Business context and reporting period
This is Leucadia National Corporation’s Form 10-K for the fiscal year ended December 31, 2017, filed February 26, 2018. The filing describes Leucadia as a diversified holding company; Jefferies is its largest subsidiary and is consolidated with a one-month reporting lag. The filing is not titled as a Jefferies Financial Group Inc. filing.
Principal businesses include Jefferies investment banking and capital markets, National Beef, and a range of financial-services and merchant-banking investments.
Financial performance and position
| Metric | 2017 | 2016 |
|---|---|---|
| Net revenues | $11.44 billion | $10.06 billion |
| Income from continuing operations before tax | $1.014 billion | $316.4 million |
| Income tax provision | $761.0 million | $122.1 million |
| Net income attributable to common shareholders | $167.4 million | $125.9 million |
| Basic and diluted EPS | $0.45 | $0.34 |
| Net cash provided by operating activities | $1.073 billion | $608.8 million |
| Total assets | $47.17 billion | $45.07 billion |
| Long-term debt | $7.886 billion | $7.380 billion |
| Shareholders’ equity | $10.11 billion | $10.13 billion |
| Book value per common share | $28.37 | $28.18 |
Consolidated cash and cash equivalents were $5.275 billion at year-end, including substantial Jefferies operating cash. Leucadia reported $1.325 billion of parent-company liquidity under its definition, against a minimum liquidity-reserve target of $544.6 million. Parent-company debt was approximately $989 million; the company’s longer-term principal maturities were $750 million in 2023 and $250 million in 2043. Consolidated operating cash flow is affected by securities-financing balances and business activity and is not a reliable recurring trend on its own.
Material changes versus the prior comparable period
- Pre-tax income rose $697.4 million. Management attributed the increase to improved performance across businesses, notably Jefferies and National Beef, and the Conwed sale gain.
- Jefferies pre-tax income increased to $527.8 million from $43.5 million, while net revenues reached a record $3.207 billion. Investment banking revenue rose 47.8% to $1.764 billion; equities revenue benefited from investment gains and its Jefferies Finance joint venture, while fixed-income revenue declined modestly.
- National Beef pre-tax income increased to $407.3 million from $329.0 million, supported by higher cattle processing volume and improved margins per head.
- Other merchant-banking pre-tax income increased to $250.7 million from $57.7 million, primarily reflecting the $178.2 million pre-tax gain on the Conwed sale.
- Other financial-services businesses remained loss-making before tax, at $34.1 million of loss, though this improved from a $73.3 million loss. A $130.2 million FXCM equity-investment impairment was recorded in 2017.
- Net income was substantially affected by the Tax Act: a provisional, non-cash $450.5 million tax charge reduced earnings, including $415.0 million from revaluing deferred tax assets and $35.5 million for deemed repatriation of foreign earnings. The resulting effective tax rate was approximately 75.1%, versus 38.6% in 2016.
Outlook, risks and unusual items
- No formal earnings or revenue guidance is provided. Management said parent-company liquidity was expected to increase in 2018. Jefferies approved a $200 million distribution to Leucadia, received January 31, 2018, and a policy for quarterly distributions equal to 50% of its net earnings; future amounts depend on earnings and taxable income.
- The company sold Conwed for $295 million cash, with potential earn-outs of up to $40 million, and recognized a $178.2 million pre-tax gain. Jefferies sold its Jefferies LoanCore interest for approximately $173.1 million, with possible additional consideration tied to future returns.
- FXCM settled U.S. regulatory complaints in February 2017, exited its U.S. customer business, and reduced its global workforce by approximately 22%. Leucadia’s remaining FXCM exposure was carried at $231.7 million, comprising a loan and equity-method investment.
- Key risks include volatile capital-markets activity and trading losses at Jefferies; regulatory and capital requirements; counterparty, funding, liquidity and credit-rating risks; cyber and operational threats; cattle-price, food-safety, labor and export risks at National Beef; oil-and-gas price volatility and asset impairments; FXCM performance; and the uncertain realizability of deferred tax assets and tax positions.
- Other items to note include $10.1 million of 2017 JETX impairment charges, $20 million write-down of a note receivable related to a prior subsidiary sale, and $1.47 billion of Berkadia-affiliate commercial paper outstanding. Leucadia agreed to reimburse Berkshire Hathaway for half of qualifying losses under the associated $1.5 billion surety-policy support.
- The independent auditor issued an unqualified opinion on the financial statements and internal controls; management reported effective disclosure controls and internal control over financial reporting.
Most important facts for investors to verify
- Reconcile the substantial increase in pre-tax income with the much smaller increase in common-shareholder earnings, especially the provisional Tax Act charge and noncontrolling-interest allocations.
- Assess how much of Jefferies’ record performance depended on investment gains, joint-venture income, and unusually strong investment-banking activity, and whether those results are repeatable.
- Review the FXCM valuation, remaining loan repayment and sale/distribution rights, given the regulatory settlement and impairment.
- Distinguish parent-company liquidity from consolidated cash and confirm the timing and availability of subsidiary distributions, including Jefferies’ post-year-end distribution policy.
- Examine debt maturities, subsidiary borrowing restrictions, Berkadia commercial-paper exposure and the reimbursement commitment to Berkshire Hathaway.
- Track final accounting for the Tax Act, deferred-tax-asset recoverability, and federal NOLs, which totaled approximately $2.3 billion and begin expiring in 2023.