Business context and reporting period
This is Leucadia National Corporation’s Form 10-K for the fiscal year ended December 31, 2012, including fourth-quarter results. Although the request metadata names Jefferies Financial Group, the filing registrant is Leucadia National Corporation. Leucadia was a diversified holding company with operating businesses in beef processing, manufacturing, gaming, real estate, medical product development and wineries, plus significant investments including a 28% interest in Jefferies.
National Beef, acquired at the end of 2011, was consolidated for 2012 but contributed no material operating results to Leucadia’s 2011 comparison. Therefore, year-over-year revenue and asset comparisons are not like-for-like.
Financial performance and position
| Metric | 2012 | 2011 |
|---|---|---|
| Revenue and other income | $9.194 billion | $1.435 billion |
| Income from continuing operations before tax, including associated companies | $1.387 billion | $65.1 million |
| Income from continuing operations | $866.3 million | $13.1 million |
| Net income attributable to common shareholders | $854.5 million | $25.2 million |
| Diluted earnings per share | $3.44 | $0.10 |
| Operating cash flow | $221.9 million | $9.1 million |
| Investing cash flow | $407.3 million provided | $175.3 million used |
| Financing cash flow | $651.7 million used | $106.6 million used |
- Fourth-quarter 2012 revenue and other income was $2.511 billion; continuing-operations income was $450.5 million and net income was $454.2 million.
- National Beef generated $7.481 billion of 2012 revenue and $59.0 million of pretax income, a roughly 0.8% pretax margin. Its cattle-to-beef spread was pressured by record cattle prices and a historically low cutout-to-cattle-price ratio.
- Corporate results included $590.6 million of net securities gains, chiefly $543.7 million from Fortescue share sales, and a $526.2 million pretax gain from redemption of the Fortescue-related note. Leucadia also recorded a $279.6 million unrealized gain on its Jefferies investment.
- Year-end total assets were $9.349 billion, total equity was $6.768 billion and book value was $27.67 per share. Cash and investments totaled $3.567 billion; management considered $3.005 billion available for liquidity after exclusions for restricted, pledged or otherwise unavailable amounts.
- Indebtedness, including repurchase agreements, was approximately $1.750 billion. Parent-company debt principal was $958.1 million; $401.9 million was due in 2013, $97.6 million in 2014 and $458.6 million in 2015. The company repaid or repurchased substantial debt during 2012.
- Cash and cash equivalents declined to $146.0 million from $168.5 million. The $715.0 million note redemption was a major source of investing cash flow; reported earnings included substantial gains that do not recur as ordinary operating cash generation.
Material changes versus the prior comparable period
- Revenue rose sharply primarily because National Beef was included for a full year in 2012, unlike 2011; the increase should not be read as organic growth.
- Net income increased from $25.2 million to $854.5 million, reflecting large Fortescue-related gains and improved results from associated companies, including the reversal of Jefferies-related losses recorded in 2011.
- Leucadia sold its remaining Fortescue shares and Chichester redeemed the FMG Note. The settlement resolved pending litigation without additional payment, but ended future interest receipts on the note.
- Leucadia sold Mueller, Keen Energy Services and a small Caribbean telecommunications provider. The Keen sale produced an $18.0 million pretax discontinued-operations loss.
- Manufacturing and gaming reported positive pretax results. Domestic real estate recorded an $11.9 million pretax loss; Sangart and other operations also remained loss-making.
Outlook, risks, contingencies and unusual items
- Jefferies merger: The proposed all-stock merger was subject to approval by both companies’ shareholders, scheduled to meet February 28, 2013, and other customary conditions. Leucadia expected to issue approximately 117.7 million common shares and $125 million of preferred stock at mandatory redemption value. The filing estimated an approximately $4.8 billion purchase price, or approximately $5.1 billion including JHYH. Completion was not conditioned on financing.
- Management’s stated financial targets after the merger: Parent-company debt to stressed equity had a target maximum of 0.50x versus 0.25x at year-end; available liquidity to parent-company debt had a target minimum of 1.0x versus 3.1x. These were management targets, not legal requirements.
- Crimson spin-off and dividend: A tax-structured distribution of Crimson Wine Group shares was scheduled for February 25, 2013, at one Crimson share for every ten Leucadia shares. It was a condition to the merger and was expected to reduce equity by approximately $197 million. Leucadia stated its intention to continue a $0.25 annual dividend, subject to board discretion.
- National Beef customer risk: Walmart intended to discontinue National Beef as a case-ready supplier in 2013. Case-ready products represented about 7% of 2012 revenue but historically 10%–26% of gross margin. Facilities were expected to operate at reduced levels, with an estimated $2.9 million first-quarter 2013 workforce-reduction charge; replacement business was uncertain.
- Litigation: Leucadia accrued $20 million for the Sykes consumer class action. Potential damages remain uncertain and could exceed the reserve. Seven additional putative class actions challenged the Jefferies merger; the company intended to defend them.
- Other material exposures: Leucadia agreed to reimburse Berkshire Hathaway for half of losses under a $2.5 billion surety arrangement supporting Berkadia commercial paper; $2.47 billion was outstanding. National Beef faced cattle-price, food-safety, labor, environmental and export risks. The Hard Rock Biloxi faced hurricane exposure, with named-storm losses subject to a $110 million sublimit and $5 million deductible.
- Development and tax uncertainties: Sangart’s Phase 2 MP4OX trauma trial missed its primary efficacy goal; further trials require substantial funding, which Leucadia had not committed to provide. Large energy projects depended on third-party financing, permits and commercial commitments. Leucadia reported a $1.215 billion net deferred tax asset and approximately $3.637 billion of federal NOLs, whose realization depends on future taxable income and tax rules.
Important facts for investors to verify
- Whether the Jefferies merger and Crimson distribution closed as planned, and the final share issuance, purchase accounting and post-merger capital structure.
- How much of 2012 earnings came from one-time Fortescue gains, note redemption and fair-value movements, versus recurring operating and investment income.
- National Beef’s ability to replace Walmart case-ready business, protect margins amid cattle-cost volatility and maintain customer relationships.
- Available liquidity after restrictions, the refinancing or repayment of near-term debt maturities, and any changes in credit ratings or management’s stated leverage and liquidity targets.
- The development of the Sykes litigation and merger-related lawsuits, and whether the $20 million litigation reserve remains adequate.
- The recoverability of the deferred tax asset and NOLs, and any further funding or dilution requirements for Sangart or proposed energy projects.