Jefferies Financial Group Inc. (formerly Leucadia National Corporation) — 10-Q Summary
Business context and reporting period
The filing is for the quarter ended September 30, 2014. The registrant was Leucadia National Corporation, a diversified holding company whose largest subsidiary was Jefferies Group. Other major operations included National Beef, manufacturing, oil and gas, and asset management. Jefferies’ fiscal year ends November 30, and its results are consolidated with a one-month lag.
Unless otherwise noted, amounts below are in U.S. dollars; financial statement amounts have been converted from thousands to millions.
Financial performance and position
- Third quarter: Net revenues were $3.004 billion, up 19% from $2.532 billion. Net income attributable to Leucadia common shareholders was $54.7 million, versus $3.0 million; diluted EPS was $0.14 versus $0.01. Income from continuing operations before taxes and income from associated companies was $89.2 million, compared with $32.8 million.
- Nine months: Net revenues were $8.798 billion, up 17% from $7.505 billion. Common-shareholder net income was $214.1 million, down from $360.7 million; diluted EPS was $0.56 versus $1.06. The prior-year period included substantial securities gains, notably a $227.6 million gain on the sale of Inmet shares, and results are affected by Jefferies’ 2013 acquisition and different consolidation periods.
- Jefferies: Third-quarter net revenues were $840.4 million, up from $502.8 million, and segment pre-tax income was $133.9 million versus $9.1 million. Management described the quarter as Jefferies’ third-highest revenue quarter, with record investment banking revenue. Nine-month Jefferies net revenues were $2.460 billion and pre-tax income was $415.9 million; management said revenue was a record for the period.
- National Beef: Third-quarter revenue rose to $1.983 billion from $1.921 billion, while pre-tax income fell to $26.3 million from $48.3 million. Higher cattle costs and lower processing volume compressed margins.
- Cash flow: Nine-month operating activities used $1.264 billion, compared with $938.7 million provided in the prior-year period. Management cited Jefferies’ trading-balance movements, investments in Harbinger and the asset-management platform, and higher interest payments among the factors. Investing activities provided $502.4 million; financing activities provided $1.100 billion. Cash and cash equivalents were $4.248 billion at September 30.
- Debt and liquidity: Long-term debt was $8.619 billion ($1.445 billion at the parent and $7.174 billion at subsidiaries); short-term borrowings were $92 million. Total equity was $10.449 billion. The parent reported $2.116 billion of available liquidity, excluding amounts pledged or otherwise restricted, equal to 1.5 times parent-company debt. Jefferies reported $4.645 billion of cash and other liquidity sources at quarter-end, and stated it had sufficient excess liquidity under its stress scenario.
- Cash and financing constraints: Jefferies reported $3.301 billion of segregated cash and securities for regulatory or clearing purposes. These funds are not equivalent to freely available corporate cash. Jefferies also relies on secured funding and capital markets access; regulatory capital requirements can restrict distributions from regulated subsidiaries.
Changes, outlook, risks and unusual items
- Jefferies’ strong quarter reflected better investment banking activity and improved fixed-income results compared with the challenging third quarter of 2013. Management also noted low market volatility and trading volumes in some businesses, and uncertainty from geopolitical and market conditions.
- National Beef faced record-high fed-cattle prices and lower cattle supply. Management said replacement business for consumer-ready facilities affected by Walmart’s 2013 departure had improved utilization, but full replacement and prior profitability remained uncertain. The Brawley facility closed in the second quarter of 2014; $6.8 million of closure costs were recognized in the first nine months.
- In September, Leucadia stopped further development of its Lake Charles clean-energy project and classified it as discontinued operations. It sold its gaming business, Premier, in July for $250 million, subject to working-capital adjustment, and recorded a $12.1 million pre-tax disposal gain. Nine-month discontinued operations generated an $18.8 million net loss.
- During 2014, Leucadia invested in its asset-management platform and oil-and-gas businesses, and invested $70.9 million in the Golden Queen gold-and-silver project. It committed up to a further approximately $27 million to Golden Queen. A proposed $400 million investment in Folger Hill’s partnership is conditional on raising at least an additional $400 million from other investors; the partnership was expected to begin investing in first-quarter 2015. These are commitments or stated plans, not guaranteed outcomes.
- A $70 million settlement of litigation relating to the Jefferies merger, plus court-approved attorneys’ fees, was agreed on October 31, 2014, after quarter-end. The settlement requires court approval and was recorded as a charge in the 2014 results. Separately, the company maintained a $20 million reserve for the Sykes consumer class action; claimed damages could be materially higher, and the case remained unresolved.
- Jefferies had $305.6 million of loans and other receivables on nonaccrual status at September 30, 2014. The filing also highlights valuation uncertainty in Level 3 assets, market and counterparty risk, credit-rating downgrade collateral calls, and sizable commitments and guarantees. No formal consolidated earnings guidance was provided.
- Management cautioned that results are inherently variable, particularly because of Jefferies’ markets-dependent earnings, fair-value investments, and potential acquisitions or dispositions. It also identified risks from cattle prices and supply, failure to replace Walmart business, oil-and-gas price and operating uncertainty, litigation, regulation, and access to funding.
Important facts for investors to verify
- Whether the $70 million Jefferies-merger settlement and attorneys’ fees receive court approval, and the final payment amount and timing.
- How much of reported cash and liquidity is unrestricted and accessible at the parent, versus held at regulated, pledged, or otherwise restricted subsidiaries.
- Whether Jefferies’ record investment-banking results and stronger fixed-income performance persist under changing market conditions, and how the acquisition-related reporting lag affects comparisons.
- Whether National Beef can restore margins amid high cattle costs and replace the lost Walmart business; also monitor remaining costs, if any, from the Brawley closure.
- The collectability and valuation of nonaccrual and Level 3 assets, and the impact of potential credit-rating downgrades on collateral needs and funding access.
- The status and funding requirements of major investment commitments, including Folger Hill and Golden Queen, and the potential cash effects of litigation, guarantees, and debt maturities.