Business Context and Reporting Period
This summary covers the Form 10-Q filed by Leucadia National Corporation for the quarterly period ended September 30, 2008. Leucadia is a diversified holding company with operations in manufacturing, telecommunications, property management, gaming, and significant investments in associated companies and securities. The filing reflects the impact of the 2008 global financial crisis, particularly regarding the valuation of its investment portfolio and the adoption of fair value accounting options (SFAS 159) for specific holdings.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2007 |
|---|---|---|---|
| Total Revenues | $251.6 million | $914.0 million | $872.3 million |
| Net Income | $89.5 million | $180.4 million | $38.6 million |
| Diluted EPS | $0.37 | $0.76 | $0.18 |
| Cash and Equivalents | $162.1 million | $162.1 million (Balance Sheet) | $695.1 million (Balance Sheet) |
| Total Debt | $2.22 billion | $2.22 billion (Balance Sheet) | $2.14 billion (Balance Sheet) |
| Shareholders' Equity | $5.83 billion | $5.83 billion (Balance Sheet) | $4.74 billion (Balance Sheet) |
Operating Cash Flow: Net cash used for operating activities was $39.8 million for the nine months ended September 30, 2008, compared to $5.1 million used in the prior year period.
Material Changes vs. Prior Period
- Net Income Surge: Net income for the nine months ended September 30, 2008, increased significantly to $180.4 million from $38.6 million in 2007. This was primarily driven by a $222.2 million credit to income tax expense resulting from the reversal of a deferred tax valuation allowance, and unrealized gains on investments in associated companies (specifically Jefferies Financial Group).
- Investment Volatility: While the company reported gains in the third quarter, the fair value of major holdings (Fortescue Metals, Jefferies, ACF) experienced severe declines subsequent to the quarter-end. The Fortescue investment dropped from $1.82 billion (Dec 2007) to $1.03 billion (Sep 2008), and further to $560 million by November 3, 2008.
- Impairment Charges: The company recorded significant impairment charges totaling $74.9 million for the nine months ended September 30, 2008, related to securities (including IFIS and Cresud) deemed other-than-temporarily impaired.
- Segment Performance:
- Manufacturing: Idaho Timber revenues declined due to weak housing demand; Conwed Plastics saw revenue increases but faced higher raw material costs.
- Telecommunications: Revenues declined 5% year-over-year due to reduced sales of unprofitable prepaid cards.
- Gaming: Premier Entertainment reported a pre-tax loss for the quarter but a profit for the nine-month period, aided by an insurance settlement gain.
Guidance, Outlook, and Risks
- Market Risk & Fair Value Option: The company elected the fair value option for investments in Jefferies and AmeriCredit (ACF). This decision significantly increases earnings volatility as unrealized gains and losses are recognized immediately. Management warns that further declines in the market value of these holdings could result in substantial unrealized losses in the fourth quarter (estimated at $440 million if values remain at November 3 levels).
- Liquidity: The company maintains approximately $1.86 billion in available liquidity (cash and marketable securities). However, credit market turmoil may increase borrowing costs or restrict access to capital markets.
- Deferred Tax Asset: The realization of the deferred tax asset is contingent on future taxable income. Management notes that if future losses occur or taxable income projections are reduced, additional valuation allowances may be required.
- Legal Proceedings: The company is defending against multiple lawsuits regarding its telecommunications subsidiary (STi Prepaid), alleging violations of consumer protection laws. Management believes the allegations are without merit.
- Forward-Looking Statements: The filing includes standard disclaimers regarding risks such as economic downturns, housing market conditions, raw material price volatility, and the potential for further declines in investment values.
Investor Verification Checklist
- Investment Valuations: Verify the current market value of Leucadia's holdings in Fortescue Metals, Jefferies, and ACF, as these have declined significantly since the September 30 reporting date and will impact Q4 earnings.
- Deferred Tax Reversal: Assess the sustainability of the $222.2 million tax benefit and the assumptions regarding future taxable income used to justify the reversal of the valuation allowance.
- Impairment Risks: Monitor for additional impairment charges on the IFIS and Cresud investments, which were already written down but face continued market pressure.
- Debt Covenants: Review debt agreements for any covenants that might be triggered by the decline in the fair value of pledged collateral (e.g., the $172.3 million in investments securing repurchase agreements).
- Legal Exposure: Track the status of the pending litigation against STi Prepaid regarding consumer protection laws.