Business context and reporting period
Leucadia National Corporation filed this unaudited Form 10-Q for the quarter ended March 31, 2016. Leucadia is a diversified holding company, with Jefferies and National Beef among its largest businesses. Jefferies is consolidated using a one-month reporting lag. The filing is by Leucadia National Corporation, not Jefferies Financial Group Inc.; verify the issuer and intended filing before relying on this summary.
Financial results and position
| Metric | Q1 2016 | Q1 2015 or prior date |
|---|---|---|
| Total revenue | $2.207 billion | $3.377 billion |
| Net revenue (after interest expense) | $2.015 billion | $3.185 billion |
| Net income (loss) attributable to common shareholders | $(222.9) million; $(0.60) per diluted share | $380.8 million; $0.99 per diluted share |
| Operating cash flow | $(922.8) million | $(1.727) billion |
| Cash and cash equivalents | $2.604 billion at March 31 | $3.639 billion at December 31 |
| Total assets / total liabilities | $43.134 billion / $32.551 billion | $46.331 billion / $35.549 billion at December 31 |
| Long-term debt / short-term borrowings | $7.620 billion / $311.9 million | $7.401 billion / $310.7 million at December 31 |
| Leucadia shareholders’ equity | $10.091 billion | $10.401 billion at December 31 |
Consolidated expenses were $2.337 billion, exceeding net revenue; the resulting pretax loss was $302.0 million. The filing does not provide a single consolidated operating-margin measure. Cash and securities segregated for regulatory or clearing purposes were an additional $679.8 million and should not be treated as freely available cash.
Leucadia reported parent-company available liquidity of $555.6 million, above its stated $426.1 million minimum liquidity reserve target. Parent-company debt was $987.1 million; the reported parent debt-to-stressed-equity ratio was 0.27, or 0.44 after excluding the net deferred tax asset, against a 0.50 target. These parent-level measures differ from consolidated cash and debt.
Material changes versus the prior comparable period
- Net revenue fell about 37%, and Leucadia moved from common-shareholder income of $380.8 million to a loss of $222.9 million. The sharp swing included principal-transaction revenue of $(102.5) million versus $729.2 million a year earlier.
- Jefferies reported net revenue of $300.8 million versus $591.4 million and a pretax loss of $245.8 million versus pretax income of $12.9 million. Management attributed weaker trading to volatile markets, limited liquidity, credit-market outflows and losses in equity block positions; compensation was 116.4% of Jefferies net revenue.
- Leucadia’s FXCM investment produced a $53.2 million loss, compared with a $686.6 million gain in Q1 2015. The investment’s fair value was $564.8 million and is Level 3, with valuation sensitive to FXCM’s share price, volatility and expected time to liquidity.
- National Beef returned to pretax profitability of $21.4 million from a $33.6 million loss. Lower cattle costs and improved margins more than offset lower revenue.
- Cash declined by $1.035 billion during the quarter. Investing activities used $512.5 million; financing activities provided $411.0 million.
Outlook, risks, contingencies and unusual items
- No formal earnings guidance is provided. Management cautions that results are not necessarily predictable or comparable between periods, given the diversified portfolio and changes in investments.
- A March 2016 nonbinding FXCM memorandum proposed extending the loan maturity by one year and granting Leucadia a 49.9% common interest in a new entity, subject to definitive agreements and approvals. The filing warns that FXCM valuation changes could materially affect results.
- Jefferies’ market-making and investment-banking results are exposed to market, liquidity, credit and counterparty risks. Management said first-quarter trading losses were more severe than historical VaR estimates; losses exceeded the 95% one-day VaR on two days in the period reviewed.
- Jefferies had $5.7 billion of long-term debt and investment-grade ratings with stable outlooks. A downgrade below investment grade could trigger additional collateral demands; the filing estimates $62.8 million of additional collateral under specified downgrade provisions. Separate derivative-related provisions could require additional collateral of $68.0 million if triggered.
- Leucadia’s $564.8 million FXCM position and $649.1 million HRG holding create material valuation exposure. A 10% decline in HRG’s share price would reduce its value by about $65 million, all else equal.
- Contingencies include a consumer class-action settlement awaiting a fairness hearing scheduled for May 11, 2016; Leucadia had previously accrued approximately $50 million. The filing also describes tax examinations and other legal and regulatory matters; management says these are not expected to significantly affect financial position or liquidity, though period earnings could be affected.
- Unusual and relevant developments include a $2.0 million real-estate impairment, oil-and-gas lease write-downs and exploration costs, and expected additional Jefferies Bache exit costs of approximately $0.8 million through the rest of 2016.
Most important facts for investors to verify
- Confirm the intended registrant: this filing is for Leucadia National Corporation, although the request identifies Jefferies Financial Group Inc.
- Review the drivers and potential recurrence of the trading and FXCM fair-value losses, including the assumptions behind the Level 3 valuations.
- Distinguish parent-company liquidity from consolidated cash, restricted cash and Jefferies’ separately managed liquidity; assess near-term funding and collateral needs.
- Check Jefferies’ operating performance, compensation ratio, debt ratings and liquidity sensitivity after the volatile quarter.
- Track the FXCM proposed restructuring, class-action settlement approval, tax examinations and any changes to other contingencies.