-end: available liquidity to parent debt was 2.9x versus a 1.0x minimum; parent debt to stressed equity was 0.26x, or 0.39x after excluding the net deferred tax asset, versus a 0.50x maximum. These are stated management targets, not legal requirements.
- National Beef faced record-high cattle prices, drought-related supply pressure, and weak processing spreads. Walmart planned to discontinue National Beef’s case-ready business in 2013; facilities were operating at reduced levels, and a $1.9 million workforce-reduction charge was recorded. Replacement business may not fully offset lost cash flow.
- Sangart’s Phase 2 MP4OX trial did not meet its primary efficacy goal. Further trials would require substantial funding; no funding commitment from Leucadia was made, and no product approval or commercial revenue is assured.
- The company reported a $1.8 billion net deferred tax asset and said approximately $4.7 billion of future U.S. pre-tax income would be needed to realize it fully. Unrecognized tax benefits were $160.6 million, including interest; tax examinations could affect results when resolved.
- Jefferies’ derivatives with credit-rating triggers had $172.6 million fair value in liability positions; it had posted $113.6 million collateral and could have been required to post an additional $63.9 million if the specified triggers were activated. More broadly, Jefferies depends on secured funding and investment-grade ratings; a downgrade could increase collateral needs and funding costs.
- Leucadia disclosed a $20 million reserve for the Sykes consumer class action and seven merger-related lawsuits. The outcome of the merger litigation was uncertain. The company also agreed to reimburse Berkshire Hathaway for up to half of losses under a $2.5 billion Berkadia surety policy; Berkadia had $2.47 billion of commercial paper outstanding.
- Jefferies’ acquisition purchase-price allocation remained preliminary, including $1.716 billion of goodwill. The filing identifies valuation judgments, potential impairment, market, credit, liquidity, regulatory, operational, and litigation risks.
Important facts for investors to verify
- Separate Jefferies’ pre-acquisition equity-method earnings from post-close consolidated results; Leucadia’s income statement does not include Jefferies March operations.
- Track the final Jefferies purchase-price allocation, including goodwill and acquired intangible valuations, and any later impairment indicators.
- Assess how much reported liquidity is genuinely available at the parent level versus pledged, regulated, or otherwise restricted subsidiary resources.
- Monitor Jefferies debt, secured-funding access, rating-sensitive collateral requirements, and regulatory capital restrictions on subsidiary distributions.
- Evaluate National Beef’s cattle-cost spreads and progress replacing Walmart’s case-ready business, as well as Sangart’s financing and clinical-trial prospects.
- Review realization assumptions for the deferred tax asset, tax examination outcomes, and developments in the disclosed litigation and Berkadia guarantee exposure.