Business context and reporting period
This is Leucadia National Corporation’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2013. Jefferies Group became a wholly owned subsidiary on March 1, 2013, and is included using a one-month reporting lag. Accordingly, year-over-year comparisons are not like-for-like: 2013 includes Jefferies from the acquisition date, while 2012 does not. The filing identifies Jefferies as the investment banking and capital markets segment; it was not the registrant name on this filing.
Key financial metrics
Amounts below are in millions of dollars except per-share data.
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenues | $2,742.1 | $2,216.9 | $7,983.6 | $6,722.1 |
| Net revenues | $2,565.1 | $2,216.9 | $7,597.0 | $6,722.1 |
| Income from continuing operations | $10.2 | $116.9 | $369.2 | $415.8 |
| Net income attributable to Leucadia common shareholders | $3.0 | $106.7 | $360.7 | $400.3 |
| Basic earnings per share | $0.01 | $0.44 | $1.08 | $1.64 |
| Cash provided by operating activities | Not separately presented quarterly | $938.7 | $263.1 |
- At September 30, total assets were $45.5 billion, liabilities $35.1 billion, and total equity $10.1 billion. Cash and cash equivalents were $4.41 billion; $3.46 billion was separately classified as regulatory or clearing-related cash and securities.
- Long-term debt was $7.35 billion and short-term borrowings were $50 million. Jefferies’ debt was largely subsidiary debt and non-recourse to the parent. Parent-company debt was $553.8 million.
- Nine-month investing activities provided $4.40 billion, principally reflecting $3.02 billion of cash acquired with Jefferies. Financing activities used $1.07 billion. These cash flows are materially affected by the acquisition and securities-financing activity.
- Management reported $2.20 billion of available parent liquidity. Of $6.4 billion in cash and available-for-sale securities, $4.2 billion was pledged, held at subsidiaries with debt, or otherwise restricted from parent use. The stated available-liquidity-to-parent-debt ratio was 4.0x.
Material changes and operating results
- Q3 net income attributable to common shareholders fell to $3.0 million from $106.7 million; nine-month net income declined to $360.7 million from $400.3 million. The prior-year periods included larger investment gains, while 2013 comparisons also reflect the addition of Jefferies and increased related compensation, financing, and operating costs.
- Jefferies reported Q3 net revenues of $502.8 million and pretax income of $9.1 million; from acquisition through September 30, it reported net revenues of $1.15 billion and pretax income of $86.7 million. Q3 investment banking revenue was strong, including $142.7 million of advisory revenue, while fixed-income trading faced difficult conditions. Jefferies compensation and benefits were 58.4% of Q3 net revenues.
- Beef-processing revenue was broadly stable, but nine-month pretax income declined to $55.1 million from $71.3 million. High cattle costs and Walmart’s decision to discontinue National Beef’s case-ready business pressured results; the company reduced staffing at the affected facilities and was seeking replacement business.
- Corporate net securities gains were $244.4 million for the first nine months of 2013, including a $227.6 million gain on the Inmet/First Quantum transaction. The nine-month 2012 period included $543.7 million of gains from Fortescue share sales. In addition, 2013 included a $16.4 million out-of-period adjustment to Berkadia income.
- Other Operations recorded a $39.0 million pretax loss for the first nine months, including $61.7 million of energy-project investigation and evaluation expenses. Domestic real estate also remained loss-making.
Outlook, risks, contingencies, and unusual items
- No specific consolidated earnings or revenue guidance was provided. Management cautioned that Jefferies results are not necessarily predictable or recurring and depend on financial-market conditions, trading positions, client activity, and financing markets.
- Management said Jefferies had sufficient excess liquidity under its stress scenarios. At quarter-end Jefferies reported $4.46 billion of actual cash and other liquidity sources; it also stated that about 77% of trading assets were consistently financeable at haircuts of 10% or less. Jefferies’ committed $950 million credit facility was due to terminate in August 2014, and the filing reported covenant compliance.
- Market-risk measures showed average one-day VaR of $11.02 million for the three months ended August 31, versus $8.77 million for the preceding three-month period. Trading losses exceeded the 95% VaR estimate on one day; excluding Knight Capital, there were no such days. VaR is a model-based measure and may not capture losses in stressed or illiquid markets.
- Deferred tax assets, net, were $1.79 billion. Management said approximately $4.5 billion of future U.S. pretax income, in addition to reversals of deferred tax liabilities on unrealized gains, would be needed to realize the net deferred tax asset fully. Realization depends on uncertain future taxable income and tax positions.
- In October, after quarter-end, Leucadia issued $1.0 billion principal amount of senior notes, with gross proceeds of $986.8 million; management said the parent debt-to-stressed-equity measure would exceed its stated target when these notes were included, viewing this as temporary. National Beef’s credit facility was amended in September, extending maturity to October 2018 and changing its covenants.
- Also after quarter-end, the company decided to stop funding Sangart research and development and begin an orderly shutdown, estimating about $15 million of fourth-quarter operating and wind-down costs. It also declared a fourth-quarter dividend of $0.0625 per share, consistent with its stated annual rate of $0.25, subject to board discretion.
- Seven putative class actions challenge the Jefferies merger; defendants’ motions to dismiss the consolidated Delaware action were denied, and trial was scheduled for June 2014. The company said it could not estimate a reasonably possible loss. A separate consumer class action remained stayed pending appeal; a $20 million reserve had previously been recorded.
- Other exposures include a commitment to reimburse Berkshire Hathaway for up to half of losses under a $2.5 billion surety policy supporting Berkadia affiliate commercial paper, of which $2.47 billion was outstanding; significant trading, counterparty, derivative, and collateral risks; and regulatory limits that may restrict transfers of capital from broker-dealer subsidiaries.
Important facts for investors to verify
- Review Jefferies’ standalone filings and the one-month consolidation lag when assessing period-to-period performance; the 2013 and 2012 consolidated results are not directly comparable.
- Reconcile parent-available liquidity with consolidated cash, segregated customer/regulatory balances, pledged assets, and subsidiary restrictions; confirm funding needs and maturities, including the post-quarter note issuance.
- Assess the sustainability of Jefferies earnings and compensation costs given market sensitivity, Q3 fixed-income weakness, Knight Capital valuation exposure, and the elevated VaR reading.
- Monitor the deferred-tax-asset realization assumptions, including the stated future taxable-income requirement and the effect of tax examinations or disputed positions.
- Track National Beef’s replacement case-ready business, cattle-cost spreads, Sangart shutdown charges, merger litigation, and the Berkadia surety exposure.