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Section 1: 10-Q (LEUCADIA NATIONAL CORPORATION 1ST QTR. 2018 FORM 10-Q)

Document


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
__________
FORM 10-Q
 
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2018
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
(State or other jurisdiction of
13-2615557
(I.R.S. Employer
incorporation or organization)
Identification Number)
 
 
520 Madison Avenue, New York, New York
(Address of principal executive offices)
10022
(Zip Code)
(212) 460-1900
(Registrant’s telephone number, including area code)

N/A
(Former name, former address and former fiscal year, if changed since last report)
______________________

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 o

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 o

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. (Check one):
Large accelerated filer  x
Accelerated filer o
Non-accelerated filer    o
 
 
(Do not check if a smaller reporting company)
Smaller reporting company  o
Emerging growth company  o
 
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. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x

The number of shares outstanding of each of the issuer’s classes of common stock at May 1, 2018 was 344,540,975.




PART I. FINANCIAL INFORMATION

Item I. Financial Statements.
 
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition
March 31, 2018 and December 31, 2017
(Dollars in thousands, except par value)
(Unaudited)
 
March 31,
 
December 31,
 
2018
 
2017
ASSETS
 
 
 
Cash and cash equivalents
$
5,144,625

 
$
5,275,480

Cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations
802,693

 
578,014

Financial instruments owned, including securities pledged of $10,861,294 and $10,842,051:
 

 
 

Trading assets, at fair value
17,346,648

 
16,082,676

Available for sale securities
690,745

 
716,561

Total financial instruments owned
18,037,393


16,799,237

Loans to and investments in associated companies
2,233,070

 
2,066,829

Securities borrowed
7,300,171

 
7,721,803

Securities purchased under agreements to resell
2,983,945

 
3,689,559

Receivables
6,710,631

 
5,419,015

Property, equipment and leasehold improvements, net
754,668

 
750,403

Intangible assets, net and goodwill
2,450,957

 
2,463,180

Deferred tax asset, net
777,138

 
743,811

Other assets
1,806,203

 
1,661,777

Total assets (1)
$
49,001,494


$
47,169,108

 
 
 
 
LIABILITIES
 

 
 

Short-term borrowings
$
468,046

 
$
436,215

Trading liabilities, at fair value
9,992,014

 
8,454,965

Securities loaned
2,372,473

 
2,843,911

Securities sold under agreements to repurchase
8,250,339

 
8,660,511

Other secured financings
1,254,893

 
1,029,485

Payables, expense accruals and other liabilities
7,336,062

 
7,167,666

Long-term debt
8,499,724

 
7,885,783

Total liabilities (1)
38,173,551


36,478,536

 
 
 
 
Commitments and contingencies


 


 
 
 
 
MEZZANINE EQUITY
 

 
 

Redeemable noncontrolling interests
414,815

 
426,593

Mandatorily redeemable convertible preferred shares
125,000

 
125,000

 
 
 
 
EQUITY
 

 
 

Common shares, par value $1 per share, authorized 600,000,000 shares; 357,215,901 and 356,227,038 shares issued and outstanding, after deducting 59,577,117 and 60,165,980 shares held in treasury
357,216

 
356,227

Additional paid-in capital
4,711,218

 
4,676,038

Accumulated other comprehensive income
357,317

 
372,724

Retained earnings
4,833,329

 
4,700,968

Total Leucadia National Corporation shareholders’ equity
10,259,080


10,105,957

Noncontrolling interests
29,048

 
33,022

Total equity
10,288,128


10,138,979

 
 
 
 
Total
$
49,001,494

 
$
47,169,108



(1)
Total assets include assets related to variable interest entities of $595.6 million and $382.9 million at March 31, 2018 and December 31, 2017, respectively, and Total liabilities include liabilities related to variable interest entities of $1,251.8 million and $1,031.0 million at March 31, 2018 and December 31, 2017, respectively. See Note 8 for additional information related to variable interest entities.

See notes to interim consolidated financial statements.

2



LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For the periods ended March 31, 2018 and 2017
(In thousands, except per share amounts)
(Unaudited)
 
 
For the Three Months Ended March 31,
 
 
 
 
2018
 
2017
Revenues:
 
 
 
 
Beef processing services
 
$
1,781,920

 
$
1,559,023

Commissions and other fees
 
147,902

 
145,822

Principal transactions
 
145,663

 
416,403

Investment banking
 
439,991

 
408,021

Interest income
 
275,290

 
223,630

Other
 
155,703

 
327,470

Total revenues
 
2,946,469

 
3,080,369

Interest expense of Jefferies
 
265,676

 
212,387

Net revenues
 
2,680,793

 
2,867,982

 
 
 
 
 
Expenses:
 
 

 
 

Cost of sales
 
1,752,711

 
1,533,094

Compensation and benefits
 
499,866

 
503,327

Floor brokerage and clearing fees
 
42,176

 
45,858

Interest expense
 
23,607

 
27,384

Depreciation and amortization
 
53,679

 
49,510

Selling, general and other expenses
 
234,200

 
182,138

Total expenses
 
2,606,239

 
2,341,311

 
 
 
 
 
Income before income taxes and income (loss) related to associated companies
 
74,554

 
526,671

Income (loss) related to associated companies
 
32,100

 
(128,574
)
Income before income taxes
 
106,654

 
398,097

Income tax provision (benefit)
 
(32,495
)
 
104,174

Net income
 
139,149

 
293,923

Net loss attributable to the noncontrolling interests
 
1,344

 
523

Net income attributable to the redeemable noncontrolling interests
 
(14,796
)
 
(12,022
)
Preferred stock dividends
 
(1,172
)
 
(1,016
)
 
 
 

 
 

Net income attributable to Leucadia National Corporation common shareholders
 
$
124,525

 
$
281,408

 
 
 
 
 
Basic earnings per common share attributable to Leucadia National Corporation common shareholders:
 
 
 
 
Net income
 
$
0.34

 
$
0.76

 
 
 
 
 
Diluted earnings per common share attributable to Leucadia National Corporation common shareholders:
 
 
 
 
Net income
 
$
0.34

 
$
0.75

 
 
 
 
 
Dividends per common share
 
$
0.1000

 
$
0.0625

 
 
 
 
 










See notes to interim consolidated financial statements.

3



LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
For the periods ended March 31, 2018 and 2017
(In thousands)
(Unaudited)
 
For the Three Months Ended March 31,
 
 
2018
 
2017
 
 
 
 
Net income
$
139,149

 
$
293,923

Other comprehensive income (loss):
 

 
 

Net unrealized holding gains (losses) on investments arising during the period, net of income tax provision (benefit) of $(370) and $5,907
(1,226
)
 
10,143

Less: reclassification adjustment for net (gains) losses included in net income (loss), net of income tax provision (benefit) of $(5) and $(11)
15

 
18

Net change in unrealized holding gains (losses) on investments, net of income tax provision (benefit) of $(365) and $5,918
(1,211
)
 
10,161

 
 
 
 
Net unrealized foreign exchange gains (losses) arising during the period, net of income tax provision (benefit) of $1,926 and $1,511
17,903

 
(18
)
Less: reclassification adjustment for foreign exchange (gains) losses included in net income (loss), net of income tax provision (benefit) of $0 and $1,097

 
5,290

Net change in unrealized foreign exchange gains (losses), net of income tax provision (benefit) of $1,926 and $414
17,903

 
5,272

 
 
 
 
Net change in unrealized instrument specific credit risk gains (losses), net of income tax provision (benefit) of $(4,634) and $(6,345)
(11,569
)
 
(9,695
)
 
 
 
 
Net change in unrealized cash flow hedges gains (losses), net of income tax provision (benefit) of $1,234 and $0
1,248

 

 
 
 
 
Reclassification adjustment for pension (gains) losses included in net income (loss), net of income tax provision (benefit) of $(151) and $(1,435)
5,806

 
(798
)
 
 
 
 
Other comprehensive income, net of income taxes
12,177

 
4,940

 
 
 
 
Comprehensive income
151,326

 
298,863

Comprehensive loss attributable to the noncontrolling interests
1,344

 
523

Comprehensive income attributable to the redeemable noncontrolling interests
(14,796
)
 
(12,022
)
Preferred stock dividends
(1,172
)
 
(1,016
)
 
 
 
 
Comprehensive income attributable to Leucadia National Corporation common shareholders
$
136,702

 
$
286,348


















See notes to interim consolidated financial statements.

4



LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the three months ended March 31, 2018 and 2017
(In thousands)
(Unaudited)
 
2018
 
2017
Net cash flows from operating activities:
 
 
 
Net income
$
139,149

 
$
293,923

Adjustments to reconcile net income to net cash used for operations:
 

 
 

Deferred income tax provision (benefit)
(28,494
)
 
99,357

Depreciation and amortization of property, equipment and leasehold improvements
38,709

 
34,482

Other amortization
3,385

 
3,541

Share-based compensation
12,431

 
9,983

Provision for doubtful accounts
11,851

 
9,517

(Income) loss related to associated companies
(37,705
)
 
102,311

Distributions from associated companies
26,546

 
14,040

Net (income) losses related to property and equipment, and other assets
7,997

 
(29
)
Gain on sale of subsidiary

 
(179,894
)
Net change in:
 
 
 
Securities deposited with clearing and depository organizations
64,861

 
13

Trading assets
(1,161,658
)
 
323,477

Securities borrowed
427,310

 
856,236

Securities purchased under agreements to resell
716,157

 
(609,225
)
Receivables from brokers, dealers and clearing organizations
(1,320,380
)
 
(807,458
)
Receivables from customers of securities operations
(37,552
)
 
(341,347
)
Other receivables
33,048

 
(35,160
)
Other assets
(134,918
)
 
(174,512
)
Trading liabilities
1,521,136

 
381,118

Securities loaned
(476,725
)
 
(295,666
)
Securities sold under agreements to repurchase
(418,052
)
 
525,137

Payables to brokers, dealers and clearing organizations
812,757

 
(329,027
)
Payables to customers of securities operations
222,603

 
114,834

Trade payables, expense accruals and other liabilities
(794,065
)
 
(317,806
)
Other
(33,644
)
 
(20,164
)
Net cash used for operating activities
(405,253
)

(342,319
)
 
 
 
 
Net cash flows from investing activities:
 

 
 

Acquisitions of property, equipment and leasehold improvements, and other assets
(59,558
)
 
(46,985
)
Proceeds from disposals of property and equipment, and other assets
4,277

 
17,288

Proceeds from sale of subsidiary, net of expenses and cash of operations sold

 
291,425

Advances on notes, loans and other receivables

 
(25,063
)
Collections on notes, loans and other receivables
8,197

 
88,608

Loans to and investments in associated companies
(1,790,110
)
 
(1,227,838
)
Capital distributions and loan repayments from associated companies
1,643,665

 
1,143,541

Purchases of investments (other than short-term)
(653,392
)
 
(383,934
)
Proceeds from maturities of investments
293,550

 
52,335

Proceeds from sales of investments
296,606

 
214,754

Other
4

 
1,250

Net cash provided by (used for) investing activities
(256,761
)

125,381

(continued)







See notes to interim consolidated financial statements.

5



LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows, continued
For the three months ended March 31, 2018 and 2017
(In thousands)
(Unaudited)
 
2018
 
2017
Net cash flows from financing activities:
 
 
 
Issuance of debt, net of issuance costs
$
1,541,116

 
$
880,493

Other changes in short-term borrowings, net

 
(107,113
)
Repayment of debt
(856,311
)
 
(55,405
)
Net change in other secured financings
225,020

 
(189,518
)
Net change in bank overdrafts
2,360

 
4,195

Contributions from noncontrolling interests
47

 
18,777

Purchase of common shares for treasury
(2,700
)
 
(3,455
)
Dividends paid
(35,990
)
 
(22,710
)
Other
966

 
441

Net cash provided by financing activities
874,508

 
525,705

 
 
 
 
Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash
2,583

 
(550
)
 
 
 
 
Change in cash classified as assets held for sale

 
(3,136
)
 
 
 
 
Net increase in cash, cash equivalents and restricted cash
215,077

 
305,081

 
 

 
 

Cash, cash equivalents and restricted cash at January 1,
5,774,505

 
4,597,113

 
 

 
 

Cash, cash equivalents and restricted cash at March 31,
$
5,989,582

 
$
4,902,194

 
 
 
 

The following presents our cash, cash equivalents and restricted cash by category within the Consolidated Statements of Financial Condition to the total of the same amounts in the Consolidated Statements of Cash Flows above (in thousands):
 
March 31, 2018
 
March 31, 2017
Cash and cash equivalents
$
5,144,625

 
$
4,261,427

Cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations
767,824

 
605,433

Other assets
77,133

 
35,334

Total cash, cash equivalents and restricted cash
$
5,989,582

 
$
4,902,194

















See notes to interim consolidated financial statements.

6



LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Equity
For the three months ended March 31, 2018 and 2017
(In thousands, except par value and per share amounts)
(Unaudited)

 
Leucadia National Corporation Common Shareholders
 
 
 
 
 
Common
Shares
$1 Par
Value
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained
Earnings
 
Subtotal
 
Noncontrolling
Interests
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2017
$
359,425

 
$
4,812,587

 
$
310,697

 
$
4,645,391

 
$
10,128,100

 
$
175,549

 
$
10,303,649

Net income
 

 
 

 
 

 
281,408

 
281,408

 
(523
)
 
280,885

Other comprehensive income, net of taxes
 

 
 

 
4,940

 
 

 
4,940

 
 

 
4,940

Contributions from noncontrolling interests
 

 
 

 
 

 
 

 

 
18,777

 
18,777

Distributions to noncontrolling interests
 

 
 

 
 

 
 

 

 
(179
)
 
(179
)
Change in interest in consolidated subsidiary
 

 
36

 
 

 
 

 
36

 
(36
)
 

Share-based compensation expense
 

 
9,983

 
 

 
 

 
9,983

 
 

 
9,983

Change in fair value of redeemable noncontrolling interests
 

 
(1,038
)
 
 

 
 

 
(1,038
)
 
 

 
(1,038
)
Purchase of common shares for treasury
(147
)
 
(3,308
)
 
 

 
 

 
(3,455
)
 
 

 
(3,455
)
Dividends ($.0625 per common share)
 

 
 

 
 

 
(23,375
)
 
(23,375
)
 
 

 
(23,375
)
Other
538

 
1,021

 
 

 
 

 
1,559

 


 
1,559

Balance, March 31, 2017
$
359,816


$
4,819,281


$
315,637


$
4,903,424


$
10,398,158


$
193,588


$
10,591,746

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2018
$
356,227

 
$
4,676,038

 
$
372,724

 
$
4,700,968

 
$
10,105,957

 
$
33,022

 
$
10,138,979

Cumulative effect of the adoption of accounting standards
 
 
 
 
(27,584
)
 
45,396

 
17,812

 
 

 
17,812

Balance, January 1, 2018, as adjusted
356,227

 
4,676,038

 
345,140

 
4,746,364

 
10,123,769

 
33,022

 
10,156,791

Net income
 

 
 

 
 

 
124,525

 
124,525

 
(1,344
)
 
123,181

Other comprehensive income, net of taxes
 

 
 

 
12,177

 
 

 
12,177

 
 

 
12,177

Change in interest in consolidated subsidiary
 

 
2,677

 
 

 
 

 
2,677

 
(2,677
)
 

Share-based compensation expense
 

 
12,431

 
 

 
 

 
12,431

 
 

 
12,431

Change in fair value of redeemable noncontrolling interests
 

 
17,067

 
 

 
 

 
17,067

 
 

 
17,067

Purchase of common shares for treasury
(100
)
 
(2,600
)
 
 

 
 

 
(2,700
)
 
 

 
(2,700
)
Dividends ($.10 per common share)
 

 
 

 
 

 
(37,560
)
 
(37,560
)
 
 

 
(37,560
)
Other
1,089

 
5,605

 
 

 
 

 
6,694

 
47

 
6,741

Balance, March 31, 2018
$
357,216


$
4,711,218


$
357,317


$
4,833,329


$
10,259,080


$
29,048


$
10,288,128














See notes to interim consolidated financial statements.

7



LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements


Note 1.  Nature of Operations

Leucadia National Corporation (“Leucadia” or the “Company”) is a diversified financial services company engaged in investment banking and capital markets, merchant banking and the early stages of building an alternative asset management platform. Our financial services businesses and subsidiaries include Jefferies (investment banking and capital markets), Leucadia Asset Management (alternative asset management), Berkadia (commercial mortgage banking, investment sales and servicing), HomeFed (real estate), FXCM (provider of online foreign exchange trading services) and Foursight Capital (vehicle finance).
Our Leucadia Merchant Banking portfolio includes interests in NYSE-listed HRG Group (consumer products), National Beef (beef processing), Vitesse Energy Finance and JETX Energy (oil and gas), Linkem (fixed wireless broadband services in Italy), Idaho Timber (manufacturing) and Golden Queen (gold and silver mining). From time to time, we evaluate the retention and disposition of holdings within our merchant banking portfolio and changes in the mix of these holdings should be expected.
We currently own 78.9% of National Beef Packing Company. 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. In April 2018, we entered into a definitive agreement to sell 48% of National Beef to Marfrig Global Foods S.A. ("Marfrig") for approximately $900 million in cash, reducing our ownership in National Beef to 31%. The estimated pre-tax gain that will be recognized as a result of this transaction is approximately $800 million to $850 million. We expect to receive an additional estimated $150 million in distributions prior to the closing, representing recent profits plus a true-up to the debt amount set in the enterprise valuation associated with the sale. Marfrig has also agreed to acquire a further 3% of National Beef from other equity owners and will own 51% of National Beef. Leucadia will continue to designate two board members and have a series of other rights in respect of our continuing equity interest, with a lockup period of five years and thereafter fair market value liquidity protections. The transaction is subject to limited conditions and is expected to close in the second quarter of 2018. Once the transaction closes, we will deconsolidate our investment in National Beef and account for our remaining interest under the equity method of accounting.

We currently own approximately 75% of Garcadia, an equity method joint venture that owns and operates 28 automobile dealerships in California, Texas, Iowa and Michigan. In April 2018, Leucadia entered into a letter agreement to sell 100% of its equity interests in Garcadia and its associated real estate to our current partners, the Garff family. At closing, we will receive $435 million in cash and $50 million in senior preferred equity of an entity that will own all of the automobile dealerships associated broadly with the Ken Garff Automotive Group, including all of the Garcadia dealerships. At or prior to closing, we will pay approximately $53 million to retire the mortgage debt on the real estate to be sold. In addition, we agreed to pay at closing an amount equal to $5.75 million to the Garff family representing the satisfaction of a pre-existing obligation. The estimated pre-tax gain that will be recognized as a result of this transaction is approximately $220 million. This transaction is expected to close in the third quarter of 2018.

Vitesse Energy, LLC ("Vitesse Energy Finance") is our consolidated subsidiary that acquires and invests in non-operated working and royalty oil and gas interests in the Bakken Shale oil field in North Dakota and Montana, as well as the Denver-Julesburg Basin in Wyoming. These non-operated interests represent Vitesse Energy Finance’s share of mineral rights associated with specified acreage. As operators convert undeveloped portions of this acreage into flowing horizontal wells, our interests in the mineral rights are essentially converted into interests in the cash flows associated with the wells. In April 2018, Vitesse Energy Finance acquired a package of non-operated Bakken assets from an institutional seller for $190 million in cash, of which approximately $145 million was funded as equity by Leucadia and the balance was drawn under Vitesse Energy Finance’s credit line. The assets purchased include interests in mineral rights associated with future oil and gas development, as well as interests in existing cash flows from producing wells through revenue sharing arrangements.
 
Leucadia Asset Management ("LAM") supports and develops focused alternative asset management businesses led by distinct management teams. We are patiently developing this business over time, and changes in the platforms and structure should be expected. LAM currently includes Folger Hill Asset Management LLC ("Folger Hill"), a multi-manager discretionary long/short equity hedge fund platform. In April 2018, we agreed with Schonfeld Strategic Advisors LLC (“Schonfeld”) to combine the fundamental equities businesses of Folger Hill and Schonfeld under the Schonfeld brand. Post-closing, Leucadia will own a significant revenue share interest in Schonfeld’s global fundamental equities business.

Note 2.  Basis of Presentation and Significant Accounting Policies

Our unaudited interim consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all information and footnotes which are normally included in our Annual Report on Form 10-K. 

8



These financial statements reflect all adjustments (consisting of normal recurring items or items discussed herein) that management believes are necessary to fairly state results for the interim periods presented. Results of operations for interim periods are not necessarily indicative of annual results of operations. For a detailed discussion about the Company’s significant accounting policies, see Note 2, Significant Accounting Policies, included in our Annual Report on Form 10-K for the year ended December 31, 2017 ("2017 10-K").

The preparation of these financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”) requires us to make estimates and assumptions that affect the reported amounts in the financial statements and disclosures of contingent assets and liabilities. On an on-going basis, we evaluate all of these estimates and assumptions. The most important of these estimates and assumptions relate to fair value measurements, compensation and benefits, asset impairment, the ability to realize deferred tax assets, the recognition and measurement of uncertain tax positions and contingencies. Although these and other estimates and assumptions are based on the best available information, actual results could be different from these estimates.

Jefferies has a November 30 year-end, which it retains for standalone reporting purposes. We reflect Jefferies in our consolidated financial statements utilizing a one month lag. We have reviewed Jefferies business and internal operating results for the month of March 2018 for the purpose of evaluating whether financial statement disclosure or adjustments are required in this Quarterly Report on Form 10-Q, and we have concluded that no additional disclosures or adjustments are warranted.

During the three months ended March 31, 2018, other than the following, there were no significant updates made to the Company’s significant accounting policies. The accounting policy changes are attributable to the adoption of the Financial Accounting Standards Board (“FASB”) guidance on Revenue from Contracts with Customers (the "new revenue standard"). These revenue recognition policy updates are applied prospectively in our financial statements from January 1, 2018 forward using the modified retrospective approach. Reported financial information for the historical comparable period was not revised and continues to be reported under the accounting standards in effect during the historical periods.

Revenue Recognition Policies
Investment Banking Revenues:
Advisory fees from mergers and acquisitions engagements are recognized at a point in time when the related transaction is completed.
Expenses associated with investment banking advisory engagements are deferred only to the extent they are explicitly reimbursable by the client and the related revenue is recognized at a point in time. All other investment banking advisory related expenses, including expenses incurred related to restructuring advisory engagements, are expensed as incurred.
All investment banking expenses are recognized within their respective expense category on the Consolidated Statements of Operations and any expenses reimbursed by clients are recognized as Investment banking revenues.
Asset Management Fees:
Performance fee revenue is generally recognized only at the end of the performance period to the extent that the benchmark return has been met.
See Accounting Developments - Adopted Accounting Standards below and Note 17 for further information.

Changes to the Consolidated Statements of Operations

We have changed the presentation of our gains and losses generated from our capital invested in asset management funds. This was previously presented as Other revenues and is now presented within Principal transactions revenues. For the three months ended March 31, 2017, this resulted in a decrease to Principal transactions revenues of $0.1 million and an increase to Other revenues of $0.1 million.

Receivables

At March 31, 2018 and December 31, 2017, Receivables include receivables from brokers, dealers and clearing organizations of $3,959.3 million and $2,635.2 million, respectively, and receivables from customers of securities operations of $1,597.0 million and $1,563.8 million, respectively.


9



Payables, expense accruals and other liabilities

At March 31, 2018 and December 31, 2017, Payables, expense accruals and other liabilities include payables to brokers, dealers and clearing organizations of $3,045.7 million and $2,228.9 million, respectively, and payables to customers of securities operations of $2,886.6 million and $2,664.0 million, respectively.

Supplemental Cash Flow Information
 
For the Three Months Ended March 31,
 
 
2018
 
2017
Cash paid during the year for:
(In thousands)
Interest
$
322,769

 
$
248,211

Income tax payments (refunds), net
$
(1,918
)
 
$
2,728

Accounting Developments - Adopted Accounting Standards

Revenue Recognition.  In May 2014, the FASB issued new guidance that defines how companies report revenues from contracts with customers, and also requires enhanced disclosures. The core principle of guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. We adopted the guidance as of January 1, 2018 and recognized an increase of $17.8 million after-tax to beginning Retained earnings as the cumulative effect of adoption of accounting standards. The increase primarily relates to the recognition of $24.3 million of revenue previously deferred from the sale of real estate to HomeFed in 2014, offset by a decrease of $6.1 million related to Jefferies. For Jefferies, the impact of adoption primarily related to investment banking expenses that were deferred as of December 31, 2017 under the previously existing accounting guidance, which would have been expensed in prior periods under the new revenue standard and investment banking revenues that were previously recognized in prior periods, which would have been deferred as of December 31, 2017 under the new revenue standard. We elected to adopt the new guidance using a modified retrospective approach applied to contracts that were not completed as of January 1, 2018. Accordingly, the new revenue standard is applied prospectively in our financial statements from January 1, 2018 forward and reported financial information for historical comparable periods is not revised and continues to be reported under the accounting standards in effect during those historical periods.

The new revenue standard does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under other GAAP, and as a result, did not have an impact on the elements of our Consolidated Statements of Operations most closely associated with financial instruments, including Principal transactions revenues, Interest income and Interest expense. The new revenue standard primarily impacts Jefferies revenue recognition and presentation accounting policies as follows:

Investment Banking Revenues. Advisory fees from mergers and acquisitions engagements are recognized at a point in time when the related transaction is completed, as the performance obligation is to successfully broker a specific transaction.

Certain Capital Markets Revenues. Revenues associated with price stabilization activities as part of a securities underwriting were historically recognized as part of Investment banking revenues. Under the new revenue standard, revenues from these activities are recognized within Principal transactions revenues, as these revenues are not considered to be within the scope of the new standard.

• Investment Banking Advisory Expenses. Historically, expenses associated with investment banking advisory assignments were deferred until reimbursed by the client, the related fee revenue is recognized or the engagement is otherwise concluded. Under the new revenue standard, expenses are deferred only to the extent they are explicitly reimbursable by the client and the related revenue is recognized at a point in time. All other investment banking advisory related expenses, including expenses incurred related to restructuring assignments, are expensed as incurred.

Investment Banking Underwriting and Advisory Expenses. Expenses have historically been recorded net of client reimbursements and/or netted against revenues. Under the new revenue standard, all investment banking expenses will be recognized within their respective expense category in the Consolidated Statements of Operations and any expense reimbursements will be recognized as Investment banking revenues (i.e., expenses are no longer recorded net of client reimbursements and are not netted against revenues).


10



Asset Management Fees. In certain asset management fee arrangements, Jefferies and LAM receive performance-based fees, which vary with performance or, in certain cases, are earned when the return on assets under management exceed certain benchmark returns or other performance targets. Historically, performance fees have been accrued (or reversed) quarterly based on measuring performance to date versus any relevant benchmark return hurdles stated in the investment management agreement. Under the new revenue standard, performance fees are considered variable as they are subject to fluctuation (e.g., based on market performance) and/or are contingent on a future event during the measurement period (e.g., exceeding a specified benchmark index) and are recognized only to the extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty is resolved. Accordingly, performance fee revenue will generally be recognized only at the end of the performance period to the extent that the benchmark return has been met.

National Beef earns over 95% of its revenues through the sale of beef, pork and beef by-products. Agreements with customers for these sales typically specify the type and quantity of products to be delivered, the unit price of each product, the estimated delivery date, and credit and payment terms. The transaction price is generally fixed at the time of sale and revenue is recognized when the customer takes control of the product. The new guidance does not impact how revenue is recognized for this revenue stream.

There was no significant impact as a result of applying the new revenue standard to our consolidated financial statements for the three months ended March 31, 2018, except as it relates to the presentation of Jefferies investment banking expenses. The table below presents the impact of applying the new revenue recognition standard to the Consolidated Statement of Operations for the three months ended March 31, 2018 as a result of the change in presentation of investment banking expenses (in thousands):
 
As Reported
 
Impact of Adoption of Revenue Recognition Standard
 
Financial Results Prior to Adoption of Revenue Recognition Standard
Revenues:
 
 
 
 
 
Beef processing services
$
1,781,920

 
$

 
$
1,781,920

Commissions and other fees
147,902

 

 
147,902

Principal transactions
145,663

 

 
145,663

Investment banking
439,991

 
32,485

 
407,506

Interest income
275,290

 

 
275,290

Other
155,703

 

 
155,703

Total revenues
2,946,469

 
32,485

 
2,913,984

Interest expense of Jefferies
265,676

 

 
265,676

Net revenues
2,680,793

 
32,485

 
2,648,308

 
 
 
 
 
 
Expenses:
 

 
 

 
 

Cost of sales
1,752,711

 

 
1,752,711

Compensation and benefits
499,866

 

 
499,866

Floor brokerage and clearing fees
42,176

 

 
42,176

Interest expense
23,607

 

 
23,607

Depreciation and amortization
53,679

 

 
53,679

Selling, general and other expenses
234,200

 
32,485

 
201,715

Total expenses
2,606,239

 
32,485

 
2,573,754

 
 
 
 
 
 
Income before income taxes and income (loss) related to associated companies
$
74,554

 
$

 
$
74,554


Financial Instruments. In January 2016, the FASB issued new guidance that affects the accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. The guidance is effective for annual and interim periods beginning after December 15, 2017. We have adopted the new guidance as of January 1, 2018 with a cumulative effect increase to opening retained earnings of $27.6 million and a corresponding decrease to Accumulated other comprehensive income. The opening retained earnings adjustment is to recognize the unrealized gains we had for available for sale equity securities. Beginning in 2018, these available for sale equity securities are now reported as part of Trading assets,

11



at fair value within the Consolidated Statements of Financial Condition. Early adoption was permitted for the accounting guidance on financial liabilities under the fair value option and we adopted this guidance in the first quarter of 2016. The adoption of the guidance on financial liabilities under the fair value option did not have a material impact on our consolidated financial statements.

Retirement Benefits. In March 2017, the FASB issued new guidance for improving the presentation of net periodic pension costs in the statement of operations. The update also allows the service cost to be eligible for capitalization, when applicable. We adopted this guidance in the first quarter of 2018 and the adoption did not have a material impact on our consolidated financial statements. The adoption of this guidance resulted in the following adjustments to the Consolidated Statements of Operations for the three months ended March 31, 2017: a decrease of $0.9 million to Compensation and benefits expenses and an increase to Selling, general and other expenses of $0.9 million.

Cash Flow Classifications. In August 2016, the FASB issued new guidance to reduce the diversity in practice in how certain transactions are classified in the statement of cash flows. The guidance adds or clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows. The guidance is effective for annual and interim periods beginning after December 15, 2017. In November 2016, the FASB issued new guidance on restricted cash. The guidance requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. We adopted this guidance in the first quarter of 2018. Prior periods were retrospectively adjusted to conform to the current period presentation. The adoption of the guidance did not have a material impact on our Consolidated Statements of Cash Flows. Upon adoption, we recorded a decrease of $149.3 million in Net cash used for operating activities and an increase of $0.6 million in Net cash provided by (used for) investing activities for the three months ended March 31, 2017 related to reclassifying the changes in our restricted cash balance from operating and investing activities to the cash and cash equivalent balances within the Consolidated Statements of Cash Flows.

Compensation. In May 2017, the FASB issued new guidance providing clarity and reducing diversity in practice and cost and complexity when accounting for a change to the terms or conditions of a share-based payment award. We adopted this guidance in the first quarter of 2018 and the adoption did not have a material impact on our consolidated financial statements.

Accounting Developments - Accounting Standards to be Adopted in Future Periods

Leases. In February 2016, the FASB issued new guidance that affects the accounting and disclosure requirements for leases. The FASB requires the recognition of lease assets and lease liabilities on the statement of financial condition. The guidance is effective for annual and interim periods beginning after December 15, 2018. We are currently evaluating the impact this new guidance will have on our consolidated financial statements.

Financial Instruments - Credit Losses. In June 2016, the FASB issued new guidance for estimating credit losses on certain types of financial instruments by introducing an approach based on expected losses. The guidance is effective for annual and interim periods beginning after December 15, 2019. We are currently evaluating the impact this new guidance will have on our consolidated financial statements.

Goodwill. In January 2017, the FASB issued new guidance for simplifying goodwill impairment testing. The guidance is effective for annual and interim periods beginning after December 15, 2019 and early adoption is permitted. We do not believe the new guidance will have a material impact on our consolidated financial statements.

Derivatives and hedging. In August 2017, the FASB issued new guidance to improve the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities in its financial statements. The guidance is effective for annual and interim periods beginning after December 15, 2018 and early adoption is permitted. We are currently evaluating the impact of the new guidance on our consolidated financial statements.

12



Note 3.  Fair Value Disclosures

The following is a summary of our financial instruments, trading liabilities, short-term borrowings and long-term debt that are accounted for at fair value on a recurring basis, excluding Investments at fair value based on net asset value ("NAV") (within trading assets) of $668.2 million and $590.1 million at March 31, 2018 and December 31, 2017, respectively, by level within the fair value hierarchy (in thousands):
 
March 31, 2018
 
Level 1
 
Level 2
 
Level 3
 
Counterparty
and
Cash
Collateral
Netting (1)
 
Total
Assets:
 
 
 
 
 
 
 
 
 
Trading assets, at fair value:
 
 
 
 
 
 
 
 
 
Corporate equity securities
$
3,483,285

 
$
65,101

 
$
35,753

 
$

 
$
3,584,139

Corporate debt securities

 
2,865,547

 
26,103

 

 
2,891,650

Collateralized debt obligations and
collateralized loan obligations

 
144,505

 
38,613

 

 
183,118

U.S. government and federal agency securities
844,212

 
42,943

 

 

 
887,155

Municipal securities

 
713,643

 

 

 
713,643

Sovereign obligations
1,312,317

 
1,139,803

 

 

 
2,452,120

Residential mortgage-backed securities

 
2,357,081

 
21,762

 

 
2,378,843

Commercial mortgage-backed securities

 
505,552

 
15,103

 

 
520,655

Other asset-backed securities

 
286,459

 
51,288

 

 
337,747

Loans and other receivables

 
2,118,571

 
62,043

 

 
2,180,614

Derivatives (2)
17,110

 
2,549,843

 
4,712

 
(2,414,276
)
 
157,389

Investments at fair value

 

 
318,159

 

 
318,159

FXCM term loan

 

 
73,200

 

 
73,200

Total trading assets, excluding investments at fair value based on NAV
$
5,656,924


$
12,789,048


$
646,736


$
(2,414,276
)

$
16,678,432

 
 
 
 
 
 
 
 
 
 
Available for sale securities:
 

 
 

 
 

 
 

 
 

U.S. government securities
$
491,396

 
$

 
$

 
$

 
$
491,396

Residential mortgage-backed securities

 
140,358

 

 

 
140,358

Commercial mortgage-backed securities

 
20,960

 

 

 
20,960

Other asset-backed securities

 
38,031

 

 

 
38,031

Total available for sale securities
$
491,396


$
199,349


$


$


$
690,745

 
 
 
 
 
 
 
 
 
 
Liabilities:
 

 
 

 
 

 
 

 
 

Trading liabilities:
 

 
 

 
 

 
 

 
 

Corporate equity securities
$
2,096,743

 
$
6,592

 
$
61

 
$

 
$
2,103,396

Corporate debt securities

 
1,595,775

 
522

 

 
1,596,297

U.S. government and federal agency securities
1,398,020

 

 

 

 
1,398,020

Municipal securities

 
7,659

 

 

 
7,659

Sovereign obligations
1,208,396

 
923,899

 

 

 
2,132,295

Commercial mortgage-backed securities

 

 
35

 

 
35

Loans

 
1,861,278

 
10,323

 

 
1,871,601

Derivatives
16,395

 
3,510,080

 
11,594

 
(2,655,358
)
 
882,711

Total trading liabilities
$
4,719,554


$
7,905,283


$
22,535


$
(2,655,358
)

$
9,992,014

Long-term debt - structured notes
$

 
$
735,456

 
$

 
$

 
$
735,456


13



 
December 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
Counterparty
and
Cash
Collateral
Netting (1)
 
Total
Assets:
 
 
 
 
 
 
 
 
 
Trading assets, at fair value:
 
 
 
 
 
 
 
 
 
Corporate equity securities
$
2,975,463

 
$
60,300

 
$
22,270

 
$

 
$
3,058,033

Corporate debt securities

 
3,261,300

 
26,036

 

 
3,287,336

Collateralized debt obligations and
collateralized loan obligations

 
139,166

 
42,184

 

 
181,350

U.S. government and federal agency securities
1,269,230

 
39,443

 

 

 
1,308,673

Municipal securities

 
710,513

 

 

 
710,513

Sovereign obligations
1,381,552

 
1,035,907

 

 

 
2,417,459

Residential mortgage-backed securities

 
1,453,294

 
26,077

 

 
1,479,371

Commercial mortgage-backed securities

 
508,115

 
12,419

 

 
520,534

Other asset-backed securities

 
217,111

 
61,129

 

 
278,240

Loans and other receivables

 
1,620,581

 
47,304

 

 
1,667,885

Derivatives
165,396

 
3,323,278

 
9,295

 
(3,318,481
)
 
179,488

Investments at fair value

 
946

 
329,944

 

 
330,890

FXCM term loan

 

 
72,800

 

 
72,800

Total trading assets, excluding investments at fair value based on NAV
$
5,791,641


$
12,369,954


$
649,458


$
(3,318,481
)

$
15,492,572

 
 
 
 
 
 
 
 
 
 
Available for sale securities:
 

 
 

 
 

 
 

 
 

Corporate equity securities (3)
$
88,486

 
$

 
$

 
$

 
$
88,486

U.S. government securities
552,805

 

 

 

 
552,805

Residential mortgage-backed securities

 
34,561

 

 

 
34,561

Commercial mortgage-backed securities

 
5,870

 

 

 
5,870

Other asset-backed securities

 
34,839

 

 

 
34,839

Total available for sale securities
$
641,291


$
75,270


$


$


$
716,561

 
 
 
 
 
 
 
 
 
 
Liabilities:
 

 
 

 
 

 
 

 
 

Trading liabilities:
 

 
 

 
 

 
 

 
 

Corporate equity securities
$
1,721,267

 
$
32,122

 
$
48

 
$

 
$
1,753,437

Corporate debt securities

 
1,688,825

 
522

 

 
1,689,347

U.S. government and federal agency securities
1,430,737

 

 

 

 
1,430,737

Sovereign obligations
1,216,643

 
956,992

 

 

 
2,173,635

Commercial mortgage-backed securities

 

 
105

 

 
105

Loans

 
1,148,824

 
3,486

 

 
1,152,310

Derivatives
249,361

 
3,480,506

 
16,041

 
(3,490,514
)
 
255,394

Total trading liabilities
$
4,618,008


$
7,307,269


$
20,202


$
(3,490,514
)

$
8,454,965

Short-term borrowings
$

 
$
23,324

 
$

 
$

 
$
23,324

Long-term debt - structured notes
$

 
$
606,956

 
$

 
$

 
$
606,956


(1)
Represents counterparty and cash collateral netting across the levels of the fair value hierarchy for positions with the same counterparty.
(2)
During the three months ended March 31, 2018, Jefferies transferred from Level 1 to Level 2 $20.8 million of listed options included in Trading assets - Derivatives, which are measured based on broker quotes or mid-market valuations. There were no other material transfers between Level 1 and Level 2 for the three months ended March 31, 2018 and 2017.
(3)
As of January 1, 2018, the Company adopted the FASB's new guidance that affects the accounting for equity investments and the presentation and disclosure requirements for financial instruments. At March 31, 2018, equity investments are primarily classified as Trading assets, at fair value and the change in fair value of equity securities is now recognized through the Consolidated Statements of Operations. See Note 2 for additional information.


14



The following is a description of the valuation basis, including valuation techniques and inputs, used in measuring our financial assets and liabilities that are accounted for at fair value on a recurring basis:

Corporate Equity Securities

Exchange Traded Equity Securities:  Exchange traded equity securities are measured based on quoted closing exchange prices, which are generally obtained from external pricing services, and are categorized within Level 1 of the fair value hierarchy, otherwise they are categorized within Level 2 of the fair value hierarchy. To the extent these securities are actively traded, valuation adjustments are not applied.
Non-Exchange Traded Equity Securities:  Non-exchange traded equity securities are measured primarily using broker quotations, pricing data from external pricing services and prices observed from recently executed market transactions and are categorized within Level 2 of the fair value hierarchy. Where such information is not available, non-exchange traded equity securities are categorized within Level 3 of the fair value hierarchy and measured using valuation techniques involving quoted prices of or market data for comparable companies, similar company ratios and multiples (e.g., price/Earnings before interest, taxes, depreciation and amortization ("EBITDA"), price/book value), discounted cash flow analyses and transaction prices observed from subsequent financing or capital issuance by Jefferies. When using pricing data of comparable companies, judgment must be applied to adjust the pricing data to account for differences between the measured security and the comparable security (e.g., issuer market capitalization, yield, dividend rate, geographical concentration).
Equity Warrants:  Non-exchange traded equity warrants are measured primarily using pricing data from external pricing services, prices observed from recently executed market transactions and broker quotations and are categorized within Level 2 of the fair value hierarchy. Where such information is not available, non-exchange traded equity warrants are generally categorized within Level 3 of the fair value hierarchy and are measured using the Black-Scholes model with key inputs impacting the valuation including the underlying security price, implied volatility, dividend yield, interest rate curve, strike price and maturity date.

Corporate Debt Securities

Corporate Bonds:  Corporate bonds are measured primarily using pricing data from external pricing services and broker quotations, where available, prices observed from recently executed market transactions and bond spreads or credit default swap spreads of the issuer adjusted for basis differences between the swap curve and the bond curve. Corporate bonds measured using these valuation methods are categorized within Level 2 of the fair value hierarchy. If broker quotes, pricing data or spread data is not available, alternative valuation techniques are used including cash flow models incorporating interest rate curves, single name or index credit default swap curves for comparable issuers and recovery rate assumptions. Corporate bonds measured using alternative valuation techniques are categorized within Level 3 of the fair value hierarchy and are a limited portion of our corporate bonds.
High Yield Corporate and Convertible Bonds:  A significant portion of our high yield corporate and convertible bonds are categorized within Level 2 of the fair value hierarchy and are measured primarily using broker quotations and pricing data from external pricing services, where available, and prices observed from recently executed market transactions of institutional size. Where pricing data is less observable, valuations are categorized within Level 3 and are based on pending transactions involving the issuer or comparable issuers, prices implied from an issuer’s subsequent financing or recapitalization, models incorporating financial ratios and projected cash flows of the issuer and market prices for comparable issuers.

Collateralized Debt Obligations and Collateralized Loan Obligations

Collateralized Debt Obligations ("CDOs") and Collateralized Loan Obligations ("CLOs") are measured based on prices observed from recently executed market transactions of the same or similar security or based on valuations received from third party brokers or data providers and are categorized within Level 2 or Level 3 of the fair value hierarchy depending on the observability and significance of the pricing inputs. Valuation that is based on recently executed market transactions of similar securities incorporates additional review and analysis of pricing inputs and comparability criteria, including, but not limited to, collateral type, tranche type, rating, origination year, prepayment rates, default rates and loss severity.

U.S. Government and Federal Agency Securities

U.S. Treasury Securities:  U.S. Treasury securities are measured based on quoted market prices and categorized within Level 1 of the fair value hierarchy.
U.S. Agency Debt Securities:  Callable and non-callable U.S. agency debt securities are measured primarily based on quoted market prices obtained from external pricing services and are generally categorized within Level 1 or Level 2 of the fair value hierarchy.


15



Municipal Securities

Municipal securities are measured based on quoted prices obtained from external pricing services and are generally categorized within Level 2 of the fair value hierarchy.

Sovereign Obligations

Sovereign government obligations are measured based on quoted market prices obtained from external pricing services, where available, or recently executed independent transactions of comparable size. To the extent external price quotations are not available or recent transactions have not been observed, valuation techniques incorporating interest rate yield curves and country spreads for bonds of similar issuers, seniority and maturity are used to determine fair value of sovereign bonds or obligations. Sovereign government obligations are classified in Level 1 or Level 2 of the fair value hierarchy, primarily based on the country of issuance.

Residential Mortgage-Backed Securities

Agency Residential Mortgage-Backed Securities:  Agency residential mortgage-backed securities include mortgage pass-through securities (fixed and adjustable rate), collateralized mortgage obligations and principal-only securities and are generally measured using market price quotations from external pricing services and categorized within Level 2 of the fair value hierarchy.
Agency Residential Interest-Only and Inverse Interest-Only Securities:  The fair value is estimated using expected future cash flow techniques that incorporate prepayment models and other prepayment assumptions to amortize the underlying mortgage loan collateral. We use prices observed from recently executed transactions to develop market-clearing spread and yield curve assumptions. Valuation inputs with regard to the underlying collateral incorporate weighted average coupon, loan-to-value, credit scores, geographic location, maximum and average loan size, originator, servicer and weighted average loan age. Agency residential interest-only and inverse interest-only securities are categorized within Level 2 of the fair value hierarchy. We also use vendor data in developing our assumptions, as appropriate.
Non-Agency Residential Mortgage-Backed Securities:  The fair value of non-agency residential mortgage-backed securities is determined primarily using discounted cash flow methodologies and securities are categorized within Level 2 or Level 3 of the fair value hierarchy based on the observability and significance of the pricing inputs used. Performance attributes of the underlying mortgage loans are evaluated to estimate pricing inputs, such as prepayment rates, default rates and the severity of credit losses. Attributes of the underlying mortgage loans that affect the pricing inputs include, but are not limited to, weighted average coupon; average and maximum loan size; loan-to-value; credit scores; documentation type; geographic location; weighted average loan age; originator; servicer; historical prepayment, default and loss severity experience of the mortgage loan pool; and delinquency rate. Yield curves used in the discounted cash flow models are based on observed market prices for comparable securities and published interest rate data to estimate market yields. In addition, broker quotes, where available, are also referenced to compare prices primarily on interest-only securities.

Commercial Mortgage-Backed Securities

Agency Commercial Mortgage-Backed Securities:  Government National Mortgage Association (“GNMA”) project loan bonds are measured based on inputs corroborated from and benchmarked to observed prices of recent securitization transactions of similar securities with adjustments incorporating an evaluation of various factors, including prepayment speeds, default rates and cash flow structures, as well as the likelihood of pricing levels in the current market environment. Federal National Mortgage Association (“FNMA”) Delegated Underwriting and Servicing (“DUS”) mortgage-backed securities are generally measured by using prices observed from recently executed market transactions to estimate market-clearing spread levels for purposes of estimating fair value. GNMA project loan bonds and FNMA DUS mortgage-backed securities are categorized within Level 2 of the fair value hierarchy.
Non-Agency Commercial Mortgage-Backed Securities:  Non-agency commercial mortgage-backed securities are measured using pricing data obtained from external pricing services and prices observed from recently executed market transactions and are categorized within Level 2 and Level 3 of the fair value hierarchy.

Other Asset-Backed Securities

Other asset-backed securities include, but are not limited to, securities backed by auto loans, credit card receivables, student loans and other consumer loans and are categorized within Level 2 and Level 3 of the fair value hierarchy. Valuations are primarily determined using pricing data obtained from external pricing services and broker quotes and prices observed from recently executed market transactions.


16



Loans and Other Receivables

Corporate Loans:  Corporate loans categorized within Level 2 of the fair value hierarchy are measured based on market price quotations where market price quotations from external pricing services are supported by transaction data. Corporate loans categorized within Level 3 of the fair value hierarchy are measured based on price quotations that are considered to be less transparent, market prices for debt securities of the same creditor and estimates of future cash flow incorporating assumptions regarding creditor default and recovery rates and consideration of the issuer’s capital structure.
Participation Certificates in Agency Residential Loans: Valuations of participation certificates in agency residential loans are based on observed market prices of recently executed purchases and sales of similar loans and data provider pricing. The loan participation certificates are categorized within Level 2 of the fair value hierarchy given the observability and volume of recently executed transactions and availability of data provider pricing.
Project Loans and Participation Certificates in GNMA Project and Construction Loans:  Valuations of participation certificates in GNMA project and construction loans are based on inputs corroborated from and benchmarked to observed prices of recent securitizations with similar underlying loan collateral to derive an implied spread. Securitization prices are adjusted to estimate the fair value of the loans to account for the arbitrage that is realized at the time of securitization. The measurements are categorized within Level 2 of the fair value hierarchy given the observability and volume of recently executed transactions.
Consumer Loans and Funding Facilities:  Consumer and small business whole loans and related funding facilities are valued based on observed market transactions and incorporating valuation inputs including, but not limited to, delinquency and default rates, prepayment rates, borrower characteristics, loan risk grades and loan age. These assets are categorized within Level 2 or Level 3 of the fair value hierarchy.
Escrow and Trade Claim Receivables:  Escrow and trade claim receivables are categorized within Level 3 of the fair value hierarchy where fair value is estimated based on reference to market prices and implied yields of debt securities of the same or similar issuers. Escrow and trade claim receivables are categorized within Level 2 of the fair value hierarchy where fair value is based on recent trade activity in the same receivable.

Derivatives

Listed Derivative Contracts:  Listed derivative contracts that are actively traded are measured based on quoted exchange prices, broker quotes or vanilla option valuation models, such as Black-Scholes, using observable valuation inputs from the principal market. Exchange quotes and/or valuation inputs are generally obtained from external vendors and pricing services. Broker quotes are validated directly through observable and tradeable quotes. Listed derivative contracts that use unadjusted exchange close prices are generally categorized within Level 1 of the fair value hierarchy. All other listed derivative contracts are generally categorized within Level 2 of the fair value hierarchy.
Over-the-Counter ("OTC") Derivative Contracts:  OTC derivative contracts are generally valued using models, whose inputs reflect assumptions that we believe market participants would use in valuing the derivative in a current transaction. Inputs to valuation models are appropriately calibrated to market data. For many OTC derivative contracts, the valuation models do not involve material subjectivity as the methodologies do not entail significant judgment and the inputs to valuation models do not involve a high degree of subjectivity as the valuation model inputs are readily observable or can be derived from actively quoted markets. OTC derivative contracts are primarily categorized within Level 2 of the fair value hierarchy given the observability and significance of the inputs to the valuation models. Where significant inputs to the valuation are unobservable, derivative instruments are categorized within Level 3 of the fair value hierarchy.

OTC options include OTC equity, foreign exchange, interest rate and commodity options measured using various valuation models, such as the Black-Scholes, with key inputs including the underlying security price, foreign exchange spot rate, commodity price, implied volatility, dividend yield, interest rate curve, strike price and maturity date. Discounted cash flow models are utilized to measure certain OTC derivative contracts including the valuations of our interest rate swaps, which incorporate observable inputs related to interest rate curves, valuations of our foreign exchange forwards and swaps, which incorporate observable inputs related to foreign currency spot rates and forward curves and valuations of our commodity swaps and forwards, which incorporate observable inputs related to commodity spot prices and forward curves. Discounted cash flow models are also utilized to measure certain variable funding note swaps, which are backed by CLOs and incorporate constant prepayment rate, constant default rate and loss severity assumptions. Credit default swaps include both index and single-name credit default swaps. External prices are available as inputs in measuring index credit default swaps and single-name credit default swaps. For commodity and equity total return swaps, market prices are generally observable for the underlying asset and used as the basis for measuring the fair value of the derivative contracts. Total return swaps executed on other underlyings are measured based on valuations received from external pricing services.

National Beef Derivatives: National Beef uses futures contracts in order to reduce its exposure associated with entering into firm commitments to purchase live cattle at prices determined prior to the delivery of the cattle as well as firm commitments to sell certain beef products at sales prices determined prior to shipment. The futures contracts and their related firm purchase

17



commitments are accounted for at fair value, which are classified as Level 1 or Level 2 within the fair value hierarchy. Certain firm commitments for live cattle purchases and all firm commitments for sales are treated as normal purchases and sales and therefore not marked to market. Fair values classified as Level 1 are calculated based on the quoted market prices of identical assets or liabilities compared to National Beef's cost of those same assets or liabilities. Fair values classified as Level 2 are calculated based on the difference between the contracted price for live cattle and the relevant quoted market price for live cattle futures.

Oil Futures Derivatives: Vitesse Energy Finance uses swaps and call and put options in order to reduce exposure to future oil price fluctuations. Vitesse Energy Finance accounts for the derivative instruments at fair value, which are classified as Level 2 within the fair value hierarchy. Fair values classified as Level 2 are determined under the income valuation technique using an option-pricing model that is based on directly or indirectly observable inputs.

Investments at Fair Value

Investments at fair value based on NAV include investments in hedge funds, fund of funds and private equity funds, which are measured at the NAV of the funds, provided by the fund managers and are excluded from the fair value hierarchy. Investments at fair value also include direct equity investments in private companies, which are measured at fair value using valuation techniques involving quoted prices of or market data for comparable companies, similar company ratios and multiples (e.g., price/EBITDA, price/book value), discounted cash flow analyses and transaction prices observed for subsequent financing or capital issuance by the company. Direct equity investments in private companies are categorized within Level 2 or Level 3 of the fair value hierarchy. Additionally, investments at fair value include investments in insurance contracts relating to Jefferies defined benefit plan in Germany. Fair value for the insurance contracts is determined using a third party and is categorized within Level 3 of the fair value hierarchy. 

The following tables present information about our investments in entities that have the characteristics of an investment company (in thousands).
 
Fair Value (1)
 
Unfunded
Commitments
 
Redemption
Frequency
(if currently eligible)
March 31, 2018
 
 
 
 
 
Equity Long/Short Hedge Funds (2)
$
375,352

 
$

 
(2)
Fixed Income and High Yield Hedge Funds (3)
405

 

 
Fund of Funds (4)
186

 

 
Equity Funds (5)
32,839

 
18,176

 
Multi-asset Funds (6)
259,434

 

 
Total
$
668,216

 
$
18,176

 
 
 
 
 
 
 
 
December 31, 2017
 

 
 

 
 
Equity Long/Short Hedge Funds (2)
$
407,895

 
$

 
(2)
Fixed Income and High Yield Hedge Funds (3)
417

 

 
Fund of Funds (4)
189

 

 
Equity Funds (5)
26,798

 
19,084

 
Multi-asset Funds (6)
154,805

 

 
Total
$
590,104

 
$
19,084

 
 
 
(1)
Where fair value is calculated based on NAV, fair value has been derived from each of the funds' capital statements.
(2)
This category includes investments in hedge funds that invest, long and short, primarily in equity securities in domestic and international markets in both the public and private sectors. At March 31, 2018 and December 31, 2017, 78% and 73%, respectively, of these investments are redeemable with 10 business days or less prior written notice, and 13% and 15%, respectively, of these investments are redeemable with 30 to 60 days prior written notice.
(3)
This category includes investments in funds that invest in loans secured by a first trust deed on property, domestic and international public high yield debt, private high yield investments, senior bank loans, public leveraged equities, distressed debt and private equity investments. There are no redemption provisions. 
(4)
This category includes investments in fund of funds that invest in various private equity funds. The investments in this category are managed by us and have no redemption provisions. These investments are gradually being liquidated or we have requested redemption, however, we are unable to estimate when these funds will be received.

18



(5)
The investments in this category include investments in equity funds that invest in the equity of various U.S. and foreign private companies in the energy, technology, internet service and telecommunication service industries. These investments cannot be redeemed; instead distributions are received through the liquidation of the underlying assets of the funds, which are expected to be liquidated in one to six years. 
(6)
This category includes investments in hedge funds that invest, long and short, primarily in multi-asset securities in domestic and international markets in both the public and private sectors. At March 31, 2018 and December 31, 2017, investments representing approximately 17% and 12%, respectively, of the fair value of investments in this category are redeemable with 30 days prior written notice.

Investment in FXCM

FXCM Group, LLC ("FXCM") is a provider of online foreign exchange trading services.  In January 2015, we entered into a credit agreement with FXCM, and provided FXCM a $300 million senior secured term loan due January 2017 (the term of which was subsequently extended to January 2019), with rights to a variable proportion of certain future distributions in connection with an FXCM sale of assets or certain other events, and to require a sale of FXCM beginning in January 2018. The loan had an initial interest rate of 10% per annum, increasing by 1.5% per annum each quarter, not to exceed 20.5% per annum. During the three months ended March 31, 2018, interest accrued at 20.5% per annum. During the three months ended March 31, 2018, we received $8.2 million of principal and interest from FXCM and $70.4 million of principal remained outstanding under the term loan as of March 31, 2018. Through March 31, 2018, we have received cumulatively $339.8 million of principal, interest and fees from our initial $279.0 million investment in FXCM.

Our investment in the FXCM term loan is reported within Trading assets, at fair value in our Consolidated Statements of Financial Condition, and unrealized and realized changes in value, including the component related to interest income on the loan, is included within Principal transactions revenues in the Consolidated Statements of Operations. We recorded gains related to the term loan in Principal transactions revenues of $8.6 million and $10.9 million during the three months ended March 31, 2018 and 2017, respectively.

On September 1, 2016, we, Global Brokerage Inc. ("Global Brokerage") and Global Brokerage Holdings, LLC ("Global Brokerage Holdings") entered into an agreement that amended the terms of our loan and associated rights. On November 10, 2017, the terms of our loan and associated rights were amended further. Among other changes, the amendments extended the maturity of the term loan 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 six board members for FXCM. We have the right, as does Global Brokerage Holdings, the owner of the remaining 50% of FXCM voting interest that is not held by Leucadia, to require a sale of FXCM beginning in January 2018. Distributions to Leucadia under the amended agreements are now: 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.

Through the amendments, we gained the ability to significantly influence FXCM through our seats on the board of directors. As a result, we classify our equity investment in FXCM in our March 31, 2018 and December 31, 2017 Consolidated Statements of Financial Condition as Loans to and investments in associated companies. We account for our equity interest on a one month lag. As the amendments only extended the maturity of the term loan, we continue to use the fair value option and classify our term loan within Trading assets, at fair value.

FXCM is considered a variable interest entity ("VIE") and our term loan and equity ownership are variable interests. We have determined that we are not the primary beneficiary of FXCM because we do not have the power to direct the activities that most significantly impact FXCM's performance. Therefore, we do not consolidate FXCM and we account for our equity interest as an investment in an associated company.

Our maximum exposure to loss as a result of our involvement with FXCM is limited to the carrying value of the term loan ($73.2 million) and the investment in associated company ($150.9 million), which totaled $224.1 million at March 31, 2018.

We estimate the fair value of our term loan by using a valuation model with inputs including management’s assumptions concerning the amount and timing of expected cash flows, the loan’s implied credit rating and effective yield. Because of these inputs and the degree of judgment involved, we have categorized our term loan within Level 3 of the fair value hierarchy.

Nonrecurring Fair Value Measurements
As described further in Note 9, in the first quarter of 2017 we engaged an independent valuation firm to assist management in estimating the fair value of our equity investment in FXCM. Our first quarter estimate of fair value was based on a discounted cash flow and comparable public company analysis and is categorized within Level 3 of the fair value hierarchy. The discounted

19



cash flow valuation model used inputs including management's projections of future FXCM cash flows and a discount rate of approximately 15%. The comparable public company model used market data for comparable companies including a price to EBITDA multiple of 5.4 and a price to revenue multiple of 1.5. The estimated fair value of our equity investment in FXCM was $186.7 million, which was $130.2 million lower than the carrying value at the end of the first quarter 2017. As a result, an impairment charge of $130.2 million was recorded in Income (loss) related to associated companies in the first quarter of 2017.

Other Secured Financings

Other secured financings that are accounted for at fair value include notes issued by consolidated VIEs, which are classified as Level 2 or Level 3 within the fair value hierarchy. Fair value is based on recent transaction prices for similar assets. 

Short-term Borrowings/Long-term Debt

Short-term borrowings that are accounted for at fair value include equity-linked notes, which are generally categorized as Level 2 within the fair value hierarchy, as the fair value is based on the price of the underlying equity security. Long-term debt includes variable rate, fixed-to-floating rate, CMS (constant maturity swap) and Bermudan structured notes. These are valued using various valuation models that incorporate Jefferies own credit spread, market price quotations from external pricing sources referencing the appropriate interest rate curves, volatilities and other inputs and are generally categorized within Level 2 of the fair value hierarchy. In addition, pricing transparency has been evidenced based on transaction data from recently issued notes.

Level 3 Rollforwards
The following is a summary of changes in fair value of our financial assets and liabilities that have been categorized within Level 3 of the fair value hierarchy for the three months ended March 31, 2018 (in thousands):
Three Months Ended March 31, 2018
 
Balance, December 31, 2017
 
Total gains/ losses
(realized and unrealized) (1)
 
Purchases
 
Sales
 
Settlements
 
Issuances
 
Net transfers
into (out of)
Level 3
 
Balance at March 31, 2018
 
Changes in
unrealized gains/losses relating to instruments still held at
March 31, 2018 (1)
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate equity securities
$
22,270

 
$
11,764

 
$
2,733

 
$
(1,381
)
 
$
(1,687
)
 
$

 
$
2,054

 
$
35,753

 
$
10,754

Corporate debt securities
26,036

 
(9
)
 
928

 
(346
)
 
(2,049
)
 

 
1,543

 
26,103

 
(1,086
)
CDOs and CLOs
42,184

 
(3,782
)
 
43,796

 
(34,168
)
 
(3,838
)
 

 
(5,579
)
 
38,613

 
(3,006
)
Residential mortgage-backed securities
26,077

 
(3,212
)
 

 

 
(3
)
 

 
(1,100
)
 
21,762

 
(2,366
)
Commercial mortgage-backed securities
12,419

 
(231
)
 
1,260

 
(508
)
 
(1,285
)
 

 
3,448

 
15,103

 
(622
)
Other asset-backed securities
61,129

 
(1,385
)
 
57,095

 
(53,459
)
 
(3,776
)
 

 
(8,316
)
 
51,288

 
127

Loans and other receivables
47,304

 
1,598

 
15,635

 
(803
)
 
(9,730
)
 

 
8,039

 
62,043

 
(190
)
Investments at fair value
329,944

 
2,289

 
240

 
(16,624
)
 

 

 
2,310

 
318,159

 
1,695

FXCM term loan
72,800

 
8,597

 

 

 
(8,197
)
 

 

 
73,200

 
4,939

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Trading liabilities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Corporate equity securities
$
48

 
$
13

 
$

 
$

 
$

 
$

 
$

 
$
61

 
$
(13
)
Corporate debt securities
522

 

 

 

 

 

 

 
522

 

Commercial mortgage-backed securities
105

 
(70
)
 

 

 

 

 

 
35

 
(35
)
Loans
3,486

 
6

 
(25
)
 
3,442

 

 

 
3,414

 
10,323

 
(6
)
Net derivatives (2)
6,746

 
(1,166
)
 
(6
)
 

 
1,012

 
296

 

 
6,882

 
(5,609
)

(1)
Realized and unrealized gains (losses) are reported in Principal transactions revenues in the Consolidated Statements of Operations.
(2)
Net derivatives represent Trading assets - Derivatives and Trading liabilities - Derivatives.




20



Analysis of Level 3 Assets and Liabilities for the three months ended March 31, 2018

During the three months ended March 31, 2018, transfers of assets of $31.9 million from Level 2 to Level 3 of the fair value hierarchy are primarily attributed to:
CDOs and CLOs of $9.1 million and loans and other receivables of $8.6 million due to reduced pricing transparency.

During the three months ended March 31, 2018, transfers of assets of $29.5 million from Level 3 to Level 2 are primarily attributed to:
CDOs and CLOs of $14.7 million and other asset-backed securities of $8.3 million due to greater pricing transparency supporting classification into Level 2.

Net gains on Level 3 assets were $15.6 million and net gains on Level 3 liabilities were $1.2 million for the three months ended March 31, 2018. Net gains on Level 3 assets were primarily due to an increased valuation of our FXCM term loan and increased market values across corporate equity securities and certain loans and other receivables, partially offset by decreased market values across CDOs and CLOs, residential mortgage-backed securities and other asset-backed securities. Net gains on Level 3 liabilities were primarily due to increased valuations of certain net derivatives.
The following is a summary of changes in fair value of our financial assets and liabilities that have been categorized within Level 3 of the fair value hierarchy for the three months ended March 31, 2017 (in thousands):
Three Months Ended March 31, 2017
 
Balance, December 31, 2016
 
Total gains/ losses
(realized and unrealized) (1)
 
Purchases
 
Sales
 
Settlements
 
Issuances
 
Net transfers
into (out of)
Level 3
 
Balance, March 31, 2017
 
Changes in
unrealized gains/ losses relating to instruments still held at
March 31, 2017 (1)
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate equity securities
$
21,739

 
$
532

 
$
847

 
$
(145
)
 
$
(186
)
 
$

 
$
(2,207
)
 
$
20,580

 
$
362

Corporate debt securities
25,005

 
(1,793
)
 
3,002

 
(3,157
)
 
(1,207
)
 

 
11,617

 
33,467

 
(1,662
)
CDOs and CLOs
54,354

 
(7,594
)
 
8,663

 
(22,633
)
 
(45
)
 

 
12,609

 
45,354

 
(8,525
)
Municipal securities