Business context and reporting period
Leucadia National Corporation, a diversified holding company whose businesses include Jefferies and National Beef, filed this Form 10-Q for the quarter ended September 30, 2015. Jefferies results are consolidated with a one-month reporting lag. Amounts below are in U.S. dollars; financial figures are generally in millions unless noted.
Key financial metrics
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenues | $2,566 | $3,214 | $8,998 | $9,450 |
| Net revenues | $2,366 | $3,004 | $8,390 | $8,798 |
| Pre-tax income (loss) from continuing operations | $(272) | $118 | $315 | $393 |
| Net income (loss) attributable to common shareholders | $(173) | $55 | $224 | $214 |
| Basic and diluted EPS | $(0.47) | $0.14 | $0.59 | $0.59 continuing operations; $0.56 total net income |
| Operating cash flow | Not separately presented for the quarter | $(1,180) | $(1,264) |
Third-quarter net revenues fell 21% year over year; the company swung to a continuing-operations pre-tax loss and a common-shareholder net loss. Nine-month net revenues declined 5%, while common-shareholder income increased modestly. No consolidated profit-margin measure is presented as a key operating metric; Jefferies’ compensation and benefits were 58.0% of net revenues in Q3 and 60.2% for the first nine months, versus 56.8% and 56.5% in 2014.
At September 30, 2015, total assets were $50.5 billion, total liabilities $39.8 billion, and total shareholders’ equity $10.4 billion. Cash and cash equivalents were $3.56 billion, down from $4.28 billion at year-end 2014; an additional $904 million was segregated or on deposit for regulatory and clearing purposes. Long-term debt was $7.86 billion, including $988 million of parent-company debt. Parent available liquidity was $662 million against a stated minimum reserve target of $494 million. Net cash used in investing activities was $944 million and net cash used in financing activities was $479 million for the nine months.
Material changes and drivers
- Jefferies: Q3 net revenues declined to $580 million from $840 million, and pre-tax income fell to $3 million from $134 million. Fixed income posted negative revenues of $17 million versus $197 million positive a year earlier; investment banking revenue fell to $390 million from $465 million. Equities increased to $204 million from $170 million. For nine months, Jefferies net revenues were $1.96 billion versus $2.46 billion and pre-tax income was $108 million versus $416 million.
- National Beef: Q3 pre-tax loss was $32 million versus income of $26 million; nine-month pre-tax loss was $75 million versus income of $5 million. Lower cattle throughput, compressed spreads and unfavorable futures mark-to-market adjustments contributed. Futures-related revenue reductions were $34 million in Q3 and $36 million year to date.
- Fair-value investments: FXCM generated a $113 million Q3 mark-to-market loss, while the investment showed $461 million of aggregate gains for the first nine months. The FXCM investment was carried at $613 million and classified as Level 3. HRG fair-value losses were $59 million for Q3 and $113 million year to date.
- Other items: Jefferies recorded $62 million of Bache restructuring and impairment costs for the first nine months and expected about $12 million more through 2015. Leucadia paid $80 million in previously accrued legal settlements during the nine months. Cash flow also reflected significant working-capital and securities/customer-balance movements.
Outlook, risks and contingencies
Management gave no numerical earnings or revenue guidance. It said it was optimistic about meaningful improvement at Jefferies and National Beef in 2016, expected progress at HRG and FXCM in Q4 and 2016, and said established businesses including Berkadia, Garcadia, Conwed and Idaho Timber continued to provide strong returns. Management cautioned that the diversified portfolio and changing business mix make pre-tax results unpredictable.
Key exposures include volatile financial markets and trading results, cattle prices and availability, FXCM and HRG valuation swings, oil and gas investments, credit and counterparty risk, funding and rating downgrade risks, and regulatory restrictions on transferring capital from regulated subsidiaries. Jefferies reported a Moody’s Baa3 negative outlook and S&P/Fitch BBB- ratings; its next scheduled note maturity was $500 million in November 2015. A downgrade below investment grade could trigger collateral demands; the filing estimated $54.9 million of additional collateral under specified arrangements.
Contingencies include the Sykes consumer class action, for which a settlement agreement remained subject to court approval; other litigation and regulatory reviews; and tax examinations. Unrecognized tax benefits were $195 million, including interest. The filing says examinations are not expected to significantly affect consolidated financial position, but could materially affect results in the period resolved. A pension lump-sum offer may result in a Q4 2015 settlement charge, dependent on participant acceptance.
Investor verification priorities
- Verify the issuer and scope: this filing is by Leucadia National Corporation, not a standalone Jefferies 10-Q; Jefferies is a consolidated subsidiary reported with a one-month lag.
- Review the drivers and sensitivity of the $613 million Level 3 FXCM valuation, including its stock-price and volatility assumptions, and distinguish Q3 losses from nine-month cumulative gains.
- Assess Jefferies fixed-income weakness, Bache exit costs, liquidity, debt maturities and potential collateral calls following a ratings downgrade.
- Track National Beef cattle supply, processing volumes, margins and futures exposure, alongside management’s 2016 improvement expectation.
- Check status and potential financial effects of the Sykes settlement, tax examinations, pension settlement charge and other legal or regulatory matters.
- Reconcile reported operating cash use with trading, customer-balance and working-capital movements; assess parent liquidity against its stated reserve target.