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Section 1: 10-K (LEUCADIA NATIONAL CORPORATION 2017 FORM 10-K)

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________
FORM 10-K
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
                                                               For the fiscal year ended December 31, 2017
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number:  1-5721
LEUCADIA NATIONAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
New York
13-2615557
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)
520 Madison Avenue
New York, New York 10022
(212) 460-1900
(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Each Exchange on Which Registered
Common Shares, par value $1 per share
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None.
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes x No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.     Yes ¨  No  x
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yes x   No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer x     Accelerated filer ☐         Non-accelerated filer ☐
                    (Do not check if a smaller reporting company)
Smaller reporting company ☐     Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes ¨  No x
Aggregate market value of the voting stock of the registrant held by non-affiliates of the registrant at June 30, 2017 (computed by reference to the last reported closing sale price of the Common Shares on the New York Stock Exchange on such date):  $8,673,116,957.
On February 15, 2018, the registrant had outstanding 356,252,768 Common Shares.

DOCUMENTS INCORPORATED BY REFERENCE:
Certain portions of the registrant’s Definitive Proxy Statement pursuant to Regulation 14A of the Securities Exchange Act of 1934 in connection with the 2017 Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K.

LOCATION OF EXHIBIT INDEX
The index of exhibits is contained in Part IV on page 66.

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PART I
Item 1.
Business.
Overview
Leucadia National Corporation ("Leucadia" or the "Company") is a diversified holding company focused on long-term value creation to maximize shareholder value. Our financial services businesses and investments include Jefferies (investment banking and capital markets), Leucadia Asset Management (asset management), Berkadia (commercial mortgage banking, investment sales and servicing), HomeFed (real estate company), FXCM (provider of online foreign exchange trading services) and Foursight Capital (vehicle finance). We also own and have investments in a diverse array of other businesses, including National Beef (beef processing), HRG Group (consumer products), Garcadia (automobile dealerships), Linkem (fixed wireless broadband services in Italy), Vitesse Energy and JETX Energy (oil and gas production and development), Idaho Timber (manufacturing) and Golden Queen (gold and silver mining project). The structure of each of our investments was tailored to the unique opportunity each transaction presented. Our investments may be reflected in our consolidated results as consolidated subsidiaries, equity investments, securities or in other ways, depending on the structure of our specific holdings.
We continuously review acquisitions of businesses, securities and assets that have the potential for significant long-term value creation, invest in a broad array of businesses, and periodically evaluate the retention and disposition of one or more of our existing businesses and investments. Changes in the mix of our businesses and investments should be expected.
At December 31, 2017, we and our investee companies had approximately 36,700 full-time employees, of which approximately 12,700 were full-time employees of Leucadia and our consolidated subsidiaries.
Our executive offices are located at 520 Madison Avenue, New York, NY 10022, as is the global headquarters of Jefferies, our largest subsidiary in terms of invested capital. Our primary telephone number is (212) 460-1900 and our website address is www.leucadia.com.
The following discussion should be read in conjunction with the Risk Factors presented in Item 1A of Part I and the Cautionary Statement for Forward-Looking Information and Management's Discussion and Analysis of Financial Condition and Results of Operations set forth in Item 7 of Part II.
Recent Events
In January 2017, we sold 100% of Conwed Plastics (“Conwed”) to Schweitzer-Mauduit International, Inc., (NYSE:SWM) for $295 million in cash plus potential earn-out payments in 2019, 2020 and 2021 totaling up to $40 million in cash to the extent the results of Conwed’s subsidiary, Filtrexx International, exceed certain performance thresholds. We recognized a pre-tax gain of $178 million (net of working capital adjustments) on the sale of Conwed during 2017.
Also in January 2017, we participated in a preferred equity financing for Linkem. Existing shareholders, along with funds managed by BlackRock, invested €100 million in cash in exchange for shares of Linkem to fund future expansion plans, of which Leucadia's share was €30 million. The financing was based on a pre-money valuation of €700 million (post-money valuation of €800 million) and our fully-diluted ownership post-transaction is 53%.
Financial Services Businesses
The following provides more information about each of our financial services businesses and investments and our ownership percentages:
Jefferies, 100% (investment banking & capital markets);
Leucadia Asset Management, various (asset management);
Berkadia, 50% (commercial mortgage banking, investment sales and servicing);
HomeFed, 70% (45% voting) (real estate);
FXCM, up to 75% (50% voting) (online foreign exchange trading); and
Foursight Capital, 100% (vehicle finance).

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Jefferies
Jefferies is the largest independent U.S. headquartered global full-service, integrated securities and investment banking firm. Jefferies largest subsidiary, Jefferies LLC, was founded in the U.S. in 1962 and its first international operating subsidiary, Jefferies International Limited, was established in the U.K. in 1986. On March 1, 2013, Jefferies Group, Inc. converted into a limited liability company (renamed Jefferies Group LLC) and became an indirect wholly owned subsidiary of Leucadia. Following the merger, Jefferies Group LLC retains a credit rating separate from Leucadia and remains an SEC reporting company, filing annual, quarterly and periodic financial reports. As of November 30, 2017, Jefferies had 3,450 employees in the Americas, Europe, the Middle East and Asia. The net book value (assets less liabilities and noncontrolling interests) of our investment in Jefferies was $5.6 billion at December 31, 2017.
Investment Banking
Jefferies provides its clients around the world with a full range of equity capital markets, debt capital markets and financial advisory services. Jefferies services are enhanced by its deep industry expertise, its global distribution capabilities and its senior level commitment to its clients.
Approximately 800 investment banking professionals operate in the Americas, Europe and Asia, and are organized into industry, product and geographic coverage groups. Jefferies industry coverage groups include Consumer and Retail; Energy; Financial Institutions; Healthcare; Industrials; Real Estate; Gaming and Lodging; Technology; Media and Telecommunications; Financial Sponsors; and Public Finance. Jefferies product coverage groups include equity capital markets; debt capital markets; and advisory, which includes both mergers and acquisitions and restructuring and recapitalization expertise. Jefferies geographic coverage groups include teams based in major cities in the U.S., Toronto, London, Frankfurt, Paris, Milan, Amsterdam, Stockholm, Mumbai, Hong Kong, Singapore, Tokyo, Zurich and Dubai.
Equity Capital Markets
Jefferies provides a broad range of equity financing capabilities to companies and financial sponsors. These capabilities include private equity placements, initial public offerings, follow-on offerings, block trades and equity-linked convertible securities transactions.
Debt Capital Markets
Jefferies provides a wide range of debt and acquisition financing capabilities for companies, financial sponsors and government entities. Jefferies focuses on structuring, underwriting and distributing public and private debt, including investment grade debt, high yield bonds, leveraged loans, municipal debt, mortgage- and other asset-backed securities, and liability management solutions.
Advisory Services
Jefferies provides mergers and acquisition and restructuring and recapitalization services to companies, financial sponsors and government entities. In the mergers and acquisition area, Jefferies advises sellers and buyers on corporate sales and divestitures, acquisitions, mergers, tender offers, spinoffs, joint ventures, strategic alliances and takeover and proxy fight defense. In the restructuring and recapitalization area, Jefferies provides to companies, bondholders and lenders a full range of restructuring advisory capabilities as well as expertise in the structuring, valuation and placement of securities issued in recapitalizations.
Equities
Equities Research, Sales and Trading
Jefferies provides its clients full-service equities research, sales and trading capabilities across global securities markets. Jefferies earns commissions or spread revenue by executing, settling and clearing transactions for clients across these markets in equity and equity-related products, including common stock, American depository receipts, global depository receipts, exchange-traded funds, exchange-traded and over-the-counter (“OTC”) equity derivatives, convertible and other equity-linked products and closed-end funds. Jefferies equity research, sales and trading efforts are organized across three geographical regions: the Americas; Europe and the Middle East and Africa (“EMEA”); and Asia Pacific. Jefferies clients are primarily institutional market participants such as mutual funds, hedge funds, investment advisors, pension and profit sharing plans, and insurance companies. Through its global research team and sales force, Jefferies maintains relationships with its clients, distributes investment research and strategy, trading ideas, market information and analyses across a range of industries and receives and executes client orders. Jefferies equity research

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covers over 2,000 companies around the world and more than 800 additional companies are covered by nine leading local firms in Asia Pacific with whom Jefferies maintains alliances.
Equity Finance
Jefferies Equity Finance business provides financing, securities lending and other prime brokerage services. Jefferies offers prime brokerage services in the U.S. that provide hedge funds, money managers and registered investment advisors with execution, financing, clearing, reporting and administrative services. Jefferies finances its clients’ securities positions through margin loans that are collateralized by securities, cash or other acceptable liquid collateral. Jefferies earns an interest spread equal to the difference between the amount Jefferies pays for funds and the amount Jefferies receives from its clients. Jefferies also operates a matched book in equity and corporate bond securities, whereby Jefferies borrows and lends securities versus cash or liquid collateral and earns a net interest spread. Jefferies offers selected prime brokerage clients the option of custodying their assets at an unaffiliated U.S. broker-dealer that is a subsidiary of a bank holding company. Under this arrangement, Jefferies directly provides its clients with all customary prime brokerage services.
Wealth Management
Jefferies provides tailored wealth management services designed to meet the needs of high net worth individuals, their families and their businesses, private equity and venture funds and small institutions. Jefferies advisors provide access to all of its institutional execution capabilities and delivers other financial services. Jefferies open architecture platform affords clients access to products and services from both its firm and from a variety of other major financial services institutions.
Fixed Income
Fixed Income Sales and Trading
Jefferies provides its clients with sales and trading of investment grade corporate bonds, U.S. and European government and agency securities, municipal bonds, mortgage- and asset-backed securities, leveraged loans, consumer loans, high yield and distressed securities, emerging markets debt, interest rate derivative products, as well as foreign exchange trade execution and securitization capabilities. Jefferies is designated as a Primary Dealer by the Federal Reserve Bank of New York and Jefferies International Limited is designated in similar capacities for several countries in Europe. Additionally, through the use of repurchase agreements, Jefferies acts as an intermediary between borrowers and lenders of short-term funds and obtains funding for various of its inventory positions. Jefferies trades and makes markets globally in cleared and uncleared swaps and forwards referencing, among other things, interest rates, investment grade and non-investment grade corporate credits, credit indexes and asset-backed security indexes.
Jefferies strategists and economists provide ongoing commentary and analysis of the global fixed income markets. In addition, Jefferies fixed income desk strategists provide ideas and analysis to clients across a variety of fixed income products.
Asset Management
Jefferies manages and provides services to a diverse group of alternative asset management platforms across a spectrum of investment strategies and asset classes. Jefferies is supporting and developing focused strategies managed by distinct management teams. These services are often provided in conjunction with the Leucadia Asset Management ("LAM") platform. Products currently offered to pension funds, insurance companies, sovereign wealth funds, and other institutional investors through these platforms include systematic quantitative and global equity event-driven strategies. Jefferies also provides back office, accounting, legal, risk and compliance via service level agreements for certain LAM entities. LAM provides general oversight and marketing services to Jefferies asset management entities.
Competition
All aspects of Jefferies business are intensely competitive. Jefferies competes primarily with large global bank holding companies that engage in capital markets activities, but also with other broker-dealers, asset managers and investment banking firms. The large global bank holding companies have substantially greater capital and resources than Jefferies does. Jefferies believes that the principal factors affecting its competitive standing include the quality, experience and skills of its professionals, the depth of its relationships, the breadth of its service offerings, its ability to deliver consistently its integrated capabilities, and its culture, tenacity and commitment to serve its clients.

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Regulation
Regulation in the United States. The financial services industry in which Jefferies operates is subject to extensive regulation. In the U.S., the Securities and Exchange Commission (“SEC”) is the federal agency responsible for the administration of federal securities laws, and the Commodity Futures Trading Commission (“CFTC”) is the federal agency responsible for the administration of laws relating to commodity interests (including futures and swaps). In addition, the Financial Industry Regulatory Authority (“FINRA”) and the National Futures Association (“NFA”) are self-regulatory organizations that are actively involved in the regulation of financial services businesses. The SEC, CFTC, FINRA and the NFA conduct periodic examinations of broker-dealers, investment advisors, futures commission merchants (“FCMs”) and swap dealers. The designated examining authority for Jefferies activities as a broker-dealer is FINRA, and the designated self-regulatory organization for Jefferies FCM activities is the NFA. Financial services businesses are also subject to regulation by state securities commissions and attorneys general in those states in which they do business.
Broker-dealers are subject to SEC and FINRA regulations that cover all aspects of the securities business, including sales and trading methods, trade practices among broker-dealers, use and safekeeping of customers’ funds and securities, capital structure of securities firms, anti-money laundering efforts, recordkeeping and the conduct of directors, officers and employees. Registered advisors are subject to, among other requirements, SEC regulations concerning marketing, transactions with affiliates, disclosure to clients, and recordkeeping; and advisors that are also registered as commodity trading advisors or commodity pool operators are also subject to regulation by the CFTC and the NFA. FCMs, introducing brokers and swap dealers that engage in commodities, futures or swap transactions are subject to regulation by the CFTC and the NFA. Additional legislation, changes in rules promulgated by the SEC, CFTC, FINRA or NFA, or changes in the interpretation or enforcement of existing laws or rules may directly affect the operations and profitability of broker-dealers, investment advisors, FCMs and swap dealers. The SEC, CFTC, FINRA, NFA, state securities commissions and state attorneys general may conduct administrative proceedings or initiate civil litigation that can result in adverse consequences for Jefferies and its officers and employees (including, without limitation, injunctions, censures, fines, suspensions, membership expulsions, or revocations of licenses and registrations). In addition, broker-dealers, investment advisors, FCMs and swap dealers must also comply with the rules and regulation of clearing houses, exchanges and trading platforms of which they are a member.
Regulatory Capital Requirements. Several Jefferies entities are subject to financial capital requirements that are set by regulation. Jefferies is a dually-registered broker-dealer and FCM and is required to maintain net capital in excess of the greater of the SEC or CFTC minimum financial requirements. As a broker-dealer, Jefferies is subject to the SEC's Uniform Net Capital Rule (the "Net Capital Rule"). Jefferies has elected to compute its minimum net capital requirement in accordance with the “Alternative Net Capital Requirement” as permitted by the Net Capital Rule, which provides that a broker-dealer shall not permit its net capital, as defined, to be less than the greater of 2% of its aggregate debit balances (primarily customer-related receivables) or $250,000 ($1.5 million for prime brokers). Compliance with the Net Capital Rule could limit Jefferies operations, such as underwriting and trading activities, that could require the use of significant amounts of capital, and may also restrict its ability to make loans, advances, dividends and other payments.
As a non-clearing FCM, Jefferies is required to maintain minimum adjusted net capital of $1.0 million.
Jefferies subsidiaries that are provisionally registered swap dealers will become subject to capital requirements under the Dodd-Frank Act once the relevant rules become final. For additional information see Item 1A. Risk Factors.
Jefferies Group LLC is not subject to any regulatory capital rules.
See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Note 25 to our consolidated financial statements for additional discussion of net capital calculations.
Regulation outside the United States. Jefferies is an active participant in the international capital markets and provides investment banking services internationally, primarily in Europe and Asia. As is true in the U.S., Jefferies international subsidiaries are subject to extensive regulations proposed, promulgated and enforced by, among other regulatory bodies, the European Commission and European Supervisory Authorities (including the European Banking Authority and European Securities and Market Authority), U.K. Financial Conduct Authority, Hong Kong Securities and Futures Commission, the Japan Financial Services Agency and the Monetary Authority of Singapore. Every country in which Jefferies does business imposes upon it laws, rules and regulations similar to those in the U.S., including with respect to some form of capital adequacy rules, customer protection rules, data protection regulations, anti-money laundering and anti-bribery rules, compliance with other applicable trading and investment banking regulations and similar regulatory reform. For additional information see Item 1A. Risk Factors.

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Leucadia Asset Management
During 2013, we formed LAM, a registered investment advisor, through which we are developing and investing in focused alternative asset management businesses. As the advisor and/or general partner to various private investment funds or other types of investment vehicles, LAM provides advisory, portfolio management and operational services to accredited investors and/or qualified purchasers. Once an investment platform is formed, it is typical that LAM or Jefferies will be an initial or major investor.  LAM's revenues derive from management fees and/or performance fees based on investment returns generated for the investors, as well as the return on our invested capital. Our strategy is to grow third party assets under management, while earning management fees and a reasonable return on our capital until the capital is returned to us. Our LAM and other asset management strategies primarily include Folger Hill Asset Management LLC ("Folger Hill"), a multi-manager discretionary long/short equity hedge fund platform; Topwater Capital ("Topwater"), a first-loss product; CoreCommodity Management LLC, an asset manager that focuses on commodities strategies; Tenacis Capital, a systematic macro investment platform; Lake Hill, an electronic trader in listed options and futures across asset classes; as well as several other smaller businesses. In addition, several investment management businesses, including Jefferies Strategic Investments Division, operate under Jefferies and are included under the marketing umbrella of the LAM platform.
Berkadia
Berkadia Commercial Mortgage LLC, and its associated entities, is a joint venture formed in 2009 with Berkshire Hathaway that provides capital solutions, investment sales advisory and mortgage servicing for multifamily and commercial properties. We and Berkshire Hathaway each have a 50% equity interest in Berkadia.
Berkadia originates commercial real estate loans, primarily in respect of multifamily housing units, for Fannie Mae, Freddie Mac and the FHA using their underwriting guidelines, and will typically sell the loan to such entities shortly after it is funded. Provided Berkadia adheres to their guidelines, these government-related entities must purchase the loan at the face amount plus accrued interest with Berkadia retaining the mortgage servicing rights. In addition, as a condition to Fannie Mae’s delegation of responsibility for underwriting, originating and servicing of loans, Berkadia assumes a shared loss position throughout the term of each loan sold to Fannie Mae, with a maximum loss percentage of approximately one-third of the original principal balance. During 2017, Berkadia originated $16.7 billion in Fannie Mae, Freddie Mac and FHA loans. Berkadia also originates and brokers commercial/multifamily mortgage loans which are not part of the government agency programs. During 2017, Berkadia closed $7.2 billion of loans in this capacity for life companies, conduits and other third-parties.
In addition, Berkadia originates loans for its own balance sheet. These loans provide interim financing to borrowers who intend to refinance the loan with longer-term loans from an eligible government agency or other third party (“Bridge loans”). Bridge loans are typically floating rate loans with 1 to 3 year maturities. During 2017, Berkadia originated $587.3 million of such loans. Berkadia held $672.0 million of Bridge loans on its balance sheet at December 31, 2017.
Berkadia also provides services related to the acquisition and disposition of multifamily real estate projects, including brokerage services, asset review, market research, financial analysis and due diligence support. During 2017, Berkadia closed over $7.8 billion in sales transactions.
Berkadia is a servicer of U.S. commercial real estate loans, performing primary, master and special servicing functions for U.S. government agency programs, commercial mortgage-backed securities transactions, banks, insurance companies and other financial institutions. Berkadia is an approved servicer of loans for Fannie Mae, Freddie Mac and the FHA. As of December 31, 2017, Berkadia serviced approximately 17,000 loans with an unpaid principal balance of $205.9 billion.
As a servicer, Berkadia is frequently responsible for managing, on behalf of its investors and borrowers, the balances that are maintained in custodial accounts for the purposes of collecting and distributing principal and interest, and for managing and disbursing various reserve accounts related to the mortgaged properties among other things. Berkadia derives certain economic benefits from administering these custodial accounts. Such balances totaled in excess of $4.5 billion as of December 31, 2017.
Our only capital contribution to Berkadia, in the amount of $217.2 million, was made at the time Berkadia was formed in 2009. Through December 31, 2017 we have received cumulative cash distributions of $562.0 million. At December 31, 2017, the net book value of our investment in Berkadia was $210.6 million, and we report Berkadia as an equity investment in our financial statements. Berkadia's strategic priorities include continued value creation by growing origination and sales advisory volumes, expanding servicing engagements with third parties, and leveraging data and technology to deliver proprietary solutions to clients.
Berkadia is required under its servicing agreements to maintain certain minimum servicer ratings or qualifications from the rating agencies. A downgrade below a certain level may give rise to the right of a customer or trustee of a securitized transaction to

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terminate Berkadia as servicer. Berkadia currently maintains approvals or ratings from Moody’s Investors Service, Fitch Ratings, Standard & Poor’s, Morningstar Credit Ratings and Dominion Bond Rating Services. These ratings currently exceed the minimum ratings required by the related servicing agreements. Ratings issued by the rating agencies can be withdrawn or lowered at any time. In addition, Fannie Mae and Freddie Mac retain broad discretion to terminate Berkadia as a seller/servicer without cause.
HomeFed Corporation
HomeFed is a developer and owner of residential and mixed-use real estate properties in California, New York, Florida, Virginia, South Carolina and Maine. After many years in the entitlement process, the majority of HomeFed's assets are now either operating real estate or entitled land ready for sale. HomeFed is a public company traded on the NASD OTC Bulletin Board (Symbol: HOFD). We own 70% of HomeFed’s common stock; however, our voting rights are limited such that we are not able to vote more than 45% of HomeFed’s total voting securities voting on any matter. Resulting from a 1998 distribution to all of our shareholders, about 4.8% of HomeFed is beneficially owned by our Chairman at December 31, 2017. Three of our executives serve on the board of directors of HomeFed, including our Chairman who serves as HomeFed’s Chairman, and our President.
At December 31, 2017, our investment had a net book value of $310.3 million and we report HomeFed as an equity investment in our financial statements. HomeFed’s strategic priorities vary by project, ranging from pursuing further planning, entitlement and approval, to beginning construction, commencing sales, oversight and management of operating assets, and taking other steps to maximize profits. HomeFed also continues to look for new opportunities both within, and outside of, the areas where it currently has projects under development.
FXCM
FXCM Group, LLC ("FXCM") is a provider of online foreign exchange trading, contract for difference trading, spread betting and related services. Its mission is to provide global traders with access to the world's largest and most liquid market by offering innovative trading tools, hiring excellent trading educators, meeting strict financial standards and striving for the best online trading experience in the market.

During 2015, we invested $279.0 million in FXCM through a combination of a term loan and rights to certain future distributions. Amendments during 2016 and 2017 extended the repayment date of the remaining loan balance to January 2019 and exchanged our rights for a 50% voting interest in FXCM and up to 75% of all distributions. Through these amendments, we also gained the right to appoint three of the six board members of FXCM and, with these board seats, now have significant influence over the operating and financial policies of FXCM. We have the right, as does Global Brokerage Holdings, LLC (“Global Brokerage Holdings”), the owner of the remaining 50% voting interest of FXCM that is not held by Leucadia, to require a sale of FXCM beginning in January 2018. Distributions to Leucadia under the amended agreements are currently: 100% until amounts due under the loan are repaid; 50% of the next $350 million; then 90% of the next $600 million; and 60% of all amounts thereafter.
During February 2017, Global Brokerage Holdings and FXCM's U.S. subsidiary, Forex Capital Markets LLC ("FXCM U.S.") settled complaints filed by the NFA and the CFTC against FXCM U.S. and certain of its principals relating to matters that occurred between 2010 and 2014. As part of the settlements, FXCM U.S. withdrew from business and sold FXCM U.S.'s customer accounts. FXCM also implemented a restructuring plan that included the termination of approximately 22% of its global workforce. The proceeds from the sale of the U.S. accounts, net of closure and severance costs, as well as regulatory capital released after the sale, has been used to pay down the Leucadia term loan.
Through December 31, 2017, we have received cumulatively $331.6 million of principal, interest and fees from our initial $279.0 million investment in FXCM. At December 31, 2017, the remaining principal due under the term loan was $69.9 million and the interest rate is 20.5%. We include this loan receivable in our Consolidated Statements of Financial Condition in Trading assets at its fair value of $72.8 million. Our 50% voting interest and share of distributions are reflected as an equity method investment and classified as Loans to and investments in associated companies, utilizing a one month lag. At December 31, 2017, our equity method investment is recorded at $158.9 million, and the total amount of both our term loan and equity method investment is $231.7 million.
Foursight Capital
In 2012, we partnered with an experienced management team in the indirect auto finance market to start Foursight Capital, of which we own 100%. Foursight Capital purchases automobile installment contracts originated by franchised and independent dealerships in conjunction with the sale of new and used automobiles and services these loans throughout the life cycle. In 2017, Foursight originated $286.5 million in auto loans, up from $250.0 million in 2016. Additionally, Foursight Capital is managing

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the wind down of the Chrome Capital portfolio. The net book value of our investment in Foursight Capital was $81.8 million at December 31, 2017.
Merchant Banking
The following provides more information about certain of our other subsidiaries and investments and our ownership percentages, including:
National Beef, 79% (beef processing);
HRG, 23% (consumer products);
Garcadia, about 75% (50% voting) (automobile dealerships);
Linkem, 53% fully-diluted (48% voting) (fixed wireless broadband services);
Vitesse Energy, 96% (oil and gas production and development);
JETX Energy, 98% (oil and gas production and development);
Idaho Timber, 100% (manufacturing); and
Golden Queen, 35% (a gold and silver mining project).
National Beef
National Beef is one of the largest beef processing companies in the U.S., accounting for approximately 12.5% of the fed cattle slaughter market. National Beef processes and markets fresh and chilled boxed beef, ground beef, beef by-products, consumer-ready beef and pork, and wet blue leather for domestic and international markets. Based in Kansas City, Missouri, National Beef had approximately 8,200 employees at December 31, 2017 and generated total revenues of $7.4 billion in 2017. We purchased National Beef in 2011 and own 78.9%.
The largest share of National Beef’s revenue, about 92.7%, is generated from the sale of boxed beef and beef by-products. National Beef also generates revenues through value-added production with its consumer-ready products. In addition, National Beef operates one of the largest wet blue tanning facilities in the world (wet blue tanning refers to the first step in processing raw and brine-cured hides into tanned leather), selling processed hides to tanners that produce finished leather for the automotive, luxury goods, apparel and furniture industries. Other streams of revenue include sales through its subsidiary, Kansas City Steak Company, LLC, which sells portioned beef and other products directly to consumers through internet, direct mail and direct response television, and service revenues generated by National Carriers, Inc., a wholly owned transportation and logistics company that is one of the largest refrigerated and livestock carrier operations in the U.S. and transports products for National Beef and a variety of other customers. National Beef’s profitability typically fluctuates seasonally as well as cyclically, based on the availability of fed cattle.
The net book value of our investment in National Beef was $517.1 million at December 31, 2017.
Sales and Marketing
National Beef markets its products to national and regional retailers, including supermarket chains, independent grocers, club stores, wholesalers and distributors, food service providers and further processors. In addition, National Beef sells beef by-products to the medical, feed processing, fertilizer and pet food industries. National Beef exports products to more than 20 countries; in 2017, export sales represented approximately 11.2% of revenues. The demand for beef is generally strongest in the spring and summer months and generally decreases during the winter months.
National Beef emphasizes the sale of higher-margin, value-added products, which include branded boxed beef, consumer-ready beef and pork, portion control beef and wet blue hides. National Beef believes its value-added products can command higher prices than commodity products because of National Beef’s ability to consistently meet product specifications, based on quality, trim, weight, size, breed or other factors, tailored to the needs of its customers. In addition to the value-added brands that National Beef owns, National Beef licenses the use of Certified Angus Beef®, a registered trademark of Certified Angus Beef LLC, and Certified Hereford Beef®, a registered trademark of Certified Hereford Beef LLC.
Raw Materials and Procurement
The primary raw material for the beef processing plants is live cattle. Live cattle prices change daily based on supply and demand for beef and other proteins, cattle inventory levels, weather and other factors.
National Beef has entered into a cattle supply agreement with U.S. Premium Beef, LLC (“USPB”), the current owner of a 15.1% interest in National Beef, which sold a substantial portion of its ownership interest to us. USPB has agreed to supply, and National

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Beef has agreed to purchase through USPB from the members of USPB, 735,385 head of cattle per year (subject to adjustment), based on pricing grids furnished by National Beef to USPB. National Beef believes the pricing grids are based on terms that could be obtained from an unaffiliated party. During 2017, National Beef purchased approximately 24.2% of the total cattle it processed from USPB members pursuant to the cattle supply agreement. National Beef also purchased additional cattle from certain USPB members outside of the cattle supply agreement as well as from hundreds of other cattle suppliers. 
Processing Facilities
National Beef owns two beef processing facilities located in Liberal and Dodge City, Kansas, which can each process approximately 6,000 cattle per day. National Beef’s three consumer-ready processing facilities are in Hummels Wharf, Pennsylvania, Moultrie, Georgia and Kansas City, Kansas. National Beef’s wet blue tanning facility is in St. Joseph, Missouri.
Competition
Competitive conditions exist both in the purchase of live cattle, as well as in the sale of beef products. Beef products compete with other protein sources, including pork and poultry, but National Beef’s principal competition comes from other beef processors.  National Beef believes the principal competitive factors in the beef processing industry are price, quality, food safety, customer service, product distribution, technological innovations (such as food safety interventions and packaging technologies) and brand loyalty. Some of National Beef’s competitors have substantially larger beef operations, greater financial and other resources and wider brand recognition for their products.
Regulation and Environmental
National Beef’s operations are subject to extensive regulation by the U.S. Department of Agriculture ("USDA") including its Food Safety and Inspection Service ("FSIS"), its Animal and Plant Health Inspection Service ("APHIS") and its Grain Inspection, Packers and Stockyards Administration ("GIPSA"), the Food and Drug Administration ("FDA"), the U.S. Environmental Protection Agency ("EPA") and other federal, state, local and foreign authorities regarding the processing, packaging, storage, safety, distribution, advertising and labeling of its products.
National Beef is subject to the Packers and Stockyards Act of 1921 ("PSA"). Among other things, this statute generally requires National Beef to make full payment for livestock purchases not later than the close of business the day after the purchase and transfer of possession or determination of the purchase price. Under the PSA, National Beef must hold in trust for the benefit of unpaid cash livestock suppliers all receivables, inventory and proceeds derived from National Beef's sale of such cattle until the sellers have received full payment. In addition, pursuant to PSA rules, at December 31, 2017, National Beef has obtained from an insurance company a surety bond in the amount of $50.4 million as a measure of protection for livestock sellers.
The Dodge City and Liberal facilities are subject to Title V permitting pursuant to the Federal Clean Air Act and the Kansas Air Quality Act. The St. Joseph facility is subject to a secondary air permit which is in place. The Dodge City, Liberal, Hummels Wharf and Moultrie facilities are subject to Clean Air Act Risk Management Plan requirements relating to the use of ammonia as a refrigerant.
All of National Beef’s plants are indirect dischargers of wastewater to publicly owned treatment works and are subject to requirements under the federal Clean Water Act, state and municipal laws, as well as agreements or permits with municipal or county authorities. Upon renewal of these agreements and permits, National Beef is from time to time required to make capital expenditures to upgrade or expand wastewater treatment facilities to address new and more stringent discharge requirements imposed at the time of renewal. Storm water discharges from National Beef’s plants are also regulated by state and local authorities.
All of National Beef’s facilities generate solid waste streams including small quantities of hazardous wastes. National Beef is subject to laws that provide for strict, and in certain circumstances, joint and several liability for remediation of hazardous substances at contaminated sites; however, National Beef has not received any demands that it has any liability at sites under the Comprehensive Environmental Response, Compensation and Liability Act (“Superfund”) or state counterparts. All plants are subject to community right to know reporting requirements under the Superfund Amendments and Reauthorization Act of 1986, which requires yearly filings as to the substances used on facility premises.

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Employees
Of National Beef’s 8,200 employees, approximately 5,200 are represented by collective bargaining agreements. Approximately 2,500 employees at the Liberal plant are represented by the United Food and Commercial Workers International Union under a collective bargaining agreement scheduled to expire in December 2022, approximately 2,500 employees at the Dodge City plant are represented by the United Food and Commercial Workers International Union under a collective bargaining agreement scheduled to expire in December 2021, and another approximately 200 employees at the St. Joseph plant are represented by the United Cereal Workers (R.W.D.S.U./U.F.C.W.) under a collective bargaining agreement scheduled to expire in June 2019.
HRG Group
HRG Group, Inc. ("HRG") is a publicly traded (NYSE: HRG) holding company that primarily owns approximately 59% of Spectrum Brands, a publicly traded (NYSE: SPB) global consumer products company. HRG sold its approximate 80% interest in Fidelity & Guaranty Life, a life insurance and annuity products company and 100% interest in Front Street, a long-term reinsurance company, to CF Corporation in the fourth quarter of 2017. HRG continues to streamline its business and simplify its holding company structure and has announced that they are exploring strategic alternatives to maximize shareholder value. These strategic alternatives may include a merger, sale or business combination involving HRG and Spectrum Brands.
As of December 31, 2017, we own 46.6 million common shares of HRG, representing about 23% of its outstanding common shares, which we reflect in our financial results at fair value. In addition, we currently have two directors on HRG’s board, including our Chairman who serves as HRG's Chairman and CEO. At December 31, 2017, the book value of our holdings in HRG is $789.9 million and our cost was $475.6 million.
Garcadia
Garcadia is a joint venture between us and Garff Enterprises, Inc. ("Garff"), which is owned by members of a family that has operated car dealerships for over 85 years. Garcadia owns and operates 28 domestic and foreign automobile dealerships in California, Iowa, Texas and Michigan. We and Garff have equal board representation and equal votes on all matters affecting Garcadia, and all operating cash flows from Garcadia are allocated 65% to us and 35% to Garff, with the exception of one dealership from which we receive 83% of all operating cash flows and four other dealerships from which we receive 71% of all operating cash flows. Garcadia’s strategy is to own and operate automobile dealerships in primary or secondary market locations meeting its specified return criteria. During 2017, we received cash distributions from Garcadia's dealerships of $45.3 million.
In addition, we own parcels of land that are leased to certain dealerships. During 2017, we received rent payments related to these leases of $9.5 million. At December 31, 2017, the net book value of our investment in Garcadia was $179.1 million and our net investment in the parcels of land leased to the dealerships was $20.4 million, net of $53.4 million in mortgage debt.
Linkem
Linkem S.p.A. is a fixed wireless broadband service provider in Italy. Unlike the U.S. and most of Western Europe, Italy does not have a national cable television system; as a result, Italy’s broadband penetration rate is among the lowest in Europe. Linkem offers residential broadband services using LTE technologies deployed over the 3.5 GHz spectrum band. 
Our initial investment in Linkem was made in July 2011. Since that time, we have funded much of Linkem’s growth and become its largest shareholder. We own approximately 42% of the common shares of Linkem, as well as convertible preferred shares which, if converted, would increase our ownership to approximately 53% of Linkem's common equity at December 31, 2017. We have approximately 48% of the total voting securities of Linkem.
Linkem owns or has exclusive rights to spectrum holdings of 84MHz covering over 80% of the population of Italy and at least 42MHz covering all of Italy. At December 31, 2017, Linkem’s network includes base stations deployed on 2,339 wireless towers that can reach 65% of Italian households. Linkem has over 500,000 subscribers for its services. Linkem's base stations are now all LTE-enabled. LTE provides subscribers with faster download speeds and improved service compared to DSL, the most popular broadband alternative. Linkem plans to increase its network coverage across Italy over the coming years as it adds subscribers and it is exploring wholesale arrangements with existing operators who would white label Linkem's services. Expansion and customer acquisition costs are expected to result in operating losses over the next couple of years. 
Through December 31, 2017, we had invested $323.9 million in Linkem and the net book value of our investment was $192.1 million at December 31, 2017

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Oil and Gas
Vitesse Energy, LLC ("Vitesse") is a non-operating owner of oil and gas properties in the core of the Bakken Shale oil field in North Dakota and Montana and the Denver-Julesburg Basin in Wyoming. We own 96% of Vitesse, which acquires producing and undeveloped leasehold properties. Vitesse participates with its operating partners in the drilling and completion of lower risk new horizontal wells on our leaseholds acreage, which converts our leasehold into cash flow producing assets. Vitesse has acquired approximately 20,600 net acres of Bakken leasehold and has an interest in 1,572 producing wells (42 net wells) and 467 gross wells (13 net wells) that are currently drilling, completing or permitted for drilling. In 2016, Vitesse acquired interests in 31 wellbores, which were drilled but not yet completed, in the Denver-Julesburg Basin. As of December 31, 2017, 26 of those wellbores have been completed. Our strategic priorities for Vitesse are to selectively add to our core acreage, participate in future profitable horizontal wells, increase aggregate cash flow, and profitably sell selective assets when appropriate.
We also own 98% of JETX Energy, LLC ("JETX"), formerly Juneau Energy, LLC, which currently has acreage and producing wells primarily in Brazos and Grimes counties in East Texas. During 2016, the management of JETX was transferred to the Vitesse team and the company is now pursuing a non-operating strategy, whereby JETX has partnered with Lonestar Resources US Inc. (NASDAQ: LONE) ("Lonestar"), an accomplished Eagle Ford operator. In August 2016, JETX sold 50% of its interest in its two East Eagle Ford wells that JETX drilled and completed in late 2015 to Lonestar for equity and interests in Lonestar's nearby oil and gas properties. Lonestar also agreed to pool some of its nearby acreage with JETX's and will pursue development of the pooled acreage. In addition, JETX invested $25 million in Lonestar in exchange for $25 million principal amount of secured second lien notes and warrants. In December 2016, Lonestar repurchased $21 million principal amount of these secured second lien notes and in January 2017, JETX sold the remaining $4 million to a third party. Lonestar successfully drilled and completed one of the better wells in the Eastern Eagle Ford when the Wildcat B1H well was brought on line in May 2017. JETX has a 50% interest in the well and the undeveloped drilling locations within the unit. JETX's strategic priorities include the further development of our acreage in the East Eagle Ford, partnering with additional proven operators in JETX's leasehold and selectively selling assets.
At December 31, 2017, we have made cumulative net cash investments of $564.5 million in Vitesse and JETX and the net book value of our oil and gas investments is $416.6 million. 
Idaho Timber
Idaho Timber manufactures and distributes an extensive range of quality wood products to markets across North America. Its activities include remanufacturing dimension lumber; remanufacturing, bundling and bar coding of home center boards for large retailers; and production of pine dimension lumber and 5/4” radius-edge, pine decking. In addition to its headquarters in Meridian, Idaho, Idaho Timber has plants in Idaho, Arkansas, Florida, Louisiana, New Mexico, North Carolina and Texas.
The net book value of our investment was $81.5 million at December 31, 2017.
Golden Queen Mining Company
Golden Queen is a joint venture between Golden Queen Mining Co., Ltd. (“GQM”) and Gauss LLC ("Gauss"). We own 70% of Gauss, which in turn owns 50% of the joint venture, giving us an effective 35% interest in Golden Queen. Golden Queen developed and operates the Soledad Mountain Project, an open pit, heap leach gold and silver mining project located in Kern County, California.  The project uses conventional open pit mining methods, cyanide heap leach and Merrill-Crowe processes to recover gold and silver from crushed, agglomerated ore. Gold and silver mining activities commenced in March 2016. GQM is a Canadian company that has been developing and exploring its mineral properties at Soledad Mountain since 1985. GQM is publicly traded on both the Toronto Stock Exchange (“GQM”) and on the OTCQX International (“GQMNF”) markets.
We have invested $83.0 million in Golden Queen. The net book value of our investment was $74.5 million at December 31, 2017.
Financial Information about Segments
Our operating segments consist of the consolidated businesses discussed above, which offer different products and services and are managed separately. Our three reportable segments, based on both qualitative and quantitative requirements, are Jefferies, National Beef, and Corporate and other. All other businesses and investments consist of our other financial services businesses and investments and our other merchant banking businesses and investments. Our other financial services businesses and investments include the Leucadia Asset Management platform, Foursight Capital, and our investments in Berkadia, HomeFed and FXCM. Our other merchant banking businesses and investments primarily include Vitesse, JETX, Idaho Timber, and our investments in HRG, Garcadia, Linkem and Golden Queen. Our financial information regarding our reportable segments is contained in Note 29, in our consolidated financial statements.

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As discussed further in Note 1 to our consolidated financial statements, we sold 100% of Conwed in January 2017 for $295 million in cash plus potential earnout payments.
Information about Leucadia on the Internet
The following documents and reports are available on or through our website (www.leucadia.com) as soon as reasonably practicable after we electronically file such materials with, or furnish to, the SEC:
Code of Business Practice;
Reportable waivers, if any, from our Code of Business Practice by our executive officers;
Board of Directors Corporate Governance Guidelines;
Charter of the Audit Committee of the Board of Directors;
Charter of the Nominating and Corporate Governance Committee of the Board of Directors;
Charter of the Compensation Committee of the Board of Directors;
Annual reports on Form 10-K;
Quarterly reports on Form 10-Q;
Current reports on Form 8-K;
Beneficial ownership reports on Forms 3, 4 and 5; and
Any amendments to the above-mentioned documents and reports.
Shareholders may also obtain a printed copy of any of these documents or reports free of charge by sending a request to Leucadia National Corporation, Investor Relations, 520 Madison Avenue, New York, NY 10022 or by calling (212) 460-1900.
Item 1A.
Risk Factors.
Our business is subject to a number of risks. You should carefully consider the following risk factors, together with all of the other information included or incorporated by reference in this report, before you decide whether to purchase our securities. The risks set out below are not the only risks we face. In addition to the specific risks mentioned in this report, we may also be affected by other factors that affect businesses generally such as global or regional changes in economic, business or political conditions, acts of war, terrorism or natural disasters. If any of such risks occur, our business, financial condition and results of operations could be materially adversely affected. In such case, the trading price of our securities could decline, and you may lose all or part of your investment.
Future acquisitions and dispositions of our businesses and investments are possible, changing the components of our assets and liabilities, and if unsuccessful or unfavorable, could reduce the value of our securities. Any future acquisitions or dispositions may result in significant changes in the composition of our assets and liabilities, as well as our business mix and prospects. Consequently, our financial condition, results of operations and the trading price of our securities may be affected by factors different from those affecting our financial condition, results of operations and trading price at the present time.
We face numerous risks and uncertainties as we expand our business. We expect the growth and development of our business to come primarily from internal expansion and through acquisitions, investments, and strategic partnering. As we expand our business, there can be no assurance that financial controls, the level and knowledge of personnel, operational abilities, legal and compliance controls and other corporate support systems will be adequate to manage our business and growth. The ineffectiveness of any of these controls or systems could adversely affect our business and prospects. In addition, if we acquire new businesses and introduce new products, we face numerous risks and uncertainties integrating their controls and systems, including financial controls, accounting and data processing systems, management controls and other operations. A failure to integrate these systems and controls, and even an inefficient integration of these systems and controls, could adversely affect our business and prospects.
Certain business initiatives, including expansions of existing businesses, may bring us into contact directly or indirectly, with individuals and entities that are not within our traditional client and counterparty base and may expose us to new asset classes and new markets. These business activities expose us to new and enhanced risks, greater regulatory scrutiny of these activities, increased credit-related, sovereign and operational risks, and reputational concerns regarding the manner in which these assets are being operated or held.
Our business, financial condition and results of operations are dependent upon those of our individual businesses, and our aggregate investment in particular industries. We are a holding company with investments in businesses and assets in a number of industries. Jefferies is our largest investment and we have significant additional investments in the financial services industry.  Our business, financial condition and results of operations are dependent upon our various businesses and investments. Any material

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adverse change in one of our businesses or investments, or in a particular industry in which we operate or invest, may cause material adverse changes to our business, financial condition and results of operations. The more capital we devote to a particular investment or industry may increase the risk that such investment could significantly impact our financial condition and results of operations, possibly in a material adverse way.
Conditions in the financial markets and the economy may adversely impact our businesses and investments. These include economic conditions that may be specific to the industries in which our businesses and investments operate, as well as a general economic slowdown, prolonged recession or other market downturn or disruption. Adverse impacts may include the following:
A market downturn could lead to a decline in client and customer activity levels, and therefore a decline in services provided, causing reduced revenues from fees, commissions, spreads and other forms of revenue.
Adverse changes in the market could lead to decreases in the value of our holdings, both realized and unrealized.
Adverse changes in the market could also lead to a reduction in revenues from asset management fees and investment income from managed funds. The build out of our asset management business could also be impacted as adverse conditions could lead to a decrease in new capital raised and may cause investors to withdraw their investments and commitments. Even in the absence of a market downturn, below-market investment performance by funds and portfolio managers could reduce asset management revenues and assets under management and result in reputational damage that might make it more difficult to attract new investors.
Limitations on the availability of credit, such as occurred during 2008, can affect the ability of our businesses and investments to borrow on a secured or unsecured basis, which may adversely affect liquidity and results of operations. Global market and economic conditions have been particularly disrupted and volatile in the last several years and may be in the future. Cost and availability of funding could be affected by illiquid credit markets and wider credit spreads.
Changes in tax law could impact our ability to utilize our deferred tax assets, decrease current and anticipated cash flows, or prompt revisions to compensation arrangements.
Should one or more of the competitors of our businesses or investments fail, business prospects and revenue could be negatively impacted due to negative market sentiment causing customers to cease doing business with, and lenders to cease extending credit to, our businesses and investments, which could adversely affect our operations, funding and liquidity.
Unfavorable economic conditions could have an adverse effect on the demand for new loans and the servicing of loans originated by third parties, which would have an adverse impact on the operations and profitability of some of our financial services businesses and investments.

The United Kingdom's exit from the European Union could adversely affect our businesses and investments. The referendum held in the U.K. on June 23, 2016 resulted in a determination that the U.K. should exit the European Union. In March 2017, the U.K. government initiated the exit process under Article 50 of the Treaty of the EU, commencing a period of up to two years for the United Kingdom and the other EU member states to negotiate the terms of the withdrawal. The uncertainty surrounding the timing, terms and consequences of the U.K.’s exit could adversely impact customer and investor confidence, result in additional market volatility, and adversely affect Jefferies, FXCM, as well as certain of HRG's subsidiaries, particularly those with operations or customers in Europe.

Jefferies operates substantial parts of its EU businesses from entities based in the U.K. Upon the U.K. leaving the EU, the regulatory and legal environment that would then exist, and to which its U.K. operations would then be subject, will depend on, in certain respects, the nature of the arrangements the U.K. agreed with the EU and other trading partners. It is highly likely that changes to its legal entity structure and operations in Europe will be required as a result of these arrangements, which might result in a less efficient operating model across its European legal entities. Jefferies is in the process of finalizing plans to ensure its continued ability to operate in the U.K. and the EU beyond the expected exit date.
Damage to our reputation could damage our business. Maintaining our reputation is critical to our attracting and maintaining customers, investors and employees. If we fail to deal with, or appear to fail to deal with, various issues that may give rise to reputational risk, we could significantly harm our business prospects. These issues include, but are not limited to, any of the risks discussed in this Item 1A, appropriately dealing with potential conflicts of interest, legal and regulatory requirements, ethical issues, money-laundering, cybersecurity and privacy, record keeping, sales and trading practices, failure to sell securities we have underwritten at the anticipated price levels, and the proper identification of the legal, reputational, credit, liquidity and market risks inherent in our products. A failure to deliver appropriate standards of service and quality, or a failure or perceived failure to treat customers and clients fairly, can result in customer dissatisfaction, litigation and heightened regulatory scrutiny, all of which can lead to lost revenue, higher operating costs and harm to our reputation. Further, negative publicity regarding us, whether or not true, may also result in harm to our prospects. Our operations in the past have been impacted as some clients either ceased doing business or temporarily slowed down the level of business they do, thereby decreasing our revenue. There is no assurance

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that we will be able to successfully reverse the negative impact of allegations and rumors in the future and our potential failure to do so could have a material adverse effect on our business, financial condition and liquidity.
Jefferies and LAM may incur losses if their risk management is not effective. Jefferies and LAM seek to monitor and control their risk exposure. Their risk management processes and procedures are designed to limit their exposure to acceptable levels as they conduct their businesses. Jefferies applies a comprehensive framework of limits on a variety of key metrics to constrain the risk profile of its business activities. The size of the limit reflects Jefferies’ risk tolerance for a certain activity. The framework includes inventory position and exposure limits on a gross and net basis, scenario analysis and stress tests, value-at-risk, sensitivities, exposure concentrations, aged inventory, amount of Level 3 assets, counterparty exposure, leverage, cash capital, and performance analysis. While Jefferies and LAM employ various risk monitoring and risk mitigation techniques, those techniques and the judgments that accompany their application, including risk tolerance determinations, cannot anticipate every economic and financial outcome or the specifics and timing of such outcomes. As a result, Jefferies and LAM may incur losses notwithstanding their risk management processes and procedures.
Recent legislation and new and pending regulation may significantly affect Jefferies or our other businesses and investments.  In recent years, there has been significant legislation and increased regulation affecting the financial services industry. In addition, there has also been recent discussions of proposed legislative and regulatory changes that would also affect the financial services industry. These legislative and regulatory initiatives affect not only Jefferies, LAM, FXCM, and Berkadia, but also their competitors and certain of their clients and customers. These changes could have an effect on our revenue and profitability, limit our ability to pursue certain business opportunities, impact the value of assets that we hold, require us to change certain business practices, impose additional costs on us and otherwise adversely affect our business. Accordingly, we cannot provide assurance that legislation and regulation will not eventually have an adverse effect on our business, results of operations, cash flows and financial condition.
Extensive regulation of Jefferies and LAM business limits their activities, and, if Jefferies or LAM violates these regulations, they may be subject to significant penalties. The financial services industry is subject to extensive laws, rules and regulations in every country in which Jefferies and LAM operates. Firms that engage in securities and derivatives trading, wealth and asset management and investment banking must comply with the laws, rules and regulations imposed by national and state governments and regulatory and self-regulatory bodies with jurisdiction over such activities. Such laws, rules and regulations cover all aspects of the financial services business, including, but not limited to, sales and trading methods, trade practices, use and safekeeping of customers’ funds and securities, capital structure, anti-money laundering and anti-bribery and corruption efforts, recordkeeping and the conduct of directors, officers and employees.
Each of Jefferies and LAM regulators supervises their business activities to monitor compliance with such laws, rules and regulations in the relevant jurisdiction. In addition, if there are instances in which Jefferies or LAM regulators question their compliance with laws, rules, and regulations, they may investigate the facts and circumstances to determine whether Jefferies or LAM have complied. At any moment in time, Jefferies or LAM may be subject to one or more such investigation or similar reviews. At this time, all such investigations and similar reviews are insignificant in scope and immaterial to Jefferies and LAM. However, there can be no assurance that, in the future, the operations of Jefferies or LAM businesses will not violate such laws, rules, or regulations and such investigations and similar reviews will not result in adverse regulatory requirements, regulatory enforcement actions and/or fines.
Any violation of these laws, rules and regulations could subject Jefferies or LAM to one or more of the following events: civil and criminal liability; sanctions, which could include the revocation of its subsidiaries' registrations as registered investment advisors or broker-dealers; the revocation of the licenses of its financial advisors; censures; fines; or a temporary suspension or permanent bar from conducting business. The occurrence of any of these events could have a material adverse effect on Jefferies or LAM business, financial condition and prospects.
Certain of Jefferies' subsidiaries are subject to regulatory financial capital holding requirements, such as the Net Capital Rule, that could impact various capital allocation decisions or limit the operations of its broker-dealers. In particular, compliance with the Net Capital Rule may restrict its broker-dealers' ability to engage in capital-intensive activities such as underwriting and trading, and may also limit their ability to make loans, advances, dividends and other payments.
Additional legislation, changes in rules, changes in the interpretation or enforcement of existing laws and rules, conflicts and inconsistencies among rules and regulations, or the entering into businesses that subject Jefferies or LAM to new rules and regulations may directly affect their business, results of operations and financial condition. Jefferies and LAM continue to monitor the impact of new U.S. and international regulation on their businesses.
A credit rating agency downgrade could significantly impact our businesses. We and Jefferies have credit ratings issued by various credit rating agencies. Maintaining our credit ratings is important to our and Jefferies business and financial condition. 

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We advised certain credit rating agencies that we would target specific concentration, leverage and liquidity principles, expressed in the form of certain ratios and percentages. A failure to meet these ratios and percentages could trigger a ratings downgrade. We and Jefferies intend to access capital markets and issue debt securities from time to time, and a ratings downgrade may decrease demand for such offered security. A decrease in demand would not only make a successful financing more difficult, but also increase our respective capital costs. Similarly, our and Jefferies access to other forms of credit may be limited and our respective borrowing costs may increase if our or Jefferies credit ratings are downgraded. A downgrade could also negatively impact our and Jefferies outstanding debt prices and our stock price. In addition, in connection with certain over-the-counter derivative contract arrangements and certain other trading arrangements, a ratings downgrade could cause us or Jefferies to provide additional collateral to counterparties, exchanges and clearing organizations which would negatively impact our and Jefferies liquidity and financial condition. There can be no assurance that our or Jefferies credit ratings will not be downgraded.
In addition, if Berkadia does not maintain specified servicer ratings from the credit rating agencies, customers would have the right to terminate their mortgage servicing agreements. If mortgage servicing agreements were terminated as a result of a servicer ratings downgrade, we could lose a significant portion of the value of our equity investment.
Jefferies principal trading and investments expose us to risk of loss. A considerable portion of Jefferies revenues is derived from trading in which Jefferies acts as principal. Jefferies may incur trading losses relating to the purchase, sale or short sale of fixed income, high yield, international, convertible, and equity securities, loans and futures and commodities for its own account. In any period, Jefferies may experience losses on its inventory positions as a result of price fluctuations, lack of trading volume, and illiquidity.  From time to time, Jefferies may engage in a large block trade in a single security or maintain large position concentrations in a single security, securities of a single issuer, securities of issuers engaged in a specific industry, or securities from issuers located in a particular country or region. In general, because Jefferies inventory is marked to market on a daily basis, any adverse price movement in these securities could result in a reduction of Jefferies revenues and profits. In addition, Jefferies may engage in hedging transactions that if not successful, could result in losses.
We are exposed to market risk. We are, directly and indirectly, affected by changes in market conditions. Market risk generally represents the risk that values of assets and liabilities or revenues will be adversely affected by changes in market conditions. For example, changes in interest rates could adversely affect our net interest spread, the difference between the yield we earn on our assets and the interest rate we pay for sources of funding, which, in turn, impacts our net interest revenue and earnings. Changes in interest rates could affect the interest earned on assets differently than interest paid on liabilities. In our brokerage operations, a rising interest rate environment generally results in our earning a larger net interest spread. Conversely, in those operations, a falling interest rate environment generally results in our earning a smaller net interest spread. If we are unable to effectively manage our interest rate risk, changes in interest rates could have a material adverse effect on our profitability.
Market risk is inherent in the financial instruments associated with our operations and activities, including trading account assets and liabilities, loans, securities, short-term borrowings, corporate debt, and derivatives. Market conditions that change from time to time, thereby exposing us to market risk, include fluctuations in interest rates, equity prices, relative exchange rates, and price deterioration or changes in value due to changes in market perception or actual credit quality of an issuer.
In addition, disruptions in the liquidity or transparency of the financial markets may result in our inability to sell, syndicate, or realize the value of security positions, thereby leading to increased concentrations. The inability to reduce our positions in specific securities may not only increase the market and credit risks associated with such positions, but also increase the level of risk-weighted assets on our balance sheet, thereby increasing capital requirements, which could have an adverse effect on our business, results of operations, financial condition and liquidity.
Increased competition may adversely affect Jefferies revenues and profitability. All aspects of Jefferies business are intensely competitive. Jefferies competes directly with a number of bank holding companies and commercial banks, other brokers and dealers, investment banking firms and other financial institutions. In addition to competition from firms currently in the securities business, there has been increasing competition from others offering financial services, including automated trading and other services based on technological innovations. Jefferies believes that the principal factors affecting competition involve market focus, reputation, the abilities of professional personnel, the ability to execute the transaction, relative price of the service and products being offered, bundling of products and services and the quality of products and service. Increased competition or an adverse change in Jefferies competitive position could lead to a reduction of business and therefore a reduction of revenues and profits.
The ability to attract, develop and retain highly skilled and productive employees is critical to the success of our business. Our ability to develop and retain our clients depends on the reputation, judgment, business generation capabilities and skills of our professionals. To compete effectively, we must attract, retain and motivate qualified professionals, including successful financial advisors, investment bankers, trading professionals, portfolio managers and other revenue producing or specialized personnel.

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Competitive pressures we experience with respect to employees could have an adverse effect on our business, results of operations, financial condition and liquidity.
Turnover in the financial services industry is high. The cost of retaining skilled professionals in the financial services industry has escalated considerably. Financial industry employers are increasingly offering guaranteed contracts, upfront payments, and increased compensation. These can be important factors in a current employee's decision to leave us as well as in a prospective employee's decision to join us. As competition for skilled professionals in the industry remains intense, we may have to devote significant resources to attracting and retaining qualified personnel.
If we were to lose the services of certain of our professionals, we may not be able to retain valuable relationships and some of our clients could choose to use the services of a competitor instead of our services. If we are unable to retain our professionals or recruit additional professionals, our reputation, business, results of operations and financial condition will be adversely affected. Further, new business initiatives and efforts to expand existing businesses frequently require that we incur compensation and benefits expense before generating additional revenues.
Moreover, companies in our industries whose employees accept positions with competitors often claim that those competitors have engaged in unfair hiring practices. We may be subject to such claims in the future as we seek to hire qualified personnel who have worked for our competitors. Some of these claims may result in material litigation. We could incur substantial costs in defending against these claims, regardless of their merits. Such claims could also discourage potential employees who work for our competitors from joining us.
Operational risks may disrupt Jefferies business, result in regulatory action against Jefferies or limit Jefferies growth. Jefferies businesses are highly dependent on its ability to process, on a daily basis, a large number of transactions across numerous and diverse markets in many currencies, and the transactions Jefferies processes have become increasingly complex. If any of Jefferies financial, accounting or other data processing systems do not operate properly or are disabled or if there are other shortcomings or failures in Jefferies internal processes, people or systems, Jefferies could suffer an impairment to its liquidity, financial loss, a disruption of its businesses, liability to clients, regulatory intervention or reputational damage. These systems may fail to operate properly or become disabled as a result of events that are wholly or partially beyond Jefferies control, including a disruption of electrical or communications services or Jefferies inability to occupy one or more of its buildings. The inability of Jefferies systems to accommodate an increasing volume of transactions could also constrain its ability to expand its businesses.
Certain of Jefferies financial and other data processing systems rely on access to and the functionality of operating systems maintained by third parties. If the accounting, trading or other data processing systems on which Jefferies is dependent are unable to meet increasingly demanding standards for processing and security or, if they fail or have other significant shortcomings, Jefferies could be adversely affected. Such consequences may include Jefferies inability to effect transactions and manage Jefferies exposure to risk.
In addition, despite the contingency plans Jefferies has in place, Jefferies ability to conduct business may be adversely impacted by a disruption in the infrastructure that supports its businesses and the communities in which they are located. This may include a disruption involving electrical, communications, transportation or other services used by Jefferies or third parties with which Jefferies conducts business.
Jefferies information and technology systems are critical components of its business and operations, and a failure of those systems or other aspects of its operations infrastructure may disrupt its business, cause financial loss, increase its legal liability and constrain its growth. Jefferies operations rely extensively on the secure processing, storage and transmission of confidential and other information in Jefferies computer systems and networks. Although Jefferies takes protective measures and devotes significant resources to maintaining and upgrading its systems and networks with measures such as intrusion and detection prevention systems, monitoring firewall to safeguard critical business applications and supervising third party providers that have access to its systems, Jefferies computer systems, software and networks may be vulnerable to unauthorized access, computer viruses or other malicious code, and other events that could have a security impact. Additionally, if a client’s computer system, network or other technology is compromised by unauthorized access, Jefferies may face losses or other adverse consequences by unknowingly entering into unauthorized transactions. If one or more of such events occur, this potentially could jeopardize Jefferies or its clients’ or counterparties’ confidential and other information processed and stored in and transmitted through our computer systems and networks. Furthermore, such events may cause interruptions or malfunctions in Jefferies, its clients’, its counterparties’ or third parties’ operations, including the transmission and execution of unauthorized transactions. Jefferies may be required to expend significant additional resources to modify its protective measures or to investigate and remediate vulnerabilities or other exposures, and Jefferies may be subject to litigation and financial losses that are either not covered or not fully covered through any insurance maintained by Jefferies. The increased use of smartphones, tablets and other mobile devices as well as cloud computing may also heighten these and other operational risks. Similar to other firms, Jefferies and its third party providers continue

16


to be the subject of attempted unauthorized access, computer viruses and malware, and cyber attacks designed to disrupt or degrade service or cause other damage and denial of service. Additional challenges are posed by external parties, including foreign state actors. There can be no assurance that such unauthorized access or cyber incidents will not occur in the future, and they could occur more frequently and on a larger scale.
Jefferies is also subject to laws and regulations relating to the privacy of the information of its clients, employees or others, and any failure to comply with these regulations could expose Jefferies to liability and/or reputational damage. In addition, Jefferies' businesses are increasingly subject to laws and regulations relating to surveillance, encryption and data on-shoring in the jurisdictions in which it operates. Compliance with these laws and regulations may require Jefferies to change its policies, procedures and technology for information security, which could, among other things, make Jefferies more vulnerable to cyber attacks and misappropriation, corruption or loss of information or technology.
Jefferies business is subject to significant credit risk. In the normal course of Jefferies businesses, Jefferies is involved in the execution, settlement and financing of various customer and principal securities and derivative transactions. These activities are transacted on a cash, margin or delivery-versus-payment basis and are subject to the risk of counterparty or customer nonperformance. Although transactions are generally collateralized by the underlying security or other securities, Jefferies still faces the risks associated with changes in the market value of the collateral through settlement date or during the time when margin is extended and collateral has not been secured or the counterparty defaults before collateral or margin can be adjusted. Jefferies may also incur credit risk in its derivative transactions to the extent such transactions result in uncollateralized credit exposure to counterparties.
Jefferies seeks to control the risk associated with these transactions by establishing and monitoring credit limits and by monitoring collateral and transaction levels daily. Jefferies may require counterparties to deposit additional collateral or return collateral pledged. In certain circumstances, Jefferies may, under industry regulations, purchase the underlying securities in the market and seek reimbursement for any losses from the counterparty. However, there can be no assurances that Jefferies risk controls will be successful.
The prices and availability of key raw materials affects the profitability of our beef processing and manufacturing operations.  The supply and market price of cattle purchased by National Beef are dependent upon a variety of factors over which National Beef has no control, including fluctuations in the size of herds maintained by producers, the relative cost of feed and energy, weather and livestock diseases. The cost of raw materials used by our manufacturing businesses have fluctuated over time as a result of a variety of factors. Although our manufacturing businesses are not currently experiencing any shortage of raw materials, if such shortages occur, revenues and profitability could decline.
Outbreaks of disease affecting livestock can adversely affect the supply of cattle and the demand for National Beef’s products.  National Beef is subject to risks relating to animal health and disease control. An outbreak of disease affecting livestock (such as foot-and-mouth disease or bovine spongiform encephalopathy (“BSE”), commonly referred to as mad cow disease) could result in restrictions on sales of products, restrictions on purchases of livestock from suppliers or widespread destruction of cattle. The discovery of BSE in the past caused certain countries to restrict or prohibit the importation of beef products. Outbreaks of diseases, or the perception by the public that an outbreak has occurred, or other concerns regarding diseases, can lead to inadequate supply, cancellation of orders by customers and create adverse publicity, any of which can have a significant negative impact on consumer demand and, as a result, on our consolidated financial position, cash flows and results of operations.
If National Beef’s products or products made by others using its products become contaminated or are alleged to be contaminated, National Beef may be subject to product liability claims that could adversely affect its business. National Beef may be subject to significant liability in excess of insurance policy limits if its products or products made by others using its products cause injury, illness or death. In addition, National Beef could recall or be required to recall products that are, or are alleged to be, contaminated, spoiled or inappropriately labeled. Organisms producing food borne illnesses (such as E. coli) could be present in National Beef’s products and result in illness or death if they are not eliminated through further processing or cooking.  Contamination of National Beef’s or its competitors’ products may create adverse publicity or cause consumers to lose confidence in the safety and quality of beef products. Allegations of product contamination may also be harmful even if they are untrue or result from third-party tampering. Any of these events may increase costs or decrease demand for beef products, any of which could have a significant adverse effect on our consolidated financial condition, cash flows and results of operations.
National Beef generally does not enter into long-term contracts with customers; as a result, the volumes and prices at which beef products are sold are subject to market forces. National Beef’s customers generally place orders for products on an as-needed basis and, as a result, their order levels have varied from period to period in the past and may vary significantly in the future. The loss of one or more significant customers, a significant decline in the volume of orders from customers or a significant decrease in beef product prices for a sustained period of time could negatively impact cash flows and results of operations.

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National Beef’s exports expose it to political and economic risks in the U.S. and foreign countries, as well as to risks related to currency fluctuations. Approximately 11.2% of National Beef’s annual sales are export sales, primarily to Japan, Mexico, South Korea, Hong Kong, China, Taiwan, Italy and Canada, and on average these sales have a higher margin than domestic sales of similar products. A reduction in international sales could adversely affect revenues and margins. Risks associated with international activities include inflation or deflation and changes in foreign currency exchange rates, including changes in currency exchange rates of other countries that may export beef products in competition with National Beef; the closing of borders by foreign countries to product imports due to disease or other perceived health or food safety issues; exchange controls; changes in tariffs; changes in political or economic conditions; trade restrictions and changes in regulatory requirements. The occurrence of any of these events could increase costs, lower demand for products or limit operations, which could have a significant adverse effect on cash flows, results of operations and future prospects. 
National Beef incurs substantial costs to comply with environmental regulations and could incur additional costs as a result of new regulations or compliance failures that result in civil or criminal penalties, liability for damages and negative publicity.  National Beef’s operations are subject to extensive and stringent environmental regulations administered by the EPA and state, local and other authorities with regards to water usage, wastewater and storm water discharge, air emissions and odor, and waste management and disposal. Failure to comply with these laws and regulations could have serious consequences, including criminal, civil and administrative penalties and negative publicity. In addition, National Beef incurs and will continue to incur significant capital and operating expenditures to comply with existing and new or more stringent regulations and requirements. All of National Beef’s processing facilities procure wastewater treatment services from municipal or other regional governmental agencies that are in turn subject to environmental laws and permit limits regarding their water discharges. As permit limits are becoming more stringent, upgrades and capital improvements to these municipal treatment facilities are likely. In locations where National Beef is a significant volume discharger, it could be asked to contribute toward the costs of such upgrades or to pay significantly increased water or sewer charges to recoup such upgrade costs.  National Beef may also be required to undertake upgrades and make capital improvements to its own wastewater pretreatment facilities, the cost of which could be significant. Compliance with environmental regulations has had and will continue to have a significant impact on National Beef’s cash flows and profitability. In addition, under most environmental laws, most notably the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) and analogous state laws, National Beef could be held liable for the cost to investigate or remediate any contamination at properties it owns or operates, or as to which it arranges for the disposal or treatment of hazardous substances, as such liability is imposed without regard to fault.
National Beef is subject to extensive governmental regulation and noncompliance with or changes in applicable requirements could adversely affect its business, financial condition, cash flows and results of operations. National Beef’s operations are subject to extensive regulation and oversight by the USDA, including its FSIS, APHIS and GIPSA agencies, the FDA, and other federal, state, local and foreign authorities regarding the procurement of cattle and the processing, packaging, storage, safety, distribution, advertising and labeling of its products. Recently, food safety practices and procedures in the meat processing industry have been subject to more intense scrutiny and oversight by the USDA. National Beef is also subject to a variety of immigration, labor and worker safety laws and regulations, including those relating to the hiring and retention of employees. Failure to comply with existing or new laws and regulations could result in administrative penalties and injunctive relief, civil remedies, fines, interruption of operations, recalls of products or seizures of properties, potential criminal sanctions and personal injury or other damage claims.  These remedies, changes in the applicable laws and regulations or discovery of currently unknown conditions could increase costs, limit business operations and reduce profitability.
National Beef’s performance depends on favorable labor relations with its employees, in particular employees represented by collective bargaining agreements. A substantial number of National Beef’s employees are covered by collective bargaining agreements. A labor-related work stoppage by unionized employees, or employees who become unionized in the future, could limit National Beef’s ability to process and ship products or could increase costs. Any significant increase in labor costs, deterioration of employee relations, slowdowns or work stoppages at any of National Beef’s locations, whether due to union activities, employee turnover or otherwise, could have a material adverse effect on our financial condition, cash flows and results of operations.
Uncertainties inherent in HRG’s business and operations could impact the realizability of the full value of our investment. As a holding company, HRG is subject to risks and uncertainties across the industries in which it invests. It is also subject to risks associated with its holding company structure, which include potential difficulties or limitations in receiving distributions from its subsidiaries, and the risk that acquisitions, dispositions or integrations of subsidiaries may not be successful. The overall profitability of HRG is directly contingent on the profitability of its subsidiaries, which are subject to a number of specific risks, including substantial indebtedness and restrictive covenants within Spectrum Brands. We hold about 23% of the common shares of HRG and we record our investment at fair value. As we do not control HRG, its management may make decisions that are not in our best interest. HRG could decide to issue additional common shares, which would dilute our current ownership. Additionally,

18


changes in the market price of HRG shares may lead to volatility in our results of operations. For additional risk factors concerning HRG, see its SEC filings.
Uncertainties relating to the results of FXCM could impact the value of our investment in FXCM. FXCM’s revenue and operating results may vary significantly from period to period due to movements and trends in the world’s currency markets and to fluctuations in trading levels. In addition, attrition of customer accounts, which are primarily comprised of individual retail customers, and failure to attract new accounts could impact revenue and profitability. FXCM is also subject to regulatory risks, as well as risks such as those relating to government actions like the unexpected actions of the Swiss National Bank on January 15, 2015, which resulted in the historic movement in the Swiss Franc.
The performance of our oil and gas production and development investments, JETX and Vitesse, is impacted by uncertainties specific to the oil and gas industry which we cannot control. The oil and gas industry, by its nature, involves a high degree of risk. The value of these investments may be impacted by changes in the prices of oil, gas and natural gas liquids, which are affected by local, regional and global events or conditions that affect supply and demand and which have a history of significant price volatility. These investments are also exposed to changes in regulations affecting the industry, which could increase our cost of compliance, increase taxes or reduce or delay business opportunities. In addition, there are numerous uncertainties inherent in the estimation of future oil and gas production and future income streams associated with production. As a result, actual results could materially differ from those we currently anticipate and our ability to profitably grow these investments could be adversely affected.
Declines in the U.S. housing market may reduce revenues of Idaho Timber. Idaho Timber generates significant revenues when the U.S. housing market is strong. If the U.S. housing market were to decline, Idaho Timber's revenues and profitability would be adversely impacted.
We may not be able to insure certain risks economically. We cannot be certain that we will be able to insure all risks that we desire to insure economically or that all of our insurers or reinsurers will be financially viable if we make a claim. If an uninsured loss or a loss in excess of insured limits should occur, or if we are required to pay a deductible for an insured loss, results of operations could be adversely affected.
When Berkadia originates loans for Fannie Mae, it is normally required to share in the losses on such loans, which could be in excess of reserved amounts. Berkadia carries a reserve on its balance sheet for contingent losses on loans originated for Fannie Mae that have loss sharing requirements. If actual losses exceed amounts reserved, Berkadia’s profitability and cash flows will be reduced.
The loss of or changes in Berkadia’s relationships with U.S. Government-Sponsored Enterprises and federal agencies would have an adverse effect on Berkadia’s business. Berkadia’s failure to comply with U.S. Government-Sponsored Enterprise or federal agency requirements may result in its termination as an approved seller/servicer, mortgagee or issuer. The loss of any such status could have a significant adverse impact on Berkadia’s results of operations, could result in a loss of similar approvals from other U.S. Government-Sponsored Enterprises or federal agencies and could have other adverse consequences to the business. Fannie Mae and Freddie Mac retain broad discretion to terminate Berkadia as a seller/servicer without cause upon notice.
Changes in existing government-sponsored and federal mortgage programs could negatively affect Berkadia’s business.  Berkadia’s ability to generate income through mortgage sales to institutional investors depends in part on programs sponsored by Fannie Mae, Freddie Mac and the FHA, which purchase such loans from Berkadia and/or facilitate the issuance of mortgage-backed securities in the secondary market. Any discontinuation of, or significant reduction or change in, the operation of those programs would have an adverse effect on Berkadia’s loan origination and servicing business and results of operations.
Berkadia’s fee-for-service businesses may be terminated on short notice. Some of Berkadia's fee-for-service customers are permitted to terminate Berkadia on short notice, usually 30 days. If Berkadia loses fee-for-service customers, it would negatively impact Berkadia’s results of operations and cash flows.
Certain loan programs expose Berkadia to credit and interest rate risk that it is not subject to with its U.S. Government-Sponsored Enterprise and federal agency lending programs. Unlike its U.S. Government-Sponsored Enterprise and federal agency lending programs, Berkadia makes certain floating rate bridge loans which are held on Berkadia's balance sheet and not intended for sale. If for any reason a borrower is unable to pay off or refinance a bridge loan, Berkadia may be forced to foreclose on defaulted loans and suffer a loss, or to sell loans to a third party at a discount, either of which would reduce Berkadia’s profitability and cash flows. As of December 31, 2017, the aggregate amount of bridge loans on Berkadia's balance sheet was $672.0 million.
If Berkadia suffered significant losses and was unable to repay its commercial paper borrowings, we would be exposed to loss pursuant to a reimbursement obligation to Berkshire Hathaway. Berkadia obtains funds generated by commercial paper sales

19


of an affiliate of Berkadia. All of the proceeds from the commercial paper sales are used by Berkadia to fund new mortgage loans, servicer advances, investments and other working capital requirements. Repayment of the commercial paper is supported by a $1.5 billion surety policy issued by a Berkshire Hathaway insurance subsidiary and a Berkshire Hathaway corporate guaranty, and we have agreed to reimburse Berkshire Hathaway for one-half of any losses incurred thereunder. If Berkadia suffers significant losses and is unable to repay its commercial paper borrowings, we would suffer losses to the extent of our reimbursement obligation to Berkshire Hathaway. As of December 31, 2017, the aggregate amount of commercial paper outstanding was $1.47 billion.
Garcadia’s business is dependent, in part, upon revenue from new and used car sales at its dealerships, and declines in revenues due to industry or other factors could result in reduced profitability, reduced cash flows and/or impairment charges. Garcadia has recorded impairment charges in the past, principally for goodwill and other intangible assets, and if the automobile industry experiences a downturn in the future, additional impairment charges are likely, reducing our profitability.
From time to time we may invest in illiquid securities that are subject to standstill agreements or are otherwise restricted. From time to time we may invest in securities that are subject to restrictions which prohibit us from selling the subject securities for a period of time. Such agreements may limit our ability to generate liquidity quickly through the disposition of the underlying investment while the agreement is effective.
We could experience significant increases in operating costs and reduced profitability due to competition for skilled management and staff employees in our operating businesses. We compete with many other entities for skilled management and staff employees, including entities that operate in different market sectors than us. Costs to recruit and retain adequate personnel could adversely affect results of operations.
Extreme weather, loss of electrical power or other forces beyond our control could negatively impact our business. Natural disasters, fire, terrorism, pandemic or extreme weather, including droughts, floods, excessive cold or heat, hurricanes or other storms, could interfere with our operating businesses due to power outages, fuel shortages, water shortages, damage to facilities or disruption of transportation channels, among other things. Any of these factors, as well as disruptions to information systems, could have an adverse effect on financial results.
We rely on the security of our information technology systems and those of our third party providers to protect our proprietary information and information of our customers. Some of our businesses involve the storage and transmission of customers’ personal information, consumer preferences and credit card information. While we believe that we have implemented protective measures to effectively secure information and prevent security breaches, and we continue to assess and improve these measures, our information technology systems have been and may continue to be vulnerable to unauthorized access, computer hacking, computer viruses or other unauthorized attempts by third parties to access the proprietary information of our customers. Information technology breaches and failures could disrupt our ability to function in the normal course of business resulting in lost revenue, the disclosure or modification of sensitive or confidential information and the incurrence of remediation and notification costs, resulting in legal and financial exposure. Moreover, loss of confidential customer identification information could harm our reputation and subject us to liability under laws that protect confidential personal data, resulting in increased costs or loss of revenues.
Legal liability may harm our business. Many aspects of our businesses involve substantial risks of liability, and in the normal course of business, we have been named as a defendant or codefendant in lawsuits involving primarily claims for damages. The risks associated with potential legal liabilities often may be difficult to assess or quantify and their existence and magnitude often remain unknown for substantial periods of time. The expansion of our businesses, including expansions into new products or markets, impose greater risks of liability. In addition, unauthorized or illegal acts of our employees could result in substantial liability. Substantial legal liability could have a material adverse financial effect or cause us significant reputational harm, which in turn could seriously harm our businesses and our prospects. Although our current assessment is that, other than as disclosed in this report, there is no pending litigation that could have a significant adverse impact, if our assessment proves to be in error, then the outcome of litigation could have a significant impact on our financial statements.
Recent U.S. tax legislation may have a material adverse effect on our financial condition, results of operations and cash flows. Recently enacted U.S. tax legislation has made significant changes to the U.S. Internal Revenue Code, including the taxation of U.S. corporations by, among other things, limiting interest deductions, limiting deductibility of certain executive compensation, reducing the U.S. corporate income tax rate, disallowing certain deductions that had previously been allowed, altering the expensing of capital expenditures, adopting elements of a territorial tax system, assessing a repatriation tax or "transition tax" on undistributed earnings and profits of U.S. owned foreign corporations, and introducing certain anti-base erosion provisions. The legislation is highly complex and unclear in certain respects and will require interpretations and implementing regulations by the Internal Revenue Service and state tax authorities. Additionally, the legislation could be subject to potential amendments and technical corrections, any of which could lessen or increase certain adverse impacts of the legislation. Thus, the impact of certain aspects

20


of the legislation on us is currently unclear and could have an adverse impact on our financial condition, results of operations and cash flows.
We may not be able to generate sufficient taxable income to fully realize our deferred tax asset. At December 31, 2017, we have recognized net deferred tax assets of $743.8 million.  If we are unable to generate sufficient taxable income, we will not be able to fully realize the recorded amount of the net deferred tax asset. If we are unable to generate sufficient taxable income prior to the expiration of our federal income tax net operating loss carryforwards (“NOLs”), all or a portion of the NOLs would expire unused. Our projections of future taxable income required to fully realize the recorded amount of the net deferred tax asset reflect numerous assumptions about our operating businesses and investments, and are subject to change as conditions change specific to our business units, investments or general economic conditions. Changes that are adverse to us could result in the need to increase the deferred tax asset valuation allowance resulting in a charge to results of operations and a decrease to total stockholders’ equity.
If our tax filing positions were to be challenged by federal, state and local or foreign tax jurisdictions, we may not be wholly successful in defending our tax filing positions. We record reserves for unrecognized tax benefits based on our assessment of the probability of successfully sustaining tax filing positions. Management exercises significant judgment when assessing the probability of successfully sustaining tax filing positions, and in determining whether a contingent tax liability should be recorded and, if so, estimating the amount. If our tax filing positions are successfully challenged, payments could be required that are in excess of reserved amounts or we may be required to reduce the carrying amount of our net deferred tax asset, either of which result could be significant to our financial condition or results of operations.
We have indicated our intention to pay quarterly dividends at the annual rate of $0.40 per common share. The payment of dividends in the future is subject to the discretion of the Board of Directors and will depend upon general business conditions, legal and contractual restrictions on the payment of dividends and other factors that the Board of Directors may deem to be relevant.
Our common shares are subject to transfer restrictions. We and certain of our subsidiaries have significant NOLs and other tax attributes, the amount and availability of which are subject to certain qualifications, limitations and uncertainties.  In order to reduce the possibility that certain changes in ownership could result in limitations on the use of the tax attributes, our certificate of incorporation contains provisions that generally restrict the ability of a person or entity from acquiring ownership (including through attribution under the tax law) of 5% or more of our common shares and the ability of persons or entities now owning 5% or more of our common shares from acquiring additional common shares.  The restriction will remain until the earliest of (a) December 31, 2024, (b) the repeal of Section 382 of the Internal Revenue Code (or any comparable successor provision) and (c) the beginning of a taxable year to which these tax benefits may no longer be carried forward. The restriction may be waived by our Board of Directors on a case by case basis. Shareholders are advised to carefully monitor their ownership of our common shares and consult their own legal advisors and/or us to determine whether their ownership of our common shares approaches the proscribed level.

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Item 1B.
Unresolved Staff Comments.
Not applicable.

Item 2.
Properties.
Our and Jefferies global executive offices and principal administrative offices are located at 520 Madison Avenue, New York, New York under an operating lease arrangement. 
Jefferies maintains additional offices in over 30 cities throughout the world including its European headquarters in London and its Asian headquarters in Hong Kong. In addition, Jefferies maintains backup data center facilities with redundant technologies for each of its three main data center hubs in Jersey City, London and Hong Kong. Jefferies leases all of its office space, or contract via service arrangement, which management believes is adequate for its business.
National Beef’s processing facilities, which are the principal properties used in its business, are described in Item 1 of this report.  National Beef also leases corporate office space in Kansas City, Missouri for its headquarters facility and space in Chicago, Kansas City (Kansas), Tokyo, Seoul and Hong Kong.
Idaho Timber’s plants, which are the principal properties used in its business, are described in Item 1 of this report.
Our businesses lease numerous other manufacturing, warehousing, office and headquarters facilities. The facilities vary in size and have leases expiring at various times, subject, in certain instances, to renewal options. See Note 24 to our consolidated financial statements.
Item 3.
Legal Proceedings.
The information required by this Item 3 is incorporated by reference from the “Contingencies” section in Note 24 in the Notes to consolidated financial statements in Item 8 of Part II of this report, which is incorporated herein by reference.
Item 4.
Mine Safety Disclosures.
Not applicable.

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PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common shares are traded on the NYSE under the symbol LUK. The following table sets forth, for the calendar periods indicated, the high and low sales price per common share on the consolidated transaction reporting system, as reported by the Bloomberg Professional Service provided by Bloomberg L.P.
 
Common Share
 
High
 
Low
 
 
 
 
2016
 
 
 
First Quarter
$
17.39

 
$
14.27

Second Quarter
18.22

 
15.32

Third Quarter
19.49

 
16.53

Fourth Quarter
24.17

 
17.87

 
 
 
 
2017
 

 
 

First Quarter
$
27.34

 
$
22.69

Second Quarter
26.78

 
23.81

Third Quarter
27.21

 
22.23

Fourth Quarter
27.09

 
24.92

 
 
 
 
2018
 

 
 

First Quarter (through February 15, 2018)
$
28.30

 
$
23.46

As of February 15, 2018, there were approximately1,544 record holders of the common shares.
We paid quarterly cash dividends of $0.10 per share for the each of the last two quarters of 2017 and $0.0625 per share for each of the first two quarters of 2017 and each quarter of 2016 and 2015. We have indicated our intention to pay quarterly dividends currently at the annual rate of $0.40 per common share. The payment of dividends in the future is subject to the discretion of the Board of Directors and will depend upon general business conditions, legal and contractual restrictions on the payment of dividends and other factors that the Board of Directors may deem to be relevant.
Certain of our subsidiaries have significant NOLs and other tax attributes, the amount and availability of which are subject to certain qualifications, limitations and uncertainties. In order to reduce the possibility that certain changes in ownership could result in limitations on the use of our tax attributes, our certificate of incorporation contains provisions which generally restrict the ability of a person or entity from acquiring ownership (including through attribution under the tax law) of 5% or more of the common shares and the ability of persons or entities now owning 5% or more of the common shares from acquiring additional common shares.  The restrictions will remain in effect until the earliest of (a) December 31, 2024, (b) the repeal of Section 382 of the Internal Revenue Code (or any comparable successor provision) or (c) the beginning of a taxable year to which these tax benefits may no longer be carried forward.
In November 2012, our Board of Directors authorized a share repurchase program pursuant to which we may, from time to time, purchase up to an aggregate of 25,000,000 of our common shares, inclusive of prior authorizations. During 2017, we repurchased a total of 3,661,588 shares in the open market pursuant to this program. Separately, during the year ended December 31, 2017, we repurchased an aggregate of 362,138 shares in connection with our share compensation plans which allow participants to use shares to satisfy certain tax liabilities arising from the vesting of restricted shares and the distribution of restricted share units. The total number of shares purchased does not include unvested shares forfeited back to us pursuant to the terms of our share compensation plans.
There were no unregistered sales of equity securities during the period covered by this report.

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The following table presents information on our purchases of our common shares during the three months ended December 31, 2017:
 
Total
Number of
Shares
Purchased (1)
 
Average
Price Paid
per Share
 
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans
or Programs
 
Maximum Number
of Shares that May Yet
Be Purchased Under the
Plans or Programs
 
 
 
 
 
 
 
 
October 2017
53,519

 
$
25.32

 

 
12,500,000

November 2017
34,454

 
$
25.39

 

 
12,500,000

December 2017
53,015

 
$
25.75

 

 
12,500,000

Total
140,988

 
 

 

 
 


(1)
Includes an aggregate 140,988 shares repurchased other than as part of our publicly announced Board authorized repurchase program. We repurchased these securities in connection with our share compensation plans which allow participants to use shares to satisfy certain tax liabilities arising from the vesting of restricted shares and the distribution of restricted share units. The total number of shares purchased does not include unvested shares forfeited back to us pursuant to the terms of our share compensation plans.

Stockholder Return Performance Graph
Set forth below is a graph comparing the cumulative total stockholder return on our common shares against the cumulative total return of the Standard & Poor’s 500 Stock Index and the Standard & Poor’s 500 Financials Index for the period commencing December 31, 2012 to December 31, 2017.  Index data was furnished by Standard & Poor’s Capital IQ.  The graph assumes that $100 was invested on December 31, 2012 in each of our common stock, the S&P 500 Index and the S&P 500 Financials Index and that all dividends were reinvested.

392352731_a10kchart.jpg

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Item 6.
Selected Financial Data.
The following selected financial data have been summarized from our consolidated financial statements. They should be read in conjunction with our consolidated financial statements and Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations of this report.
 
Year Ended December 31,
 
2017
 
2016
 
2015
 
2014
 
2013
 
(In thousands, except per share amounts)
SELECTED INCOME STATEMENT DATA: (a)
 
 
 
 
 
 
 
 
 
Net revenues (b)
$
11,436,393

 
$
10,062,617

 
$
10,886,458

 
$
11,486,485

 
$
10,425,746

Expenses
10,347,678

 
9,900,785

 
10,640,203

 
11,243,790

 
9,999,202

Income (loss) related to associated companies
(74,901
)
 
154,598

 
110,281

 
138,527

 
119,041

Income from continuing operations before income taxes
1,013,814

 
316,430

 
356,536

 
381,222

 
545,585

Income tax provision
760,967

 
122,109

 
109,947

 
165,971

 
136,481

Income from continuing operations
252,847

 
194,321

 
246,589

 
215,251

 
409,104

Income (loss) from discontinued operations, including gain (loss) on disposal, net of taxes

 

 
5,522

 
(16,226
)
 
(46,911
)
Net (income) loss attributable to the redeemable noncontrolling interests
(84,576
)
 
(65,746
)
 
26,543

 
8,616

 
9,282

Net income attributable to Leucadia National Corporation common shareholders
167,351

 
125,938

 
279,587

 
204,306

 
369,240

Per share:
 

 
 

 
 

 
 

 
 

Basic earnings (loss) per common share attributable to Leucadia National Corporation common shareholders:
 

 
 

 
 

 
 

 
 

Income from continuing operations
$
0.45

 
$
0.34

 
$
0.73

 
$
0.58

 
$
1.20

Income (loss) from discontinued operations, including gain (loss) on disposal

 

 
0.01

 
(0.04
)
 
(0.13
)
Net income
$
0.45

 
$
0.34

 
$
0.74

 
$
0.54

 
$
1.07

Diluted earnings (loss) per common share attributable to Leucadia National Corporation common shareholders:
 

 
 

 
 

 
 

 
 

Income from continuing operations
$
0.45

 
$
0.34

 
$
0.73

 
$
0.58

 
$
1.20

Income (loss) from discontinued operations, including gain (loss) on disposal

 

 
0.01

 
(0.04
)
 
(0.14
)
Net income
$
0.45

 
$
0.34

 
$
0.74

 
$
0.54

 
$
1.06

 
At December 31,
 
2017
 
2016
 
2015
 
2014
 
2013
 
(In thousands, except per share amounts)
SELECTED BALANCE SHEET DATA: (a)
 
 
 
 
 
 
 
 
 
Total assets
$
47,169,108

 
$
45,071,307

 
$
46,331,184

 
$
52,614,324

 
$
47,858,780

Long-term debt
7,885,783

 
7,380,443

 
7,400,582

 
8,519,584

 
8,172,864

Mezzanine equity
551,593

 
461,809

 
316,633

 
311,686

 
366,075

Shareholders’ equity
10,105,957

 
10,128,100

 
10,401,211

 
10,302,158

 
10,102,462

Book value per common share
$
28.37

 
$
28.18

 
$
28.68

 
$
28.03

 
$
27.71

Cash dividends per common share
$
0.325

 
$
0.25

 
$
0.25

 
$
0.25

 
$
0.25


(a)
Subsidiaries are reflected above as consolidated entities from the date of acquisition. Jefferies was acquired on March 1, 2013. 
(b)
Includes net realized securities gains of $23.0 million, $29.5 million, $63.0 million, $30.4 million and $244.0 million for the years ended December 31, 2017, 2016, 2015, 2014 and 2013, respectively.

25


Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The purpose of this section is to discuss and analyze our consolidated financial condition, liquidity and capital resources and results of operations. This analysis should be read in conjunction with the consolidated financial statements and related footnote disclosures contained in this report and the following “Cautionary Statement for Forward-Looking Information.”
Cautionary Statement for Forward-Looking Information
Statements included in this report may contain forward-looking statements. Such statements may relate, but are not limited, to projections of revenues, income or loss, development expenditures, plans for growth and future operations, competition and regulation, as well as assumptions relating to the foregoing. Such forward-looking statements are made pursuant to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements are inherently subject to risks and uncertainties, many of which cannot be predicted or quantified. When used in this report, the words “will,” “could,” “estimates,” “expects,” “anticipates,” “believes,” “plans,” “intends” and variations of such words and similar expressions are intended to identify forward-looking statements that involve risks and uncertainties.  Future events and actual results could differ materially from those set forth in, contemplated by or underlying the forward-looking statements.
Factors that could cause actual results to differ materially from any results projected, forecasted, estimated or budgeted or may materially and adversely affect our actual results include, but are not limited to, those set forth in Item 1A. Risk Factors and elsewhere in this report and in our other public filings with the SEC.
Undue reliance should not be placed on these forward-looking statements, which are applicable only as of the date hereof. Except as may be required by law, we undertake no obligation to revise or update these forward-looking statements to reflect events or circumstances that arise after the date of this report or to reflect the occurrence of unanticipated events.
Results of Operations
We focus on long-term value creation and invest in a broad variety of businesses. The mix of our business and investments change from time to time. Our investments may be reflected in our consolidated results as consolidated subsidiaries, equity investments, securities or in other ways, depending on the structure of our specific holdings. Further, as our investments span a number of industries, each may be impacted by different factors. For these reasons, our pre-tax income is not predictable or necessarily comparable from period to period.

Income from continuing operations before income taxes was $1,013.8 million for the year ended December 31, 2017. This compares to $316.4 million for the year ended December 31, 2016. The increase of $697.4 million reflects improved performance across many of Leucadia’s businesses. Jefferies pre-tax income increased $484.3 million due to record investment banking and equities revenues. National Beef’s pre-tax income grew by $78.3 million, as increased cattle availability and strong demand for beef continued to support strong margins.  Other Financial Services Businesses and Investments pre-tax income increased by $39.2 million, as Berkadia continued its strong performance and Leucadia Asset Management made a positive contribution, offset by an impairment charge of $130.2 million early in the year to revalue our equity method investment in FXCM.  Other Merchant Banking Businesses and Investments pre-tax income was higher than the previous year by $193.0 million, primarily related to the gain on the sale of Conwed.  Pre-tax income of our Corporate and Other segment was lower by $97.3 million due primarily to an increase in the fair value of a trading asset during 2016.


26


A summary of results of continuing operations for the year ended December 31, 2017 is as follows (in thousands):
 
Jefferies
 
National Beef
 
Other Financial Services Businesses and Investments
 
Other Merchant Banking Businesses and Investments
 
Corporate and Other
 
Parent Company Interest
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net revenues
$
3,207,097

 
$
7,358,948

 
$
191,810

 
$
615,691

 
$
62,847

 
$

 
$
11,436,393

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Expenses:
 
 
 

 
 
 
 

 
 
 
 
 
 
Cost of sales

 
6,764,055

 

 
280,952

 

 

 
7,045,007

Compensation and benefits
1,830,469

 
39,884

 
41,484

 
17,024

 
64,915

 

 
1,993,776

Floor brokerage and clearing fees
174,506

 

 

 

 

 

 
174,506

Interest

 
6,657

 
38,517

 
3,742

 

 
58,943

 
107,859

Depreciation and amortization
62,668

 
98,515

 
9,484

 
33,065

 
5,178

 

 
208,910

Selling, general and other expenses
611,650

 
42,525

 
54,984

 
38,096

 
70,365

 

 
817,620

Total expenses
2,679,293

 
6,951,636

 
144,469

 
372,879

 
140,458

 
58,943

 
10,347,678

Income (loss) from continuing operations before income taxes and income (loss) related to associated companies
527,804

 
407,312

 
47,341

 
242,812

 
(77,611
)
 
(58,943
)
 
1,088,715

Income (loss) related to associated companies

 

 
(81,490
)
 
7,904

 
(1,315
)
 

 
(74,901
)
Income (loss) from continuing operations before income taxes
$
527,804

 
$
407,312

 
$
(34,149
)
 
$
250,716

 
$
(78,926
)
 
$
(58,943
)
 
$
1,013,814


A summary of results of continuing operations for the year ended December 31, 2016 is as follows (in thousands):
 
Jefferies
 
National Beef
 
Other Financial Services Businesses and Investments
 
Other Merchant Banking Businesses and Investments
 
Corporate and Other
 
Parent Company Interest
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net revenues
$
2,421,055

 
$
7,027,243

 
$
(46,028
)
 
$
571,757

 
$
88,590

 
$

 
$
10,062,617

 
 
 
 
 
 
 
 
 
 
 
 
 

Expenses:
 
 
 

 
 
 
 

 
 
 
 
 

Cost of sales

 
6,513,768

 

 
337,039

 

 

 
6,850,807

Compensation and benefits
1,568,824

 
39,271

 
53,569

 
30,923

 
37,998

 

 
1,730,585

Floor brokerage and clearing fees
167,205

 

 

 

 

 

 
167,205

Interest

 
12,946

 
33,771

 
3,105

 

 
58,881

 
108,703

Depreciation and amortization
60,206

 
94,482

 
13,697

 
39,589

 
3,619

 

 
211,593

Selling, general and other expenses
581,312

 
37,754

 
50,782

 
129,808

 
32,236

 

 
831,892

Total expenses
2,377,547


6,698,221


151,819


540,464


73,853


58,881


9,900,785

Income (loss) from continuing operations before income taxes and income related to associated companies
43,508


329,022


(197,847
)

31,293


14,737


(58,881
)

161,832

Income related to associated companies

 

 
124,508

 
26,441

 
3,649

 

 
154,598

Income (loss) from continuing operations before income taxes
$
43,508


$
329,022


$
(73,339
)

$
57,734


$
18,386


$
(58,881
)

$
316,430


27



A summary of results of continuing operations for the year ended December 31, 2015 is as follows (in thousands):
 
Jefferies
 
National Beef
 
Other Financial Services Businesses and Investments
 
Other Merchant Banking Businesses and Investments
 
Corporate and Other
 
Parent Company Interest
 
Inter-company Eliminations
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net revenues
$
2,476,133

 
$
7,402,419

 
$
524,053

 
$
426,731

 
$
78,122

 
$

 
$
(21,000
)
 
$
10,886,458

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Expenses:
 
 
 

 
 
 
 

 
 
 
 
 
 
 

Cost of sales

 
7,347,874

 

 
329,359

 

 

 

 
7,677,233

Compensation and benefits
1,467,752

 
34,781

 
35,054

 
24,657

 
103,221

 

 

 
1,665,465

Floor brokerage and clearing fees
199,780

 

 

 

 

 

 

 
199,780

Interest

 
16,633

 
9,404

 
2,586

 

 
87,181

 

 
115,804

Depreciation and amortization
92,165

 
89,317

 
8,176

 
30,731

 
3,744

 

 

 
224,133

Selling, general and other expenses
597,271

 
37,729

 
48,279

 
79,421

 
16,088

 

 
(21,000
)
 
757,788

Total expenses
2,356,968

 
7,526,334

 
100,913

 
466,754

 
123,053

 
87,181

 
(21,000
)
 
10,640,203

Income (loss) from continuing operations before income taxes and income related to associated companies
119,165

 
(123,915
)
 
423,140

 
(40,023
)
 
(44,931
)
 
(87,181
)
 

 
246,255

Income related to associated companies

 

 
81,688

 
27,957

 
636

 

 

 
110,281

Income (loss) from continuing operations before income taxes
$
119,165

 
$
(123,915
)
 
$
504,828

 
$
(12,066
)
 
$
(44,295
)
 
$
(87,181
)
 
$

 
$
356,536

Jefferies
Jefferies was acquired on March 1, 2013 and is reflected in our consolidated financial statements utilizing a one month lag; Jefferies fiscal year ends on November 30th and its fiscal quarters end one month prior to our reporting periods. A summary of results of operations for Jefferies included in the years ended December 31, 2017, 2016 and 2015 is as follows (in thousands):
 
2017
 
2016
 
2015
 
 
 
 
 
 
Net revenues
$
3,207,097

 
$
2,421,055

 
$
2,476,133

 
 
 
 
 
 
Expenses:
 

 
 

 
 

Compensation and benefits
1,830,469

 
1,568,824

 
1,467,752

Floor brokerage and clearing fees
174,506

 
167,205

 
199,780

Depreciation and amortization
62,668

 
60,206

 
92,165

Selling, general and other expenses
611,650

 
581,312

 
597,271

Total expenses
2,679,293

 
2,377,547

 
2,356,968

Income before income taxes
$
527,804

 
$
43,508

 
$
119,165

Jefferies comprises many business units, with many interactions and much integration among them. Business activities include the sales, trading, origination and advisory effort for various equity, fixed income, commodities, foreign exchange and advisory services.  Jefferies business, by its nature, does not produce predictable or necessarily recurring revenues or earnings. Jefferies results in any given period can be materially affected by conditions in global financial markets, economic conditions generally, and its own activities and positions.

28


On April 9, 2015, Jefferies entered into an agreement to transfer certain of the client activities of its Jefferies Bache business to Société Générale S.A. During the second quarter of 2016, Jefferies completed the exit of the Futures business. Net revenues globally from this business activity, which are included within Jefferies fixed income results, and expenses directly related to the Bache business, which are included within non-interest expenses, were $80.2 million and $214.8 million, respectively, in 2015. There were no meaningful revenues or expenses from the Bache business for 2016. Total expenses for 2015 include costs of $73.1 million, on a pre-tax basis, related to the exit of the Bache business. These costs consist primarily of severance, retention and benefit payments for employees, incremental amortization of outstanding restricted stock and cash awards, contract termination costs and incremental amortization expense of capitalized software expected to no longer be used subsequent to the wind-down of the business. For further information, refer to Note 30 in our consolidated financial statements.
The discussion below is presented on a detailed product and expense basis. Net revenues presented for equity and fixed income businesses include allocations of interest income and interest expense as Jefferies assesses the profitability of these businesses inclusive of the net interest revenue or expense associated with the respective sales and trading activities, which is a function of the mix of each business’s associated assets and liabilities and the related funding costs.
The following provides a summary of net revenues by source included in the years ended December 31, 2017, 2016 and 2015 (in thousands):
 
2017
 
2016
 
2015
 
 
 
 
 
 
Equities
$
804,635

 
$
553,169

 
$
757,764

Fixed income
621,738

 
642,982

 
271,947

Total sales and trading
1,426,373

 
1,196,151

 
1,029,711

Investment banking:
 

 
 

 
 

Capital markets:
 

 
 

 
 

Equities
344,973

 
235,207

 
408,474

Debt
649,220

 
304,576

 
397,979

Advisory
770,092

 
654,190

 
632,354

Total investment banking
1,764,285

 
1,193,973

 
1,438,807

Other
16,439

 
30,931

 
7,615

Total net revenues
$
3,207,097

 
$
2,421,055

 
$
2,476,133

Net Revenues
Net revenues for 2017 were an annual record and reflect record investment banking revenues and record equities net revenues, partially offset by lower fixed income net revenues. The record investment banking revenues reflect record debt capital markets revenues, record advisory revenues and significantly higher equity capital markets revenues, as a result of higher transaction volumes and values throughout 2017, driven in part by Jefferies effort to continue to expand its investment banking team through promotions and new hires. The increase in equities revenues was primarily attributable to a net gain of $117.3 million recognized during 2017 from Jefferies investment in two equity positions, including KCG Holdings, Inc. ("KCG"), compared with a net loss of $17.9 million during 2016 from these two equity positions. KCG was sold for $20.00 per share in cash on July 20, 2017. The increase in equities net revenues was also due to net revenues of $90.8 million from Jefferies share of its Jefferies Finance, LLC ("Jefferies Finance") joint venture during 2017, compared with a net loss of $9.3 million during 2016. The decrease in fixed income net revenues is primarily due to lower volumes and volatility, which negatively impacted Jefferies client flow oriented fixed income businesses in the last nine months of 2017. Net revenues for 2017 included investment losses from managed funds of $4.0 million, compared with investment income from managed funds of $4.7 million during 2016.

Net revenues for 2016 were impacted by an extremely volatile bear market environment during the first three months of the year, with meaningful improvement over the rest of the year. Net revenues for the first quarter of 2016 declined $292.7 million or 49.5% in comparison to the first quarter of 2015. The decrease in total net revenues for 2016 primarily reflects lower net revenues in investment banking and equities, partially offset by increased revenues in fixed income. Net revenues for 2016 included investment income from managed funds of $4.7 million, compared with investment losses from managed funds of $23.8 million in 2015, primarily due to lower valuations in the energy and shipping sectors in 2015.
Net revenues for 2015 reflect the impact of challenging market conditions throughout the year on Jefferies fixed income business, partially offset by increased revenues in Jefferies equities business. Almost all of Jefferies fixed income credit businesses were

29


impacted by lower levels of liquidity due to the expectations of interest rate increases by the Federal Reserve and deterioration in the global energy and distressed markets.
Equities Net Revenues
Equities net revenues include equity commissions, equity security principal trading and investments (including Jefferies investments in KCG and from time to time, other blocks of equity securities) and net interest revenue generated by its equities sales and trading, prime services and wealth management business relating to cash equities, electronic trading, equity derivatives, convertible securities, prime brokerage, securities finance and alternative investment strategies. KCG was sold on July 20, 2017. Jefferies recognized a $93.4 million gain from its holdings of KCG in 2017 and an aggregate gain of $347.7 million over the five year life of this investment. Equities net revenues also include Jefferies share of the net earnings of its joint venture investments in Jefferies Finance and Jefferies LoanCore, LLC ("Jefferies LoanCore"), which are accounted for under the equity method. On October 31, 2017, Jefferies sold all of its membership interests in Jefferies LoanCore for approximately $173.1 million, the estimated book value at October 31, 2017. In addition, Jefferies may be entitled to additional cash consideration over the next five years in the event Jefferies LoanCore’s yearly return on equity exceeds certain thresholds.

Equities net revenues were $804.6 million for 2017 compared with $553.2 million in 2016. Equities revenue for 2017 include a net gain of $117.3 million from Jefferies investment in two equity positions, including KCG, compared with a net loss of $17.9 million in 2016 from these two equity positions.

Equities net revenues related to the core equities businesses during 2017 increased with higher revenues in Jefferies electronic trading, prime services, and Asia Pacific cash equities businesses primarily due to increased customer activity and increased trading volumes. The increase was partially offset by lower revenues in its equity options and Europe cash equities businesses, primarily due to reduced market making activities and lower equity volatility. In addition, 2016 included certain strategic investment gains from exposures to energy, volatility, financial and currency markets.

Equities commission revenues declined in Jefferies equity derivative and U.S. cash equities businesses due to reduced trading volumes and lower levels of volatility, partially offset by higher revenues in its electronic trading and Asia Pacific cash equities businesses due to increased trading volumes.

Equities net revenues during 2017 include net revenues of $90.8 million from Jefferies share of Jefferies Finance, primarily due to an increase in loan syndication activity, compared with a net loss of $9.3 million in the prior year, primarily due to the mark down of certain loans held for sale. Net revenues from Jefferies share of Jefferies LoanCore increased slightly during 2017 as compared to 2016 due to an increase in loan closings and syndications. On October 31, 2017, Jefferies sold all of its membership interests in Jefferies LoanCore for approximately $173.1 million, the estimated book value at October 31, 2017.
Total equities net revenues were $553.2 million for 2016 compared with $757.8 million in 2015. Results for 2016 includes a net loss of $17.9 million from Jefferies investment in two equity positions, including KCG, as compared to gains of $49.1 million in 2015 from these two equity positions. In addition, equities net revenues for 2015 included significant gains on additional securities positions, which were not repeated during 2016. Equities commission revenues gained slightly with improved market share across various product and client segments. Commissions in Jefferies U.S. cash equities and equity derivatives businesses held firm, while global electronic trading commissions gained from increased volumes and client market share. In Jefferies global electronic trading business, Jefferies has market leading customized algorithms in over 40 countries. European equities commissions increased due to improved market share, while commissions in Jefferies Asia Pacific cash equities business declined because of a challenging market environment. Jefferies global cash businesses were among the highest market share gainers compared with Jefferies peers and, in the U.S. and U.K., Jefferies platform remains in the top 10.
Equities trading revenues were solid across most of Jefferies equities sales and trading businesses in 2016. Trading revenues from client market making improved in Jefferies U.S. and European cash equities businesses. Equity derivatives trading revenues declined due to a difficult volatility trading climate and convertibles trading revenues declined driven by weakness in the energy sector during 2016. In addition, certain strategic investments gained from exposures to energy, volatility, financial and currency markets.
Equities net revenues during 2016 included a net loss of $9.3 million from Jefferies share of Jefferies Finance, primarily due to the mark down of certain loans held for sale during the first part of 2016, compared with net revenues of $41.4 million in 2015. Net revenues from Jefferies share of Jefferies LoanCore also decreased during 2016 as compared to 2015 due to a decrease in loan closings and syndications.

30


Fixed Income Net Revenues
Fixed income net revenues include commissions, principal transactions and net interest revenue generated by Jefferies fixed income sales and trading businesses from investment grade corporate bonds, mortgage- and asset-backed securities, government and agency securities, high yield and distressed securities, bank loans, municipal bonds, emerging markets debt, foreign exchange and interest rate derivatives,
Fixed income net revenues for 2017 decreased $21.2 million as compared to 2016, primarily due to a more challenging trading environment across most products, including most credit and rates businesses. In 2017, volatility was dampened as quantitative easing continued across most markets Jefferies transacts in. This was partially offset by better risk management, addition of staff in certain businesses, and refreshed strategies in some businesses.
Net revenues in Jefferies leveraged credit business in 2017 were higher due to increased trading activities in high yield and distressed products as a result of additions to staff and repositioned risk. This was compared to relatively significant mark-to-market losses recognized in the early part of 2016. Higher revenues in its European credit and international securitized markets group businesses were due to repositioned strategies taking advantage of trading opportunities in certain industry sectors. This is compared to volatile oil prices and uncertainty as to bank liquidity in 2016, which negatively impacted revenues in this business in the prior year.

Jefferies municipal securities business performed extremely well for the greater part of the year, driven by increased client activity as new team members were added and market share expanded. Performance for the municipal securities business was partially dampened at the end of the 2017 fiscal year as the municipal bond market dislocated over concerns around the potential impacts of pending U.S. tax reform on both municipal bond issuers and investors.

Revenues in Jefferies corporates and emerging markets business declined in a maturing credit cycle as volatility and transaction spreads decreased from prior year levels, while demand for new issuances and higher yielding investments and higher levels of volatility were prevalent in 2016. Lower revenues in its global rates and U.S. securitized markets group business were due to lower levels of volatility resulting in lower transaction based revenues. In the U.S. securitized markets businesses this was partially offset by increased activity in origination businesses including collateralized loan obligations (“CLOs”).

Jefferies recorded higher revenues in 2016 as compared with 2015 due to improved trading conditions across most core businesses, partially offset by lower revenues in its international rates business due to lower trading volumes. 2015 included $80.2 million of net revenues globally from the Bache business activity. There were no meaningful revenues from the Bache business during 2016, as Jefferies completed the exit of the Bache business during the second quarter of 2016. Excluding revenues from the Bache business activity, revenues increased $451.2 million.

Revenues in Jefferies leveraged credit business were strong on increased trading volumes within high yield and distressed products, as a result of an improved credit environment, as well as strategic growth in the business, compared with mark-to-market write-downs in 2015. Results in Jefferies emerging markets business during 2016 were higher as compared to 2015 due to an upgraded sales and trading team and increased levels of volatility and improved market conditions. Revenues in 2016 from Jefferies corporates businesses increased as compared to 2015 due to increased client activity and higher demand for new issuances and higher yielding investments. Jefferies securitized markets businesses were positively impacted by increased demand for spread products compared with the negative impact of market volatility as credit spreads tightened for these asset classes and expectations of future rate increases in 2015. The municipal securities business performed well during 2016 as improved trading activity was driven by market technicals compared with net outflows in 2015. Volatility during 2016 due to fluctuating expectations as to future Federal Reserve interest rate increases contributed to increased revenues in Jefferies U.S. rates business as compared to the prior year.
Investment Banking Revenues
Jefferies provides a full range of capital markets and financial advisory services to its clients across most industry sectors in the Americas, Europe and Asia. Capital markets revenues include underwriting and placement revenues related to corporate debt, municipal bonds, mortgage- and asset-backed securities and equity and equity-linked securities. Advisory revenues consist primarily of advisory and transaction fees generated in connection with merger, acquisition and restructuring transactions.
Total investment banking revenues were $1,764.3 million for 2017, 47.8% higher than 2016. This increase was due to strong performance across Jefferies debt capital markets, equity capital markets and advisory businesses, supported by a strong overall capital raising and merger and acquisition environment. In 2016, new issue equity and leveraged finance capital markets were virtually closed throughout January and February and remained slow throughout 2016. Capital markets revenues for 2017 increased 84.2% from 2016. Advisory revenues for 2017 increased 17.7% compared to the prior year.


31


From equity and debt capital raising activities, Jefferies generated $345.0 million and $649.2 million in revenues, respectively, for the year ended December 31, 2017. During 2017, Jefferies completed 1,121 public and private debt financings that raised $292.1 billion in aggregate and Jefferies completed 173 public and private equity and convertible offerings that raised $59.7 billion (164 of which Jefferies acted as sole or joint bookrunner). Financial advisory revenues totaled $770.1 million, including revenues from 171 merger and acquisition transactions and 10 restructuring and recapitalization transactions with an aggregate transaction value of $180.6 billion.

Total investment banking revenues were $1,194.0 million for 2016, 17.0% lower than 2015. Lower investment banking results were attributable to lower new issue equity and leveraged finance capital markets revenues. This was primarily as a result of the capital markets slowdown, which began in the second half of 2015 and continued for much of 2016. From equity and debt capital raising activities, Jefferies generated $235.2 million and $304.6 million in revenues, respectively, for 2016, a decrease of 42.4% and 23.5%, respectively, from 2015.

Jefferies reduced capital markets activity for 2016 was partially offset by increased advisory revenues. Specifically, Jefferies advisory revenues for 2016 increased 3.5% compared to 2015, primarily through an increase in the number of merger, acquisition and restructuring transactions, including closing a record number of merger and acquisition transactions in excess of $1 billion. Jefferies investment banking results benefited both from a record fourth quarter of advisory fees in 2016, with Jefferies merger, acquisition and restructuring and recapitalization businesses showing continued momentum, and from improvement in capital markets activity, which began in the late summer of 2016, leading to an increase in new issue transaction volume.

During 2016, Jefferies completed 892 public and private debt financings that raised $188.6 billion in aggregate and Jefferies completed 129 public and private equity and convertible offerings that raised $24.4 billion (125 of which Jefferies acted as sole or joint bookrunner). Financial advisory revenues totaled $654.2 million, including revenues from 161 merger and acquisition transactions and 18 restructuring and recapitalization transactions with an aggregate transaction value of $135.2 billion.
During 2015, Jefferies generated $1,438.8 million in investment banking revenues. From equity and debt capital raising activities, Jefferies generated $408.5 million and $398.0 million in revenues, respectively, in 2015. Advisory revenues of $632.4 million for 2015 were primarily due to higher transaction volume. During 2015, Jefferies completed 1,003 public and private debt financings that raised $199.8 billion in aggregate and Jefferies completed 203 public and private equity and convertible offerings that raised $56.6 billion (183 of which Jefferies acted as sole or joint bookrunner). Financial advisory revenues totaled $632.4 million, including revenues from 158 merger and acquisition transactions and 13 restructuring and recapitalization transactions with an aggregate transaction value of $141.1 billion.
Compensation and Benefits
Compensation and benefits expense consists of salaries, benefits, cash bonuses, commissions, annual cash compensation awards, and the amortization of certain non-annual share-based and cash compensation awards to employees. Cash and historical share-based awards and a portion of cash awards granted to employees as part of year end compensation generally contain provisions such that employees who terminate their employment or are terminated without cause may continue to vest in their awards, so long as those awards are not forfeited as a result of other forfeiture provisions (primarily non-compete clauses) of those awards.  Accordingly, the compensation expense for a portion of awards granted at year end as part of annual compensation is recorded in the year of the award.
Included in Compensation and benefits expense is share-based amortization expense for senior executive awards granted in September 2012, February 2016 and January 2017, non-annual share-based and cash-based awards to other employees and certain year end awards that contain future service requirements for vesting, all of which are being amortized over their respective future service periods. In addition, the senior executive awards contain market and performance conditions. Compensation expense related to the amortization of share-based and cash-based awards amounted to $278.2 million, $287.3 million and $307.7 million for 2017, 2016 and 2015, respectively. Compensation and benefits as a percentage of Net revenues was 57.1%, 64.8% and 59.3% for 2017, 2016 and 2015, respectively.
Compensation and benefits expense directly related to Jefferies Bache business was $87.7 million for 2015 and was not meaningful for 2016. Included within Compensation and benefits expense for the Bache business for 2015 are severance, retention and related benefits costs of $38.2 million, incurred as part of decisions surrounding the exit of this business.

32


Non-Compensation Expenses
Non-compensation expenses include floor brokerage and clearing fees, technology and communications expense, occupancy and equipment rental expense, business development, professional services, bad debt provision, impairment charges, depreciation and amortization expense and other costs. All of these expenses, other than floor brokerage and clearing fees and depreciation and amortization expense, are included in Selling, general and other expenses in the Consolidated Statements of Operations.
In 2017, non-compensation expenses increased 5.0% compared to 2016. The increase in non-compensation expenses during 2017 was consistent with the increased activity associated with higher net revenues, as well as increased spending on technology. At the same time, non-compensation expenses as a percentage of Net revenues declined from 33.4% to 26.5% again demonstrating strategically the operating leverage inherent in Jefferies business. The increase in non-compensation expenses was primarily due to an increase in Floor brokerage and clearing expenses due to the mix of costs across certain equities and fixed income businesses, technology and communications expenses due to costs associated with the development of the various trading systems and projects associated with corporate support and core business infrastructures, and an increase in certain other expenses.

In 2016, non-compensation expenses decreased 9.1% compared to 2015. The decrease in 2016 was due to the exiting of the Bache business, which in 2015 generated $127.2 million of non-compensation expenses, including accelerated amortization expense of $19.7 million related to capitalized software, $11.2 million in contract termination costs and professional services costs of approximately $2.5 million in connection with Jefferies actions in exiting the Bache business. There were no meaningful non-compensation expenses related to the Bache business in 2016. This reduction in 2016 was partially offset by higher technology and communications expenses, excluding the Bache business, and higher professional services expenses, excluding the Bache business. Technology and communications expenses, excluding the Bache business, increased due to higher costs associated with the development of the various trading systems and projects associated with corporate support infrastructure. In both years, Jefferies continued to incur legal and consulting fees as part of implementing various regulatory requirements. During 2015, Jefferies also released $4.4 million in reserves related to the resolution of bankruptcy claims against Lehman Brothers Holdings, Inc.
National Beef
A summary of results of operations for National Beef for the three years in the period ended December 31, 2017 is as follows (in thousands):
 
2017
 
2016
 
2015
 
 
 
 
 
 
Net revenues
$
7,358,948

 
$
7,027,243

 
$
7,402,419

 
 
 
 
 
 
Expenses:
 
 
 

 
 

Cost of sales
6,764,055

 
6,513,768

 
7,347,874

Compensation and benefits
39,884

 
39,271

 
34,781

Interest
6,657

 
12,946

 
16,633

Depreciation and amortization
98,515

 
94,482

 
89,317

Selling, general and other expenses
42,525

 
37,754

 
37,729

Total expenses
6,951,636

 
6,698,221

 
7,526,334

Income (loss) before income taxes
$
407,312

 
$
329,022

 
$
(123,915
)
National Beef’s profitability is dependent, in large part, on the spread between its cost for live cattle, the primary raw material for its business, and the value received from selling boxed beef and other products coupled with its overall volume. National Beef operates in a large and liquid commodity market and it does not have much influence over the price it pays for cattle or the selling price it receives for the products it produces. National Beef’s profitability typically fluctuates seasonally with relatively higher margins in the spring and summer months and during times of ample cattle availability. National Beef's fiscal year consists of 52 or 53 weeks, ending on the last Saturday in December. National Beef's fiscal years 2017 and 2015 consisted of 52 weeks each and its fiscal 2016 consisted of 53 weeks.
Revenues in 2017 increased 5% in comparison to 2016, primarily due to an increase in the number of cattle processed. Cost of sales increased by 4% in 2017 as compared to 2016. The increase is also due to an increase in the number of cattle processed. The combined effects of increased margin per head and an increase in volume led to higher profitability in 2017 as compared to 2016.

33


Revenues in 2016 decreased about 5% in comparison to 2015, due to lower average selling prices for beef and beef by-products, partially offset by an increase in the number of cattle processed. Additionally, during 2015, decreases to revenues of $52.9 million were recorded as a result of National Beef's use of derivatives in its hedging activity. For 2016, cost of sales declined 11% as compared to 2015, due to a decrease in the price of fed cattle, partially offset by an increase in volume. For 2016, the combined effects of increased margin per head and an increase in volume led to higher profitability as compared to 2015.
Lower average debt balances in 2017 and 2016 led to a 49% decline in interest expense in 2017 as compared to 2016 and a 22% decline in interest expense in 2016 as compared to 2015. 
Corporate and Other Results
A summary of results of operations for corporate and other for the three years in the period ended December 31, 2017 is as follows (in thousands):
 
2017
 
2016
 
2015
 
 
 
 
 
 
Net revenues
$
62,847

 
$
88,590

 
$
78,122

 
 
 
 
 
 
Expenses:
 
 
 

 
 

Compensation and benefits
61,958

 
35,009

 
52,385

WilTel pension
2,957

 
2,989

 
50,836

Depreciation and amortization
5,178

 
3,619

 
3,744

Selling, general and other expenses
70,365

 
32,236

 
16,088

Total expenses
140,458

 
73,853

 
123,053

Income (loss) before income taxes and income (loss) related to associated companies
(77,611
)
 
14,737

 
(44,931
)
Income (loss) related to associated companies
(1,315
)
 
3,649

 
636

Income (loss) from continuing operations before income taxes
$
(78,926
)
 
$
18,386

 
$
(44,295
)
Net revenues of corporate and other primarily include realized and unrealized securities gains and interest income for investments held at the holding company. Net revenues for 2017 and 2016, respectively, include a $6.1 million and $65.6 million increase in a trading asset which is held at fair value. Net revenues for 2017 also include a $19.7 million realized security gain from an investment in a non-public security. Net revenues for 2015 include a realized security gain related to a recovery of $35.0 million of an investment in a non-public security that was sold and had been written off in prior years.
For the years ended December 31, 2017, 2016 and 2015, corporate compensation and benefits includes incentive bonus expense of $10.1 million, $7.6 million and $17.4 million, respectively. Share-based compensation expense was $20.9 million, $9.7 million and $14.6 million in 2017, 2016 and 2015, respectively. Compensation and benefits also increased in 2017 compared to 2016 as a result of the growth of our other investments.
Pursuant to the agreement to sell one of our former subsidiaries, WilTel Communications Group, LLC, the responsibility for WilTel’s defined benefit pension plan was retained by us. WilTel pension expense in 2015 includes a non-cash pension settlement charge of $40.7 million related to a voluntary lump sum offer to participants of the legacy plan. See Note 19 to our consolidated financial statements for further information.
Selling, general and other expenses for 2017 reflects the write-down of a note receivable of $20.0 million related to the prior sale of a subsidiary. Selling, general and other expenses also increased in 2017 compared to 2016 as a result of the growth of our other investments. Selling, general and other expenses for 2015 reflects the recovery of $20.1 million in insurance payments in respect of previously expensed legal fees.

34


Other Financial Services Businesses and Investments
A summary of results of operations for other financial services businesses and investments for the three years in the period ended December 31, 2017 is as follows (in thousands):
 
2017
 
2016
 
2015
 
 
 
 
 
 
Net revenues
$
191,810

 
$
(46,028
)
 
$
524,053

 
 
 
 
 
 
Expenses:
 
 
 

 
 

Compensation and benefits
41,484

 
53,569

 
35,054

Interest
38,517

 
33,771

 
9,404

Depreciation and amortization
9,484

 
13,697

 
8,176

Selling, general and other expenses
54,984

 
50,782

 
48,279

Total expenses
144,469

 
151,819

 
100,913

Income (loss) before income taxes and income (loss) related to associated companies
47,341

 
(197,847
)
 
423,140

Income (loss) related to associated companies
(81,490
)
 
124,508

 
81,688

Income (loss) from continuing operations before income taxes
$
(34,149
)
 
$
(73,339
)
 
$
504,828

Our other financial services businesses and investments include the consolidated results of Leucadia Asset Management fund managers, the returns on our investments in these funds, the consolidated results of Foursight Capital and Chrome Capital (vehicle finance), our share of the income of Berkadia, the results of our investment in FXCM and our share of the income of HomeFed.
Excluding the FXCM revenues discussed below, the net revenues in other financial services businesses and investments reflect revenues of $168.7 million, $8.6 million and $32.7 million for the years ended December 31, 2017, 2016 and 2015, respectively. The year-over-year increase in 2017 revenues as compared to 2016 primarily reflects greater returns on investments related to the Leucadia Asset Management businesses and at our 54 Madison real estate fund. The year-over-year decrease in 2016 compared to 2015 primarily reflects losses on investments recorded at market value related to the Leucadia Asset Management businesses partially offset by growth in our vehicle finance businesses and at our 54 Madison real estate fund.

All expense categories were impacted by the growth of our Leucadia Asset Management businesses and vehicle finance businesses in 2017 and 2016 as compared to the prior years. Selling, general and other expenses for 2015 also include $21.0 million of investment banking and advisory fees paid to Jefferies in connection with our entering into the agreement with FXCM, and which Jefferies recognized in net revenues.  These intercompany fees have been eliminated in our consolidated results. Income (losses) from continuing operations before income taxes related to our Leucadia Asset Management businesses totaled $27.0 million, $(109.9) million and $(32.6) million for 2017, 2016 and 2015, respectively. Income (losses) from continuing operations before income taxes at our Leucadia Asset Management businesses primarily reflect the continued build out of the businesses, as well as returns on investments recorded at market value.
For the years ended December 31, 2017, 2016 and 2015, income related to associated companies attributable to Berkadia was $93.8 million, $94.2 million and $78.1 million, respectively. Berkadia's results were impacted by reversals of mortgage service rights impairments of $35.9 million in 2016, and investment gains of $15.4 million in 2015, of which we then recorded our applicable share. As our share of profits from Berkadia are primarily taxed at the Leucadia level, the income discussed above is pre-tax. Income related to associated companies attributable to HomeFed was $7.7 million, $23.9 million and $3.6 million for the years ended December 31, 2017, 2016 and 2015, respectively. The increase in 2016 primarily reflects a reversal of HomeFed's deferred tax valuation allowance in 2016 as HomeFed concluded that it was more likely than not that they would have future taxable income sufficient to realize their net deferred tax asset.
As more fully discussed in Note 4 to our consolidated financial statements, on September 1, 2016, we amended the terms of our loan and associated rights. Among other changes, the amendments gave Leucadia a 50% voting interest in FXCM and we gained the ability to significantly influence FXCM through our seats on the board. As a result of the amendment, we have accounted for our equity interest in FXCM under the equity method of accounting since September 1, 2016. Net revenues include gains (losses) of $23.2 million during 2017 from our FXCM term loan and $(54.6) million and $491.3 million, respectively, during 2016 and 2015 from our FXCM term loan and related rights. This includes the component related to interest income, which is recorded within Principal transactions revenues. We also recorded income (losses), before impairment charges, related to our equity method investment in FXCM of $(47.4) million and $1.9 million during 2017 and 2016, respectively.

35



During February 2017, Global Brokerage Holdings and FXCM's U.S. subsidiary, FXCM U.S. settled complaints filed by the NFA and the CFTC against FXCM U.S. and certain of its principals relating to matters that occurred between 2010 and 2014. As part of the settlements, FXCM U.S. withdrew from business and sold FXCM U.S.'s customer accounts. FXCM also implemented a restructuring plan that included the termination of approximately 22% of its global workforce.

Based on the above February 2017 actions, we evaluated in the first quarter of 2017 whether our equity method investment was fully recoverable. We engaged an independent valuation firm to assist management in estimating the fair value of FXCM. Our estimate of fair value was based on a discounted cash flow and comparable public company analysis. The result of our analysis indicated that the estimated fair value of our equity interest in FXCM was lower than our carrying value by $130.2 million. We concluded based on the above regulatory actions, FXCM's restructuring plan, investor perception and declines in the trading price of Global Brokerage, Inc.'s ("Global Brokerage") common shares and convertible debt, that the decline in fair value of our equity interest was other than temporary. As such, we impaired our equity investment in FXCM in the first quarter of 2017 by $130.2 million.
Other Merchant Banking Businesses and Investments
A summary of results for other merchant banking businesses and investments for the three years in the period ended December 31, 2017 is as follows (in thousands):
 
2017
 
2016
 
2015
 
 
 
 
 
 
Net revenues
$
615,691

 
$
571,757

 
$
426,731

 
 
 
 
 
 
Expenses:
 
 
 

 
 

Cost of sales
280,952

 
337,039

 
329,359

Compensation and benefits
17,024

 
30,923

 
24,657

Interest
3,742

 
3,105

 
2,586

Depreciation and amortization
33,065

 
39,589

 
30,731

Selling, general and other expenses
38,096

 
129,808

 
79,421

Total expenses
372,879

 
540,464

 
466,754

Income (loss) before income taxes and income related to associated companies
242,812

 
31,293

 
(40,023
)
Income related to associated companies
7,904

 
26,441

 
27,957

Income (loss) from continuing operations before income taxes
$
250,716

 
$
57,734

 
$
(12,066
)

Our other merchant banking operations include our ownership of HRG shares, which is accounted for at fair value and impacts our results through its mark-to-market adjustments reflected in net revenues, and the consolidated results of Vitesse and JETX (oil and gas production and development) and Conwed and Idaho Timber (manufacturing companies). It also includes our equity investments in Garcadia (automobile dealerships), Linkem (fixed wireless broadband services in Italy) and Golden Queen (a gold and silver mining project). 

Net revenues include principal transactions related to unrealized gains (losses) of $64.8 million, $93.2 million and $(28.0) million for the years ended December 31, 2017, 2016 and 2015, respectively, from the change in value of our investment in HRG. We classify HRG as a trading asset for which the fair value option was elected and we reflect mark-to-market adjustments through Principal transactions revenues.
For the years ended December 31, 2017, 2016 and 2015, net revenues for manufacturing were $504.5 million (including the gain on the sale of Conwed of $178.2 million, net of working capital adjustments), $415.8 million and $392.1 million, respectively. 
Net revenues for the years ended December 31, 2017, 2016 and 2015 for our oil and gas production and development businesses were $45.2 million, $53.5 million and $54.1 million, respectively. As discussed further in Note 4 to our consolidated financial statements, Vitesse uses swaps and call and put options in order to reduce exposure to future oil price fluctuations. Net unrealized gains (losses) of $1.8 million, $(11.8) million and $7.4 million were recorded related to these derivatives in 2017, 2016 and 2015, respectively. JETX revenues during 2017 and 2016 were impacted by $(20.1) million and $9.6 million, respectively, of unrealized gains (losses) on a trading asset which is held at fair value.

36


The decrease in cost of sales for 2017 as compared to 2016 is primarily due to the sale of Conwed in the first quarter of 2017.
For the years ended December 31, 2017, 2016 and 2015, Selling, general and other expenses for manufacturing were $2.8 million, $9.2 million and $8.6 million, respectively. Selling, general and other expenses for our oil and gas production and development businesses were $35.3 million, $109.1 million and $49.8 million in 2017, 2016 and 2015, respectively. Total selling, general and other expenses decreased $91.7 million in 2017 as compared to 2016, primarily reflecting lower costs for our oil and gas production and development businesses and the sale of Conwed in early 2017. Selling, general and other expenses for our oil and gas production and development businesses include impairment charges of $10.1 million, $63.8 million and $20.3 million recorded by JETX in 2017, 2016 and 2015, respectively. The 2017 impairment charge related to the write-off of the remaining Houston County acreage due to the decision made in 2017 to focus on JETX's other higher returning acreage. The 2016 impairment charge primarily related to decisions made by JETX in the third quarter to curtail development of both its southern acreage in the East Eagle Ford and its Houston County acreage. A $55.0 million impairment charge was then recorded for the difference between the carrying value of that acreage and the estimated net realizable value. The 2016 impairment also included the write-down of certain JETX leases that would not benefit its business going forward. The 2015 impairment charge related to the write-down of JETX oil field assets in Houston County to fair value.
Depreciation and amortization for the oil and gas production and development businesses were $29.9 million, $30.4 million and $25.1 million in 2017, 2016 and 2015, respectively. The significant increase in 2017 and 2016 is due to increased production and additional wells compared to 2015.
Income related to associated companies primarily relates to our investments in Garcadia and Linkem. For the years ended December 31, 2017, 2016 and 2015, income related to Garcadia was $48.2 million, $52.3 million and $53.2 million, respectively, and losses related to Linkem were $32.6 million, $22.9 million and $15.6 million, respectively.
Pre-tax income for 2017 includes $208.0 million from manufacturing, including the gain on the sale of Conwed of $178.2 million (including working capital adjustments), $7.9 million of income related to associated companies and $64.8 million related to our investment in HRG, offset partially by pre-tax losses from the oil and gas production and development businesses of $26.0 million. Pre-tax income for 2016 includes $93.2 million related to our investment in HRG, $39.8 million from manufacturing and $26.4 million of income related to associated companies, offset by pre-tax losses for the oil and gas production and development businesses of $90.8 million. Pre-tax losses for 2015 includes losses of $28.0 million related to our investment in HRG and pre-tax losses for the oil and gas production and development businesses of $31.9 million, partially offset by $31.1 million of income from manufacturing and $28.0 million of income related to associated companies.
Parent Company Interest
Parent company interest totaled $58.9 million, $58.9 million and $87.2 million for 2017, 2016 and 2015, respectively. The decline in interest expense in 2016 as compared to 2015 is primarily due to the repayment of our 8.125% Senior Notes in September 2015.
Income Taxes
On December 22, 2017, the Tax Cuts and Jobs Act (the "Tax Act") was enacted. The Tax Act is one of the most comprehensive changes in the U.S. corporate income tax since 1986 and certain provisions are complex in their application. The Tax Act revises the U.S. corporate income tax by, among other things, lowering the corporate income tax rate from 35% to 21%, adopting a territorial income tax system, and imposing a transition tax on unremitted earnings of foreign subsidiaries. In connection with our initial analysis, we have recorded a discrete tax expense of $450.5 million as a provisional estimate of the impact of the Tax Act during 2017. This provisional estimate primarily consists of a $415.0 million expense related to the revaluation of our deferred tax asset and a $35.5 million expense related to the deemed repatriation of foreign earnings.
For the year ended December 31, 2017, our provision for income taxes was $761.0 million, representing an effective tax rate of about 75%. Our 2017 provision was impacted by a non-cash $450.5 million charge related to the impact of tax reform. This charge increased our effective rate by 44%. Additionally, our 2017 provision was reduced by a $31.9 million benefit resulting from the repatriation of Jefferies earnings from certain of its foreign subsidiaries, along with their associated foreign tax credits. This benefit reduced our effective tax rate for 2017 by approximately 3%.
For the year ended December 31, 2016, our provision for income taxes was $122.1 million, representing an effective tax rate of about 39%. Our 2016 provision was increased by a $24.9 million charge related to previously issued stock awards, which increased our effective rate by 8%. The majority of the awards expired unexercised during the first quarter of 2016. The tax deductions associated with the remainder of the awards was less than the compensation cost recognized for financial reporting purposes.

37


For the year ended December 31, 2015, our provision for income taxes was $109.9 million, representing an effective tax rate of about 31%. Our 2015 provision was reduced by $10.7 million, lowering our effective rate by 3%, related to benefits recorded for certain state and local net operating loss carryforwards, which are more likely than not to be realized in the future.
Discontinued Operations
Our gain on disposal from discontinued operations, net of tax totaled $5.1 million in 2015. This gain primarily relates to additional consideration received related to the 2012 sale of our small Caribbean-based telecommunications provider and a reversal of a legal reserve.  
For further information, see Note 28 to our consolidated financial statements.
Selected Balance Sheet Data

In addition to preparing our Consolidated Statements of Financial Condition in accordance with accounting principles generally accepted in the United States of America (“GAAP”), we also review the tangible capital associated with each of our businesses and investments, which is a non-GAAP presentation and may not be comparable to similar non-GAAP presentations used by other companies. We believe that this information is useful to investors as it allows them to view our businesses and investments through the eyes of management while facilitating a comparison across historical periods. We define tangible capital as Total Leucadia National Corporation shareholders' equity less Intangible assets, net and goodwill.


38


The tables below reconcile tangible capital to our GAAP balance sheet (in thousands):
 
December 31, 2017
 
Jefferies
 
National Beef
 
Other Financial Services Businesses and Investments
 
Other Merchant Banking Businesses and Investments
 
Corporate liquidity and other assets, net of Corporate liabilities
 
Inter-company Eliminations
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
5,164,492

 
$
18,516

 
$
13,681

 
$
29,609

 
$
49,182

 
$

 
$
5,275,480

Cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations
578,014

 

 

 

 

 

 
578,014

Financial instruments owned
13,998,125

 
2,880

 
454,846

 
805,926

 
967,514

 

 
16,229,291

Investments in managed funds
195,227

 

 
324,460

 

 
50,259

 

 
569,946

Loans to and investments in associated companies
682,790

 

 
715,892

 
476,284

 
191,863

 

 
2,066,829

Securities borrowed
7,721,803

 

 

 

 

 

 
7,721,803

Securities purchased under agreements to resell
3,689,559

 

 

 

 

 

 
3,689,559

Receivables
4,459,827

 
201,675

 
677,211

 
47,979

 
32,323

 

 
5,419,015

Property, equipment and leasehold improvements, net
297,750

 
401,148

 
2,681

 
18,771

 
30,053

 

 
750,403

Intangible assets, net and goodwill
1,899,093

 
554,541

 
1,561

 

 
7,985

 

 
2,463,180

Deferred tax asset, net
212,954

 

 

 

 
530,857

 

 
743,811

Other assets
676,098

 
281,779

 
79,993

 
547,728

 
146,500

 
(70,321
)
 
1,661,777

    Total Assets
39,575,732

 
1,460,539

 
2,270,325

 
1,926,297

 
2,006,536

 
(70,321
)
 
47,169,108

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
Long-term debt (1)
6,416,844

 
199,221

 
187,478

 
93,219

 
989,021

 

 
7,885,783

Other liabilities
27,514,235

 
332,111

 
656,996

 
34,710

 
125,022

 
(70,321
)
 
28,592,753

  Total liabilities
33,931,079

 
531,332

 
844,474

 
127,929

 
1,114,043

 
(70,321
)
 
36,478,536

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Redeemable noncontrolling interests

 
412,128

 

 
13,653

 
812

 

 
426,593

Mandatorily redeemable convertible preferred shares

 

 

 

 
125,000

 

 
125,000

Noncontrolling interests
737

 

 
1,382

 
30,525

 
378

 

 
33,022

Total Leucadia National Corporation shareholders' equity
$
5,643,916

 
$
517,079

 
$
1,424,469

 
$
1,754,190

 
$
766,303

 
$

 
$
10,105,957

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reconciliation to Tangible Capital
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Leucadia National Corporation shareholders' equity
$
5,643,916

 
$
517,079

 
$
1,424,469

 
$
1,754,190

 
$
766,303

 
$

 
$
10,105,957

Less: Intangible assets, net and goodwill
(1,899,093
)
 
(554,541
)
 
(1,561
)
 

 
(7,985
)
 

 
(2,463,180
)
Tangible Capital, a non-GAAP measure
$
3,744,823

 
$
(37,462
)
 
$
1,422,908

 
$
1,754,190

 
$
758,318

 
$

 
$
7,642,777


(1) Long-term debt within Other financial services businesses and investments of $187.5 million at December 31, 2017, includes $170.5 million for Foursight Capital and $17.0 million for Chrome Capital. Long-term debt within Other merchant banking businesses and investments of $93.2 million at December 31, 2017, includes $53.4 million for our real estate associated with the Garcadia investment and $39.8 million for Vitesse.

39


 
December 31, 2016
 
Jefferies
 
National Beef
 
Other Financial Services Businesses and Investments (1)
 
Other Merchant Banking Businesses and Investments
 
Corporate liquidity and other assets, net of Corporate liabilities
 
Inter-company Eliminations
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
3,529,457

 
$
37,702

 
$
41,165

 
$
45,151

 
$
154,083

 
$

 
$
3,807,558

Cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations
857,337

 

 

 

 

 

 
857,337

Financial instruments owned
13,809,512

 
1,906

 
188,976

 
761,249

 
524,643

 

 
15,286,286

Investments in managed funds
186,508

 

 
301,171

 

 
27,639

 

 
515,318

Loans to and investments in associated companies
653,872

 

 
985,780

 
451,117

 
34,329

 

 
2,125,098

Securities borrowed
7,743,562

 

 

 

 

 

 
7,743,562

Securities purchased under agreements to resell
3,862,488

 

 

 

 

 

 
3,862,488

Receivables
3,163,171

 
179,313

 
938,254

 
47,761

 
96,679

 

 
4,425,178

Property, equipment and leasehold improvements, net
265,553

 
385,599

 
4,551

 
31,351

 
22,188

 

 
709,242

Intangible assets, net and goodwill
1,903,335

 
599,794

 
10,549

 

 

 

 
2,513,678

Deferred tax asset, net
337,580

 

 

 

 
1,124,235

 

 
1,461,815

Assets held for sale

 

 

 
128,083

 

 

 
128,083

Other assets
679,721

 
294,003

 
117,274

 
563,905

 
63,442

 
(82,681
)
 
1,635,664

    Total Assets
36,992,096

 
1,498,317

 
2,587,720

 
2,028,617

 
2,047,238

 
(82,681
)
 
45,071,307

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 

Long-term debt (2)
5,483,331

 
276,341

 
545,528

 
87,352

 
987,891

 

 
7,380,443

Other liabilities
26,090,308

 
270,184

 
351,505

 
64,315

 
231,775

 
(82,681
)
 
26,925,406

  Total liabilities