10-Q 1 luk10q3312016.htm LEUCADIA NATIONAL CORPORATION 1ST QTR. 2016 FORM 10-Q 10-Q


 
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, 2016
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            _____

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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  x
 
Accelerated filer o
Non-accelerated filer    o
(Do not check if a smaller reporting company)
Smaller reporting company  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES            _____   NO            X     

The number of shares outstanding of each of the issuer’s classes of common stock at April 28, 2016 was 362,330,232.




LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition
March 31, 2016 and December 31, 2015
(Dollars in thousands, except par value)
(Unaudited)
 
March 31,
 
December 31,
 
2016
 
2015
ASSETS
 
 
 
Cash and cash equivalents
$
2,604,066

 
$
3,638,648

Cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations
679,812

 
751,084

Financial instruments owned, including securities pledged of $11,174,383 and $12,207,123:
 

 
 

Trading assets, at fair value
15,144,599

 
18,293,090

Available for sale securities
398,856

 
207,355

Total financial instruments owned
15,543,455


18,500,445

Investments in managed funds
546,805

 
603,720

Loans to and investments in associated companies
1,843,470

 
1,757,369

Securities borrowed
7,347,587

 
6,975,136

Securities purchased under agreements to resell
3,526,686

 
3,854,746

Receivables
4,178,419

 
3,830,967

Property, equipment and leasehold improvements, net
721,060

 
721,875

Intangible assets, net and goodwill
2,622,351

 
2,648,362

Deferred tax asset, net
1,646,292

 
1,575,368

Other assets
1,874,362

 
1,473,464

Total
$
43,134,365


$
46,331,184

 
 
 
 
LIABILITIES
 

 
 

Short-term borrowings
$
311,885

 
$
310,659

Trading liabilities, at fair value
7,542,927

 
6,840,430

Securities loaned
2,670,611

 
3,014,300

Securities sold under agreements to repurchase
8,252,356

 
9,966,868

Other secured financings
1,028,569

 
908,741

Payables, expense accruals and other liabilities
5,124,603

 
7,107,081

Long-term debt
7,620,461

 
7,400,582

Total liabilities
32,551,412


35,548,661

 
 
 
 
Commitments and contingencies


 


 
 
 
 
MEZZANINE EQUITY
 

 
 

Redeemable noncontrolling interests
208,773

 
191,633

Mandatorily redeemable convertible preferred shares
125,000

 
125,000

 
 
 
 
 
 
 
 
EQUITY
 

 
 

Common shares, par value $1 per share, authorized 600,000,000 shares; 362,329,220 and 362,617,423 shares issued and outstanding, after deducting 54,043,495 and 53,755,292 shares held in treasury
362,329

 
362,617

Additional paid-in capital
4,968,447

 
4,986,819

Accumulated other comprehensive income
394,004

 
438,793

Retained earnings
4,366,525

 
4,612,982

Total Leucadia National Corporation shareholders’ equity
10,091,305


10,401,211

Noncontrolling interests
157,875

 
64,679

Total equity
10,249,180


10,465,890

 
 
 
 
Total
$
43,134,365

 
$
46,331,184


See notes to interim consolidated financial statements.

2



LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For the periods ended March 31, 2016 and 2015
(In thousands, except per share amounts)
(Unaudited)
 
 
For the Three Months Ended March 31,
 
 
 
 
2016
 
2015
Revenues:
 
 
 
 
Beef processing services
 
$
1,631,371

 
$
1,852,311

Commissions
 
155,824

 
166,922

Principal transactions
 
(102,483
)
 
729,235

Investment banking
 
230,930

 
250,995

Interest income
 
232,016

 
237,599

Net realized securities gains
 
728

 
15,089

Other
 
58,923

 
124,370

Total revenues
 
2,207,309

 
3,376,521

Interest expense
 
192,203

 
191,838

Net revenues
 
2,015,106

 
3,184,683

 
 
 
 
 
Expenses:
 
 

 
 

Cost of sales
 
1,648,052

 
1,922,223

Compensation and benefits
 
389,407

 
410,852

Floor brokerage and clearing fees
 
40,479

 
55,080

Interest
 
22,318

 
31,422

Depreciation and amortization
 
49,610

 
52,440

Selling, general and other expenses
 
187,255

 
166,010

 
 
2,337,121

 
2,638,027

Income (loss) before income taxes and income related to associated companies
 
(322,015
)
 
546,656

Income related to associated companies
 
20,052

 
40,451

Income (loss) before income taxes
 
(301,963
)
 
587,107

Income tax provision (benefit)
 
(83,361
)
 
212,678

Net income (loss)
 
(218,602
)
 
374,429

Net loss attributable to the noncontrolling interests
 
1,052

 
234

Net (income) loss attributable to the redeemable noncontrolling interests
 
(4,314
)
 
7,112

Preferred stock dividends
 
(1,016
)
 
(1,016
)
 
 
 

 
 

Net income (loss) attributable to Leucadia National Corporation common shareholders
 
$
(222,880
)
 
$
380,759

 
 
 
 
 
Basic earnings (loss) per common share attributable to Leucadia National Corporation common shareholders:
 
 
 
 
Net income (loss)
 
$
(0.60
)
 
$
1.00

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

 
 

Net income (loss)
 
$
(0.60
)
 
$
0.99

 
 
 
 
 
Amounts attributable to Leucadia National Corporation common shareholders:
 
 

 
 

Net income (loss)
 
$
(222,880
)
 
$
380,759


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, 2016 and 2015
(In thousands)
(Unaudited)

 
 
For the Three Months Ended March 31,
 
 
 
 
2016
 
2015
 
 
 
 
 
Net income (loss)
 
$
(218,602
)
 
$
374,429

Other comprehensive income (loss):
 
 

 
 

Net unrealized holding gains (losses) on investments arising during the period, net of income tax provision (benefit) of $(522) and $(619)
 
(940
)
 
(1,115
)
Less: reclassification adjustment for net (gains) losses included in net income (loss), net of income tax provision (benefit) of $14 and $2,944
 
(26
)
 
(5,303
)
Net change in unrealized holding gains (losses) on investments, net of income tax provision (benefit) of $(536) and $(3,563)
 
(966
)
 
(6,418
)
 
 
 
 
 
Net unrealized foreign exchange gains (losses) arising during the period, net of income tax provision (benefit) of $3,236 and $(5,768)
 
(43,921
)
 
(14,721
)
Less: reclassification adjustment for foreign exchange (gains) losses included in net income (loss), net of income tax provision (benefit) of $0 and $0
 

 

Net change in unrealized foreign exchange gains (losses), net of income tax provision (benefit) of $3,236 and $(5,768)
 
(43,921
)
 
(14,721
)
 
 
 
 
 
Net unrealized gains (losses) on instrument specific credit risk arising during the period, net of income tax provision (benefit) of $0 and $0
 
(302
)
 

Less: reclassification adjustment for instrument specific credit risk (gains) losses included in net income (loss), net of income tax provision (benefit) of $0 and $0
 

 

Net change in unrealized instrument specific credit risk gains (losses), net of income tax provision (benefit) of $0 and $0
 
(302
)
 

 
 
 
 
 
Net pension gains (losses) arising during the period, net of income tax provision (benefit) of $0 and $0
 

 

Less: reclassification adjustment for pension (gains) losses included in net income (loss), net of income tax provision (benefit) of $(178) and $(653)
 
400

 
1,175

Net change in pension liability, net of income tax provision (benefit) of $178 and $653
 
400

 
1,175

 
 
 
 
 
Other comprehensive income (loss), net of income taxes
 
(44,789
)
 
(19,964
)
 
 
 
 
 
Comprehensive income (loss)
 
(263,391
)
 
354,465

Comprehensive loss attributable to the noncontrolling interests
 
1,052

 
234

Comprehensive (income) loss attributable to the redeemable noncontrolling interests
 
(4,314
)
 
7,112

Preferred stock dividends
 
(1,016
)
 
(1,016
)
 
 
 
 
 
Comprehensive income (loss) attributable to Leucadia National Corporation common shareholders
 
$
(267,669
)
 
$
360,795






See notes to interim consolidated financial statements.

4



LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the periods ended March 31, 2016 and 2015
(In thousands)
(Unaudited)
 
2016
 
2015
Net cash flows from operating activities:
 
 
 
Net income (loss)
$
(218,602
)
 
$
374,429

Adjustments to reconcile net income (loss) to net cash used for operations:
 

 
 

Deferred income tax provision (benefit)
(81,521
)
 
214,612

Depreciation and amortization
35,167

 
40,328

Share-based compensation
6,933

 
32,794

Provision for doubtful accounts
11,003

 
3,636

Net securities gains
(728
)
 
(15,089
)
(Income) loss related to associated companies
3,364

 
(61,140
)
Distributions from associated companies
13,908

 
39,703

Net (gains) losses related to property and equipment, and other assets
5,874

 
(659
)
Net change in:
 

 
 

Cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations
70,939

 
257,319

Trading assets
3,041,330

 
(1,095,937
)
Investments in managed funds
49,350

 
(312,111
)
Securities borrowed
(385,463
)
 
285,891

Securities purchased under agreements to resell
298,260

 
179,290

Receivables from brokers, dealers and clearing organizations
(204,142
)
 
(38,561
)
Receivables from customers of securities operations
6,966

 
(94,841
)
Other receivables
(22,889
)
 
(28,557
)
Other assets
(370,398
)
 
(124,643
)
Trading liabilities
761,729

 
(966,190
)
Securities loaned
(295,559
)
 
575,750

Securities sold under agreements to repurchase
(1,721,276
)
 
654,705

Payables to brokers, dealers and clearing organizations
(1,492,311
)
 
384,163

Payables to customers of securities operations
(180,980
)
 
(1,481,640
)
Trade payables, expense accruals and other liabilities
(262,392
)
 
(487,782
)
Other
8,645

 
(62,857
)
Net cash used for operating activities
(922,793
)

(1,727,387
)
 
 
 
 
Net cash flows from investing activities:
 

 
 

Acquisitions of property, equipment and leasehold improvements, and other assets
(90,722
)
 
(62,821
)
Proceeds from disposals of property and equipment, and other assets
5,298

 
3,103

Advances on notes, loans and other receivables
(148,622
)
 
(283,000
)
Collections on notes, loans and other receivables
11,686

 
21,836

Loans to and investments in associated companies
(284,820
)
 
(607,025
)
Capital distributions and loan repayments from associated companies
193,952

 
560,043

Purchases of investments (other than short-term)
(295,088
)
 
(400,484
)
Proceeds from maturities of investments
18,358

 
139,988

Proceeds from sales of investments
83,460

 
897,246

Other
(5,959
)
 
(966
)
Net cash provided by (used for) investing activities
(512,457
)

267,920

(continued)
See notes to interim consolidated financial statements.



5




LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows, continued
For the periods ended March 31, 2016 and 2015
(In thousands)
(Unaudited)

 
2016
 
2015
Net cash flows from financing activities:
 
 
 
Issuance of debt, net of issuance costs
$
262,249

 
$
127,486

Change in short-term borrowings
1,226

 
399,998

Reduction of debt
(34,937
)
 
(15,448
)
Net proceeds from other secured financings
119,794

 
245,251

Issuance of common shares
531

 
616

Distributions to noncontrolling interests
(271
)
 

Contributions from noncontrolling interests
94,904

 
533

Purchase of common shares for treasury
(9,624
)
 
(27,010
)
Dividends paid
(23,001
)
 
(23,359
)
Other
153

 
246

Net cash provided by financing activities
411,024

 
708,313

 
 
 
 
Effect of foreign exchange rate changes on cash
(10,356
)
 
(1,097
)
 
 
 
 
Net decrease in cash and cash equivalents
(1,034,582
)
 
(752,251
)
 
 

 
 

Cash and cash equivalents at January 1,
3,638,648

 
4,276,775

 
 

 
 

Cash and cash equivalents at March 31,
$
2,604,066

 
$
3,524,524

 
 
 
 
Supplemental disclosures of cash flow information:
 

 
 

Cash paid during the year for:
 

 
 

Interest
$
195,300

 
$
204,769

Income tax payments (refunds), net
$
(8,596
)
 
$
828

 
 
 
 


















See notes to interim consolidated financial statements.


6



LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Equity
For the periods ended March 31, 2016 and 2015
(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, 2015
$
367,499

 
$
5,059,508

 
$
447,082

 
$
4,428,069

 
$
10,302,158

 
$
67,864

 
$
10,370,022

Net income
 

 
 

 
 

 
380,759

 
380,759

 
(234
)
 
380,525

Other comprehensive loss, net of taxes
 

 
 

 
(19,964
)
 
 

 
(19,964
)
 
 

 
(19,964
)
Contributions from noncontrolling interests
 

 
 

 
 

 
 

 

 
533

 
533

Change in interest in consolidated subsidiary
 

 
(370
)
 
 

 
 

 
(370
)
 
370

 

Share-based compensation expense
 

 
32,794

 
 

 
 

 
32,794

 
 

 
32,794

Change in fair value of redeemable noncontrolling interests
 

 
11,033

 
 

 
 

 
11,033

 
 

 
11,033

Purchase of common shares for treasury
(1,182
)
 
(25,828
)
 
 

 
 

 
(27,010
)
 
 

 
(27,010
)
Dividends ($.0625 per common share)
 

 
 

 
 

 
(23,862
)
 
(23,862
)
 
 

 
(23,862
)
Other
404

 
(4,104
)
 
 

 
 

 
(3,700
)
 


 
(3,700
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, March 31, 2015
$
366,721


$
5,073,033


$
427,118


$
4,784,966


$
10,651,838


$
68,533


$
10,720,371

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2016
$
362,617

 
$
4,986,819

 
$
438,793

 
$
4,612,982

 
$
10,401,211

 
$
64,679

 
$
10,465,890

Net loss
 

 
 

 
 

 
(222,880
)
 
(222,880
)
 
(1,052
)
 
(223,932
)
Other comprehensive loss, net of taxes
 

 
 

 
(44,789
)
 
 

 
(44,789
)
 
 

 
(44,789
)
Contributions from noncontrolling interests
 

 
 

 
 

 
 

 

 
94,904

 
94,904

Distributions to noncontrolling interests
 

 
 

 
 

 
 

 

 
(271
)
 
(271
)
Deconsolidation of asset management entities
 

 
 

 
 

 
 

 

 
(385
)
 
(385
)
Share-based compensation expense
 

 
6,933

 
 

 
 

 
6,933

 
 

 
6,933

Change in fair value of redeemable noncontrolling interests
 

 
(12,835
)
 
 

 
 

 
(12,835
)
 
 

 
(12,835
)
Purchase of common shares for treasury
(583
)
 
(9,041
)
 
 

 
 

 
(9,624
)
 
 

 
(9,624
)
Dividends ($.0625 per common share)
 

 
 

 
 

 
(23,577
)
 
(23,577
)
 
 

 
(23,577
)
Other
295

 
(3,429
)
 
 

 
 

 
(3,134
)
 
 

 
(3,134
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, March 31, 2016
$
362,329


$
4,968,447


$
394,004


$
4,366,525


$
10,091,305


$
157,875


$
10,249,180





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 holding company focused on return on investment and long-term value creation to maximize shareholder value.  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 evaluate the retention and disposition of our existing operations and holdings.  Changes in the mix of our businesses and investments should be expected.

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), FXCM (a publicly traded company providing online foreign exchange trading), HomeFed (a publicly traded real estate company) and Foursight Capital and Chrome Capital (vehicle finance).  We also own and have investments in a diverse array of other businesses, including National Beef (beef processing), HRG Group ("HRG"), formerly known as Harbinger (a publicly traded diversified holding company), Vitesse Energy and Juneau Energy (oil and gas exploration and development), Garcadia (automobile dealerships), Linkem (fixed wireless broadband services in Italy), Conwed Plastics and Idaho Timber (manufacturing companies), and Golden Queen (a 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 operating subsidiaries, equity investments, receivables, securities, or in other ways, depending on the structure of our specific holdings.

Jefferies is a global full-service, integrated securities and investment banking firm.  In March 2013, Jefferies became an indirect wholly-owned subsidiary of Leucadia, yet retains a separate credit rating and continues to be a separate SEC reporting company.  Through Jefferies, we own 50% of Jefferies Finance LLC ("Jefferies Finance"), our joint venture with Babson Capital Management LLC and Massachusetts Mutual Life Insurance Company.  Jefferies Finance is a commercial finance company whose primary focus is the origination and syndication of senior secured debt of middle market and growth companies in the form of term and revolving loans.  Through Jefferies, we also own a 48.5% voting interest in Jefferies LoanCore, a joint venture with the Government of Singapore Investment Corporation, the Canada Pension Plan Investment Board and LoanCore, LLC.  Jefferies LoanCore originates, purchases and securitizes commercial real estate loans throughout the U.S.

Jefferies has a November 30th fiscal year, 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 2016 for the purpose of evaluating whether financial statement disclosure or adjustments are required in this Quarterly Report on Form 10-Q, and we have included in our consolidated financial statements investments of $126.5 million made by Jefferies during March 2016, which were made after Jefferies fiscal quarter end but before March 31, 2016.

Leucadia Asset Management supports and develops focused alternative asset management businesses led by distinct management teams. These primarily include Folger Hill, a multi-manager discretionary long/short equity hedge fund platform; Topwater Capital, a first-loss hedge fund; and 54 Madison Capital, LLC ("54 Madison"), which targets real estate projects.

Our investment in FXCM Inc. and some of its subsidiaries (collectively, "FXCM") currently consists of a senior secured term loan due January 2017 ($192.7 million outstanding at March 31, 2016), with rights to a variable proportion of certain distributions in connection with an FXCM sale of assets or certain other events, and our right to require a sale of FXCM beginning in January 2018. On March 10, 2016, we and FXCM entered into a nonbinding memorandum of understanding that would amend the terms of the term loan and rights to certain distributions in connection with an FXCM sale of assets. See Note 3 to our consolidated financial statements for additional information.

Berkadia, our 50-50 equity method joint venture with Berkshire Hathaway Inc., is a commercial real estate company providing capital solutions, investment sales advisory, research and servicing for multifamily and commercial properties.

We own an approximate 65% equity method interest in HomeFed, which owns and develops residential and mixed use real estate properties.  HomeFed is a public company traded on the NASD OTC Bulletin Board.

We own 100% of Foursight Capital, an auto loan originator and servicer, and 83% of Chrome Capital, which provides leases on used Harley-Davidson motorcycles.


8



We 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.  National Beef operates two beef processing facilities, three consumer-ready facilities and a wet blue tanning facility, all located in the U.S. National Beef operates one of the largest wet blue tanning facilities in the world that sells processed hides to tanners that produce finished leather for the automotive, luxury goods, apparel and furniture industries.  National Beef owns Kansas City Steak Company, LLC, which sells portioned beef and other products to customers in the food service and retail channels as well as direct to consumers through the internet, direct mail and direct response television.  National Beef also owns a refrigerated and livestock transportation and logistics company that provides transportation services for National Beef and third parties.

We own approximately 23% of HRG, a public company traded on the NYSE, and we reflect this investment at fair value based on quoted market prices. Its consumer products segment contains an approximate 58% ownership stake in Spectrum Brands, a global consumer products company. Its insurance segment includes an approximate 81% ownership stake in Fidelity & Guaranty Life ("FGL"). On November 8, 2015, FGL and Anbang Insurance Group Co., Ltd. ("Anbang") entered into a definitive merger agreement pursuant to which Anbang will acquire FGL for $26.80 per share.

Vitesse Energy, LLC is our 96% owned consolidated subsidiary that acquires and develops non-operated working and royalty oil and gas interests in the Bakken Shale oil field in North Dakota and Montana.

Juneau Energy, LLC, is our 98% owned consolidated subsidiary that engages in the exploration, development and production of oil and gas from onshore, unconventional resource areas.  Juneau currently has interests in acreage in the Oklahoma and Texas Gulf Coast regions.

Garcadia is an equity method joint venture that owns and operates 27 automobile dealerships in California, Texas, Iowa and Michigan. We own approximately 75% of Garcadia.

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 56% of Linkem's common equity.  Linkem provides residential broadband services using WiMAX and LTE technologies deployed over the 3.5 GHz spectrum band.  Linkem operates in Italy, which has few cable television systems and poor broadband alternatives. Linkem is accounted for under the equity method.

Conwed Plastics is our consolidated subsidiary that manufactures and markets lightweight plastic netting used for building and construction, erosion and sediment control, packaging, agricultural purposes, carpet padding, filtration, consumer products and other purposes. 

Idaho Timber is our wholly-owned subsidiary engaged in the manufacture and distribution of various wood products, including the following principal product activities:  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. 

Golden Queen Mining Company, LLC ("Golden Queen") owns the Soledad Mountain project, a fully-permitted, open pit, heap leach gold and silver project in Kern County, California.  We and the Clay family have formed and made contributions to a limited liability company, controlled by us, through which we invested in Golden Queen for the development and operation of the project. Our effective ownership of Golden Queen is approximately 35% and is accounted for under the equity method.

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.  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.

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.


9



Fair Value Hierarchy

In determining fair value, we maximize the use of observable inputs and minimize the use of unobservable inputs by requiring that observable inputs be used when available.  Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from independent sources.  Unobservable inputs reflect our assumptions that market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.  We apply a hierarchy to categorize our fair value measurements broken down into three levels based on the transparency of inputs as follows:
Level 1:
Quoted prices are available in active markets for identical assets or liabilities as of the reported date.
Level 2:
Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date.  The nature of these financial instruments include cash instruments for which quoted prices are available but traded less frequently, derivative instruments whose fair value have been derived using a model where inputs to the model are directly observable in the market, or can be derived principally from or corroborated by observable market data, and instruments that are fair valued using other financial instruments, the parameters of which can be directly observed.
Level 3:
Instruments that have little to no pricing observability as of the reported date.  These financial instruments are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

Financial instruments are valued at quoted market prices, if available.  Certain financial instruments have bid and ask prices that can be observed in the marketplace.  For financial instruments whose inputs are based on bid-ask prices, the financial instrument is valued at the point within the bid-ask range that meets our best estimate of fair value.  We use prices and inputs that are current as of the measurement date.  For financial instruments that do not have readily determinable fair values using quoted market prices, the determination of fair value is based upon consideration of available information, including types of financial instruments, current financial information, restrictions on dispositions, fair values of underlying financial instruments and quotations for similar instruments.

The valuation of financial instruments may include the use of valuation models and other techniques.  Adjustments to valuations derived from valuation models may be made when, in management’s judgment, features of the financial instrument such as its complexity, the market in which the financial instrument is traded and risk uncertainties about market conditions require that an adjustment be made to the value derived from the models.  Adjustments from the price derived from a valuation model reflect management’s judgment that other participants in the market for the financial instrument being measured at fair value would also consider in valuing that same financial instrument.  To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment.

The availability of observable inputs can vary and is affected by a wide variety of factors, including, for example, the type of financial instrument and market conditions.  As the observability of prices and inputs may change for a financial instrument from period to period, this condition may cause a transfer of an instrument among the fair value hierarchy levels.  Transfers among the levels are recognized at the beginning of each period.  The degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3.
Valuation Process for Financial Instruments
The Jefferies Independent Price Verification ("IPV") Group, which is part of the Jefferies finance department, in partnership with Jefferies Risk Management, is responsible for establishing Jefferies valuation policies and procedures.  The IPV Group and Risk Management, which are independent of business functions, play an important role and serve as a control function in determining that Jefferies financial instruments are appropriately valued and that fair value measurements are reliable.  This is particularly important where prices or valuations that require inputs are less observable. In the event that observable inputs are not available, the control processes are designed to assure that the valuation approach utilized is appropriate and consistently applied and that the assumptions are reasonable.  The IPV Group reports to the Jefferies Global Controller and is subject to the oversight of the IPV Committee, which includes senior members of Jefferies finance department and other personnel.  Jefferies independent price verification policies and procedures are reviewed, at a minimum, annually and changes to the policies require the approval of the IPV Committee.

Price Testing Process.  Jefferies business units are responsible for determining the fair value of Jefferies financial instruments using approved valuation models and methodologies.  In order to ensure that the business unit valuations represent a fair value exit price, the IPV Group tests and validates the fair value of the financial instruments inventory.  In the testing process, the IPV Group obtains prices and valuation inputs from sources independent of Jefferies, consistently adheres to established procedures set forth in the valuation policies for sourcing prices and valuation inputs and utilizing valuation methodologies.  Sources used to

10



validate fair value prices and inputs include, but are not limited to, exchange data, recently executed transactions, pricing data obtained from third party vendors, pricing and valuation services, broker quotes and observed comparable transactions.

To the extent discrepancies between the business unit valuations and the pricing or valuations resulting from the price testing process are identified, such discrepancies are investigated by the IPV Group and fair values are adjusted, as appropriate.  The IPV Group maintains documentation of its testing, results, rationale and recommendations and prepares a monthly summary of its valuation results.  This process also forms the basis for the classification of fair values within the fair value hierarchy (i.e., Level 1, Level 2 or Level 3).  The IPV Group utilizes the additional expertise of Risk Management personnel in valuing more complex financial instruments and financial instruments with less or limited pricing observability.  The results of the valuation testing are reported to the IPV Committee on a monthly basis, which discusses the results and is charged with the final conclusions as to the financial instrument fair values in the consolidated financial statements.  This process specifically assists management in asserting as to the fair presentation of our financial condition and results of operations as included within our Quarterly Reports on Form 10-Q and Annual Report on Form 10-K.  At each quarter end, the overall valuation results, as concluded upon by the IPV Committee, are presented to the Jefferies Audit Committee.

Judgment exercised in determining Level 3 fair value measurements is supplemented by daily analysis of profit and loss performed by the Product Control functions.  Gains and losses, which result from changes in fair value, are evaluated and corroborated daily based on an understanding of each of the trading desks’ overall risk positions and developments in a particular market on the given day.  Valuation techniques generally rely on recent transactions of suitably comparable financial instruments and use the observable inputs from those comparable transactions as a validation basis for Level 3 inputs.  Level 3 fair value measurements are further validated through subsequent sales testing and market comparable sales, if such information is available.  Level 3 fair value measurements require documentation of the valuation rationale applied, which is reviewed for consistency in application from period to period; and the documentation includes benchmarking the assumptions underlying the valuation rationale against relevant analytic data.

Third Party Pricing Information.  Pricing information obtained from external data providers (including independent pricing services and brokers) may incorporate a range of market quotes from dealers, recent market transactions and benchmarking model derived prices to quoted market prices and trade data for comparable securities.  External pricing data is subject to evaluation for reasonableness by the IPV Group using a variety of means including comparisons of prices to those of similar product types, quality and maturities, consideration of the narrowness or wideness of the range of prices obtained, knowledge of recent market transactions and an assessment of the similarity in prices to comparable dealer offerings in a recent time period.  Jefferies has a process whereby it challenges the appropriateness of pricing information obtained from external data providers (including independent pricing services and brokers) in order to validate the data for consistency with the definition of a fair value exit price.  Jefferies process includes understanding and evaluating the external data providers’ valuation methodologies.  For corporate, U.S. government and agency, municipal debt securities, and loans, to the extent independent pricing services or broker quotes are utilized in our valuation process, the vendor service providers are collecting and aggregating observable market information as to recent trade activity and active bid-ask submissions.  The composite pricing information received from the independent pricing service is not based on unobservable inputs or proprietary models.  For mortgage- and other asset-backed securities and collateralized debt obligations, the independent pricing services use a matrix evaluation approach incorporating both observable yield curves and market yields on comparable securities as well as implied inputs from observed trades for comparable securities in order to determine prepayment speeds, cumulative default rates and loss severity.  Further, Jefferies considers pricing data from multiple service providers as available as well as compares pricing data to prices observed for recent transactions, if any, in order to corroborate valuation inputs.

Model Review Process.  Where a pricing model is to be used to determine fair value, the pricing model is reviewed for theoretical soundness and appropriateness by Risk Management, independent from the trading desks, and then approved by Risk Management to be used in the valuation process.  Review and approval of a model for use may include benchmarking the model against relevant third party valuations, testing sample trades in the model, backtesting the results of the model against actual trades and stress-testing the sensitivity of the pricing model using varying inputs and assumptions.  In addition, recently executed comparable transactions and other observable market data are considered for purposes of validating assumptions underlying the model.  Models are independently reviewed and validated by Risk Management annually or more frequently if market conditions or use of the valuation model changes.

Receivables

At March 31, 2016 and December 31, 2015, Receivables include receivables from brokers, dealers and clearing organizations of $1,803.5 million and $1,616.3 million, respectively, and receivables from customers of securities operations of $1,177.3 million and $1,191.3 million, respectively.

11



Payables, expense accruals and other liabilities
At March 31, 2016 and December 31, 2015, Payables, expense accruals and other liabilities include payables to brokers, dealers and clearing organizations of $1,242.5 million and $2,757.2 million, respectively, and payables to customers of securities operations of $2,599.5 million and $2,780.5 million, respectively.
Accounting Developments

Revenue Recognition.  In May 2014, the Financial Accounting Standards Board ("FASB") issued new guidance that defines how companies report revenues from contracts with customers, and also requires enhanced disclosures.  The core principle of this new 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.  This guidance originally was effective for interim and annual periods beginning after December 15, 2016.  In August 2015, the FASB issued guidance that deferred the effective date by one year, with early adoption on the original effective date permitted.  We are currently evaluating the impact this new guidance will have on our consolidated financial statements.

Consolidation.  In January 2016, we adopted the FASB's new guidance that amended the consolidation guidance including changes to both the variable and voting interest models used to evaluate whether an entity should be consolidated.  This guidance also eliminates the deferral of certain consolidation standards for entities considered to be investment companies.  The adoption of this guidance did not have a significant impact on our consolidated financial statements.

Debt Issuance Costs.  In January 2016, we adopted the FASB's new guidance that requires debt issuance costs related to a recognized debt liability be presented in the Consolidated Statements of Financial Condition as a direct deduction from the carrying amount of that debt liability.  The guidance is effective retrospectively and we have adopted this guidance in the first quarter of 2016. The adoption of this guidance resulted in the following adjustments to the Consolidated Statement of Financial Condition on December 31, 2015: a decrease of $8.6 million to Other assets, a decrease of $7.0 million to Long-term debt and a decrease of $1.6 million to Other secured financings. The adoption of this guidance also resulted in the following adjustments to the Consolidated Statement of Operations for the first quarter of 2015: a decrease of $1.0 million to Selling, general and other expenses and an increase of $1.0 million to Interest.

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 are currently evaluating the impact of the new guidance related to equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements of financial instruments on our consolidated financial statements. Early adoption is permitted for the accounting guidance on financial liabilities under the fair value option and we have early adopted this guidance in the first quarter of 2016. This guidance did not have a material effect on our consolidated financial statements.

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.

Share-Based Payments to Employees. In March 2016, the FASB issued new guidance to simplify and improve accounting for share-based payments. The amendments include income tax consequences, the accounting for forfeitures, classification of awards as either equity or liabilities and classification on the statement of cash flows. The guidance is effective for annual and interim periods beginning after December 15, 2016. We are currently evaluating the impact this new guidance will have on our consolidated financial statements.

12



Note 3.  Fair Value Disclosures

The following is a summary of our financial instruments and trading liabilities that are accounted for at fair value on a recurring basis, excluding Investments at fair value based on net asset value ("NAV") of $32.8 million and $36.7 million, respectively, by level within the fair value hierarchy at March 31, 2016 and December 31, 2015 (in thousands):
 
March 31, 2016
 
Level 1 (1)
 
Level 2 (1)
 
Level 3
 
Counterparty
and
Cash
Collateral
Netting (2)
 
Total
Assets:
 
 
 
 
 
 
 
 
 
Trading assets, at fair value:
 
 
 
 
 
 
 
 
 
Corporate equity securities
$
2,432,334

 
$
140,168

 
$
30,540

 
$

 
$
2,603,042

Corporate debt securities

 
2,516,929

 
25,634

 

 
2,542,563

Collateralized debt obligations

 
61,290

 
67,348

 

 
128,638

U.S. government and federal agency securities
1,018,909

 
310,273

 

 

 
1,329,182

Municipal securities

 
609,169

 

 

 
609,169

Sovereign obligations
1,490,358

 
799,541

 
119

 

 
2,290,018

Residential mortgage-backed securities

 
2,243,865

 
68,019

 

 
2,311,884

Commercial mortgage-backed securities

 
816,047

 
21,994

 

 
838,041

Other asset-backed securities

 
263,877

 
33,124

 

 
297,001

Loans and other receivables

 
820,132

 
155,442

 

 
975,574

Derivatives
938

 
6,173,287

 
22,975

 
(5,850,803
)
 
346,397

Investments at fair value

 
54

 
275,389

 

 
275,443

Investment in FXCM

 

 
564,800

 

 
564,800

Total trading assets, excluding Investments at fair value based on NAV
$
4,942,539


$
14,754,632


$
1,265,384


$
(5,850,803
)

$
15,111,752

 
 
 
 
 
 
 
 
 
 
Available for sale securities:
 

 
 

 
 

 
 

 
 

Corporate equity securities
$
72,000

 
$

 
$

 
$

 
$
72,000

Corporate debt securities

 
4,539

 

 

 
4,539

U.S. government securities
302,428

 

 

 

 
302,428

Residential mortgage-backed securities

 
9,866

 

 

 
9,866

Commercial mortgage-backed securities

 
2,126

 

 

 
2,126

Other asset-backed securities

 
7,897

 

 

 
7,897

Total available for sale securities
$
374,428


$
24,428


$


$


$
398,856

Cash and cash equivalents
$
2,604,066

 
$

 
$

 
$

 
$
2,604,066

Cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations (3)
$
679,812

 
$

 
$

 
$

 
$
679,812

 
 
 
 
 
 
 
 
 
 
Liabilities:
 

 
 

 
 

 
 

 
 

Trading liabilities:
 

 
 

 
 

 
 

 
 

Corporate equity securities
$
1,637,749

 
$
75,166

 
$
38

 
$

 
$
1,712,953

Corporate debt securities

 
1,877,856

 

 

 
1,877,856

U.S. government and federal agency securities
1,299,982

 

 

 

 
1,299,982

Sovereign obligations
1,131,337

 
710,989

 

 

 
1,842,326

Residential mortgage-backed securities

 
20,585

 

 

 
20,585

Loans

 
432,782

 
7,744

 

 
440,526

Derivatives
302

 
6,192,855

 
34,732

 
(5,879,190
)
 
348,699

Total trading liabilities
$
4,069,370


$
9,310,233


$
42,514


$
(5,879,190
)

$
7,542,927

Other secured financings
$

 
$

 
$
538

 
$

 
$
538

Debt-structured notes
$

 
$
37,118

 
$

 
$

 
$
37,118


13



 
December 31, 2015
 
Level 1 (1)
 
Level 2 (1)
 
Level 3
 
Counterparty
and
Cash
Collateral
Netting (2)
 
Total
Assets:
 
 
 
 
 
 
 
 
 
Trading assets, at fair value:
 
 
 
 
 
 
 
 
 
Corporate equity securities
$
2,803,243

 
$
133,732

 
$
40,906

 
$

 
$
2,977,881

Corporate debt securities

 
2,867,165

 
25,876

 

 
2,893,041

Collateralized debt obligations

 
89,144

 
85,092

 

 
174,236

U.S. government and federal agency securities
2,555,018

 
90,633

 

 

 
2,645,651

Municipal securities

 
487,141

 

 

 
487,141

Sovereign obligations
1,251,366

 
1,407,955

 
120

 

 
2,659,441

Residential mortgage-backed securities

 
2,731,070

 
70,263

 

 
2,801,333

Commercial mortgage-backed securities

 
1,014,913

 
14,326

 

 
1,029,239

Other asset-backed securities

 
118,629

 
42,925

 

 
161,554

Loans and other receivables

 
1,123,044

 
189,289

 

 
1,312,333

Derivatives
2,253

 
4,406,207

 
19,785

 
(4,165,446
)
 
262,799

Investments at fair value

 
26,224

 
199,794

 

 
226,018

Investment in FXCM

 

 
625,689

 

 
625,689

Total trading assets, excluding Investments at fair value based on NAV
$
6,611,880


$
14,495,857


$
1,314,065


$
(4,165,446
)

$
18,256,356

 
 
 
 
 
 
 
 
 
 
Available for sale securities:
 

 
 

 
 

 
 

 
 

Corporate equity securities
$
73,579

 
$

 
$

 
$

 
$
73,579

Corporate debt securities

 
4,744

 

 

 
4,744

U.S. government securities
63,945

 

 

 

 
63,945

Residential mortgage-backed securities

 
23,240

 

 

 
23,240

Commercial mortgage-backed securities

 
2,374

 

 

 
2,374

Other asset-backed securities

 
39,473

 

 

 
39,473

Total available for sale securities
$
137,524


$
69,831


$


$


$
207,355

Cash and cash equivalents
$
3,638,648

 
$

 
$

 
$

 
$
3,638,648

Cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations
$
751,084

 
$

 
$

 
$

 
$
751,084

 
 
 
 
 
 
 
 
 
 
Liabilities:
 

 
 

 
 

 
 

 
 

Trading liabilities:
 

 
 

 
 

 
 

 
 

Corporate equity securities
$
1,428,048

 
$
36,518

 
$
38

 
$

 
$
1,464,604

Corporate debt securities

 
1,556,941

 

 

 
1,556,941

Collateralized debt obligations
1,488,121

 

 

 

 
1,488,121

U.S. government and federal agency securities
837,614

 
505,382

 

 

 
1,342,996

Sovereign obligations

 
117

 

 

 
117

Loans

 
758,939

 
10,469

 

 
769,408

Derivatives
364

 
4,456,334

 
19,543

 
(4,257,998
)
 
218,243

Total trading liabilities
$
3,754,147


$
7,314,231


$
30,050


$
(4,257,998
)

$
6,840,430

Other secured financings
$

 
$

 
$
544

 
$

 
$
544


(1)
There were no material transfers between Level 1 and Level 2 during the three months ended March 31, 2016 and during the year ended December 31, 2015.
(2)
Represents counterparty and cash collateral netting across the levels of the fair value hierarchy for positions with the same counterparty.
(3)
Cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations includes U.S. treasury securities with a fair value of $99.9 million at March 31, 2016.

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 or Level 3 of the fair value hierarchy.
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 for 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/EBITDA, price/book value), discounted cash flow analyses and transaction prices observed for subsequent financing or capital issuance by the company.  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 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 for recently executed market transactions of comparable size, 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 comprise 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 for recently executed market transactions of comparable 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 financings or recapitalizations, models incorporating financial ratios and projected cash flows of the issuer and market prices for comparable issuers.

Collateralized Debt Obligations

Collateralized debt obligations are measured based on prices observed for 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 severities.

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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 Issued Debt Securities:  Callable and non-callable U.S. agency issued 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.

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

Foreign 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. Foreign sovereign government obligations are classified in Level 1, Level 2 or Level 3 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 interest-only 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 ("Agency Inverse IOs"):  The fair value of Agency Inverse IOs 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 for 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 Inverse IOs are categorized within Level 2 or Level 3 of the fair value hierarchy. We also use vendor data in developing our assumptions, as appropriate.
Non-Agency Residential Mortgage-Backed Securities:  Fair values are 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.

Commercial Mortgage-Backed Securities

Agency Commercial Mortgage-Backed Securities:  Government National Mortgage Association (“GNMA”) project loans are measured based on inputs corroborated from and benchmarked to observed prices of recent securitization transactions of similar securities with adjustments incorporating an evaluation for 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 for 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 for recently executed market transactions and are categorized within Level 2 and Level 3 of the fair value hierarchy.


16



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 prices observed for recently executed market transactions.

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 market transaction data.  Corporate loans categorized within Level 3 of the fair value hierarchy are measured based on market 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. 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 of assets with similar underlying loan collateral to derive an implied spread. Securitization prices are adjusted to estimate the fair value of the loans incorporating an evaluation for various factors, including prepayment speeds, default rates, and cash flow structures as well as the likelihood of pricing levels in the current market environment. 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 incorporating additional 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 security.

Derivatives

Listed Derivative Contracts:  Listed derivative contracts that are actively traded are measured based on quoted exchange prices, which are generally obtained from external pricing services, and are categorized within Level 1 of the fair value hierarchy.  Listed derivatives for which there is limited trading activity are measured based on incorporating the closing auction price of the underlying equity security, use similar valuation approaches as those applied to over-the-counter derivative contracts and are categorized within Level 2 of the fair value hierarchy.
OTC Derivative Contracts:  Over-the-counter ("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 period 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 impacting the valuation including the underlying security, foreign exchange spot rate or 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.  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 observable for the underlying asset

17



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 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 uses call and put options in order to reduce exposure to future oil price fluctuations. Vitesse 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 included in Trading assets on the Consolidated Statements of Financial Condition 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 our 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. 

Investment in FXCM

In January 2015, we entered into a credit agreement with FXCM, and provided FXCM a $300 million senior secured term loan due January 2017, with rights to a variable proportion of certain distributions in connection with an FXCM sale of assets or certain other events, and to require a sale of FXCM beginning in January 2018.  FXCM is an online provider of foreign exchange trading and related services.  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.  The variable proportion of distributions is as follows: 100% until amounts due under the loan are repaid; 50% of the next $350 million; then 90% of the next $500 million (this was an amount initially set at a range between $500 million to $680 million and based on payments made by FXCM to us through April 16, 2015, this amount became $500 million); and 60% of all amounts thereafter.  During the three months ended March 31, 2016, we received $7.7 million of principal, interest and fees from FXCM and $192.7 million remained outstanding under the credit agreement as of March 31, 2016. Through the first quarter of 2016 interest accrued at 16.0% per annum; in the second quarter of 2016 interest will accrue at 17.5% per annum.

FXCM is considered a variable interest entity and our term loan with rights is a variable interest.  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.

We view the FXCM loan and associated rights as one integrated transaction; since the rights, as derivatives, are accounted for at fair value, we have elected the fair value option for the loan.  The total amount of our investment in FXCM 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, are included within Principal transactions in the Consolidated Statements of Operations.  During the three months ended March 31, 2016 and 2015, we recorded in Principal transactions an aggregate $(53.2) million and $686.6 million, respectively, of unrealized and realized gains (losses), interest income and fees relating to our investment in FXCM.  Our maximum exposure to loss as a result of our involvement with FXCM is limited to the carrying value of our investment ($564.8 million at March 31, 2016).

On March 10, 2016 we and FXCM entered into a nonbinding memorandum of understanding that would amend the terms of the FXCM loan and associated rights. Among other changes, the proposed amendments would extend the maturity of the term loan by one year to January 2018 to allow FXCM more time to optimize remaining asset sales; give Leucadia a 49.9% common membership interest in FXCM Newco, LLC ("FXCM Newco") as well as non-voting preferred shares; create an eight-member board for FXCM Newco, comprised of three directors appointed by Leucadia, three directors appointed by FXCM, and two

18



independent directors; and put in place a long-term incentive program for FXCM senior management. The nonbinding memorandum of understanding remains subject to the execution of definitive agreements and Board and regulatory approvals.

We engaged an independent valuation firm to assist management in estimating the fair value of our loan and rights in FXCM.  Our estimate of fair value was determined using valuation models with inputs including management’s assumptions concerning the amount and timing of expected cash flows; the loan’s implied credit rating and effective yield; implied total equity value, based primarily on the publicly traded FXCM stock price; volatility; risk-free rate; and term.  Because of these inputs and the degree of judgment involved, we have categorized our FXCM investment in Level 3.  The valuation is most significantly impacted by the inputs and assumptions related to the publicly traded stock price, volatility and the time to liquidity event.  A $1.00 change in the price of FXCM’s shares alone (representing about 9% of the price at March 31, 2016 of its common stock), would result in a change of about $17 million in this valuation, assuming no change in any other factors we considered.  Likewise, a 10% change in the assumed volatility would result in a change of about $20 million in this valuation, assuming no other change in any other factors.  A three month change in the estimated time to liquidity event would result in a change of about $7 million in this valuation, assuming no change in any other factors. As we adjust to fair value each quarter, we anticipate there could be volatility in the FXCM valuation, which could materially impact our results in a given period.

Investments at Fair Value based on NAV and Investments in Managed Funds

Investments at fair value based on NAV and Investments in managed funds include investments in hedge funds, fund of funds, private equity funds, convertible bond funds and other funds, which are measured at the NAV of the funds provided by the fund managers and are excluded from the fair value hierarchy. The following tables present information about our investments in entities that have the characteristics of an investment company and are measured based on NAV (in thousands).
 
Fair Value (1)
 
Unfunded
Commitments
 
Redemption
Frequency
(if currently eligible)
March 31, 2016
 
 
 
 
 
Equity Long/Short Hedge Funds (2)
$
424,516

 
$

 
(2)
Fixed Income and High Yield Hedge Funds (3)
1,321

 

 
Fund of Funds (4)
279

 

 
Equity Funds (5)
39,496

 
20,512

 
Multi-strategy Fund (7)
114,040

 

 
Total
$
579,652


$
20,512

 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 

 
 

 
 
Equity Long/Short Hedge Funds (2)
$
482,570

 
$

 
(2)
Fixed Income and High Yield Hedge Funds (3)
1,703

 

 
Fund of Funds (4)
287

 
94

 
Equity Funds (5)
42,111

 
20,791

 
Convertible Bond Funds (6)
326

 

 
At Will
Multi-strategy Fund (7)
113,458

 

 
Total
$
640,455


$
20,885

 
 
 
(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, in primarily equity securities in domestic and international markets in both the public and private sectors.  At March 31, 2016 and December 31, 2015, investments with a fair value of $97.5 million and $107.1 million are redeemable with 30 to 90 days prior written notice, and includes an investment in a private asset management fund managed by us with a fair value of $54.4 million and $52.4 million at March 31, 2016 and December 31, 2015, respectively.  At March 31, 2016 and December 31, 2015, this category also includes investments in Folger Hill feeder funds that invest solely in a Folger Hill master fund that makes long/short equity investments, with broad industry and geographic diversification.  Investment in these funds is subject to a lock-up until August 15, 2019, subject to certain release events and other withdrawal rights.  Following this date, investments can be redeemed as of any calendar quarter-end with no less than 45 calendar days’ notice, subject to certain limitations.  At March 31, 2016 and December 31, 2015, our investments in these funds had an aggregate fair value of $327.0 million and $375.5 million, respectively.

19



(3)
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.  At March 31, 2016 and December 31, 2015, the underlying assets of 7% and 8%, respectively, of these funds are being liquidated and we are unable to estimate when the underlying assets will be fully liquidated.
(4)
Includes investments in fund of funds that invest in various private equity funds.  At March 31, 2016 and December 31, 2015, approximately 69% and 95%, respectively, of the fair value of investments in this category is managed by us and has no redemption provisions; instead distributions are received through the liquidation of the underlying assets of the fund of funds, which are estimated to start liquidating in the next nine months.  For the remaining investments, we have requested redemption; however, we are unable to estimate when these funds will be received.
(5)
At March 31, 2016 and December 31, 2015, approximately 99% and 100%, respectively, of the fair value of 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 liquidate in one to eight years. 
(6)
Investment in the Jefferies Umbrella Fund, an open-ended investment company managed by Jefferies that invested primarily in convertible bonds.  The remaining investments were in liquidation at December 31, 2015 and the underlying assets were fully liquidated during the three months ended March 31, 2016.
(7)
Investment in private asset management fund managed by us that employs a variety of investment strategies and can invest in U.S. and non-U.S. equity and equity related securities, futures, exchange traded funds, fixed income securities, preferred securities, options, forward contracts and swaps.  Withdrawals during any calendar quarter are limited to 25% of the fund’s net asset value.  This restriction can be waived by us, in our sole discretion.

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. 

Debt-Structured Notes

Long-term debt includes variable rate and fixed to floating rate structured notes that contain payment terms and redemption values based on the performance of certain interest rate indices and are generally measured using valuation models for the derivative and debt portions of the notes. These models incorporate market price quotations from external pricing sources referencing the appropriate interest rate curves and are generally categorized within Level 2 of the fair value hierarchy. The impact of Jefferies credit spreads is also included based on observed secondary bond market spreads and asset-swap spreads.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



20



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, 2016 (in thousands):
Three Months Ended March 31, 2016
 
Balance, December 31, 2015
 
Total gains (losses)
(realized and unrealized) (1)
 
Purchases
 
Sales
 
Settlements
 
Issuances
 
Net transfers
into (out of)
Level 3
 
Balance at March 31, 2016
 
Changes in
unrealized gains (losses) relating to instruments still held at
March 31, 2016(1)
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate equity securities
$
40,906

 
$
3,071

 
$
2,087

 
$

 
$

 
$

 
$
(15,524
)
 
$
30,540

 
$
3,560

Corporate debt securities
25,876

 
(2,602
)
 
15,337

 
(15,129
)
 
(111
)
 

 
2,263

 
25,634

 
(2,540
)
Collateralized debt obligations
85,092

 
(16,573
)
 
1,021

 
(20,178
)
 
(463
)
 

 
18,449

 
67,348

 
(17,003
)
Sovereign obligations
120

 
(1
)
 

 

 

 

 

 
119

 
(1
)
Residential mortgage-backed securities
70,263

 
(4,548
)
 
62,844

 
(64,926
)
 
(114
)
 

 
4,500

 
68,019

 
(3,358
)
Commercial mortgage-backed securities
14,326

 
(971
)
 
2,962

 

 
(878
)
 

 
6,555

 
21,994

 
(1,387
)
Other asset-backed securities
42,925

 
1,662

 
15,425

 
(2,100
)
 
(1
)
 

 
(24,787
)
 
33,124

 
1,679

Loans and other receivables
189,289

 
(5,772
)
 
181,264

 
(114,667
)
 
(95,354
)
 

 
682

 
155,442

 
(9,113
)
Investments at fair value
199,794

 
48,618

 
1,187

 

 
(273
)
 

 
26,063

 
275,389

 
48,618

Investment in FXCM
625,689

 
(53,203
)
 

 

 
(7,686
)
 

 

 
564,800

 
(53,203
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Trading liabilities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Corporate equity securities
$
38

 
$

 
$

 
$

 
$

 
$

 
$

 
$
38

 
$

Net derivatives (2)
(242
)
 
10,304

 

 

 
2,558

 
554

 
(1,417
)
 
11,757

 
(8,135
)
Loans
10,469

 
(345
)
 
(2,240
)
 
1,033

 
(1,077
)
 

 
(96
)
 
7,744

 
345

Other secured financings
544

 
(6
)
 

 

 

 

 

 
538

 


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

Analysis of Level 3 Assets and Liabilities for the three months ended March 31, 2016

During the three months ended March 31, 2016, transfers of assets of $119.0 million from Level 2 to Level 3 of the fair value hierarchy are attributed to:
Collateralized debt obligations of $39.5 million and non-agency residential mortgage-backed securities of $20.4 million, for which no recent trade activity was observed for purposes of determining observable inputs;
Investments at fair value of $26.1 million due to a lack of observable market transactions.

During the three months ended March 31, 2016, transfers of assets of $100.8 million from Level 3 to Level 2 are attributed to:
Other asset-backed securities of $28.8 million and non-agency residential mortgage-backed securities of $15.9 million for which market trades were observed in the period for either identical or similar securities;
Collateralized debt obligations of $21.0 million due to a greater number of contributors for certain vendor quotes supporting classification into Level 2;
Corporate equity securities of $19.2 million due to an increase in observable market transactions.


Net losses on Level 3 assets were $30.3 million and net losses on Level 3 liabilities were $10.0 million for three months ended March 31, 2016.  Net losses on Level 3 assets were primarily due to decreased valuations of our investment in FXCM and decreased valuations of collateralized debt obligations, loans and other receivables, residential mortgage-backed securities and corporate debt securities, partially offset by an increase in valuations of investments at fair value, corporate equity securities and other asset-backed securities.  Net losses on Level 3 liabilities were primarily due to increased valuations of certain derivative instruments.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



21



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, 2015 (in thousands):
Three Months Ended March 31, 2015
 
Balance, December 31, 2014
 
Total gains (losses)
(realized and unrealized) (1)
 
Purchases
 
Sales
 
Settlements
 
Issuances
 
Net transfers
into (out of)
Level 3
 
Balance, March 31, 2015
 
Changes in
unrealized gains (losses) relating to instruments still held at
March 31,
2015 (1)
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate equity securities
$
20,964

 
$
63

 
$

 
$
(168
)
 
$

 
$

 
$
(2,649
)
 
$
18,210

 
$
243

Corporate debt securities
22,766

 
(311
)
 
469

 
(533
)
 

 

 
2,404

 
24,795

 
43

Collateralized debt obligations
124,650

 
(17,642
)
 

 
(13,519
)
 
(1,296
)
 

 
4,644

 
96,837

 
(17,506
)
Sovereign obligations

 
13

 

 
(1
)
 

 

 
321

 
333

 
12