Business context and reporting period
The supplied filing is Leucadia National Corporation’s unaudited Form 10-Q for the quarter ended March 31, 2011—not a filing under the name Jefferies Financial Group Inc. Leucadia reported a diversified portfolio of operating businesses and investments, including an approximately 28% interest in Jefferies Group, Inc. The filing reports in thousands of dollars unless otherwise noted.
Key financial metrics
| Metric | Q1 2011 | Q1 2010 / prior balance date |
|---|---|---|
| Revenue and other income | $284.0 million | $259.3 million |
| Income from continuing operations | $12.4 million | $196.3 million |
| Net income attributable to common shareholders | $10.5 million; $0.04 basic and diluted EPS | $191.5 million; $0.79 basic and $0.78 diluted EPS |
| Operating cash flow | $(17.8) million | $(72.0) million |
| Cash and cash equivalents | $313.9 million | $441.3 million at Dec. 31, 2010 |
| Total assets / total liabilities | $9.224 billion / $2.316 billion | $9.350 billion / $2.387 billion at Dec. 31, 2010 |
| Equity | $6.908 billion | $6.963 billion at Dec. 31, 2010 |
| Debt and repurchase agreements | $1.540 billion debt, plus $545.6 million repo obligations | $1.691 billion debt, plus $401.1 million repos at Dec. 31, 2010 |
Revenue increased about 10%, but reported earnings fell sharply. The quarter included an $81.8 million gain on forgiveness of Myrtle Beach project debt; results also reflected a $79.7 million loss related to the Jefferies investment. The prior-year comparison benefited from a $94.9 million Fortescue share-sale gain and $158.5 million of after-tax income related to AmeriCredit. The filing does not present a consolidated operating margin that is readily comparable across this diversified business.
Cash declined $127.4 million during the quarter. Investing activities used $179.5 million, while financing activities provided $69.9 million. Current assets were $767.7 million and current liabilities $720.4 million at quarter-end. Management said parent-level available liquidity was $3.687 billion, comprising cash and marketable securities; this excludes $839.0 million of investments unavailable for parent liquidity because of collateral, restrictions, private holdings, or subsidiary-level constraints.
Material changes and unusual items
- Domestic real estate reported $81.3 million pretax income, largely due to the Myrtle Beach debt-forgiveness gain. A subsidiary paid $19.3 million to settle project debt with a stated balance of $100.5 million.
- Jefferies’ market-value decline generated an $83.4 million unrealized loss; the overall pretax loss from associated companies was $44.2 million, compared with $157.1 million of income in Q1 2010.
- Fortescue note interest income was $37.4 million, versus $21.7 million a year earlier. The company received $72.9 million net of withholding taxes in January for second-half 2010 interest.
- In April 2011, Leucadia paid $125 million for 5,154,639 Jefferies shares in connection with Jefferies’ offering; its ownership declined to 27.5%. This was subsequent to quarter-end.
- Q1 debt repurchases covered $42.4 million principal of senior notes and resulted in a $2.9 million pretax loss. In April, the company repurchased a further $23.9 million principal amount.
Outlook, risks and contingencies
No consolidated earnings or revenue guidance is provided. Management cautioned that results depend on volatile investment prices and economic conditions. It cited risks from housing and real estate weakness, raw-material costs, commodity and energy prices, drilling activity, capital-market liquidity, and the ability to realize deferred tax assets. It also noted that a prolonged downturn could reduce cash flows and trigger impairment charges.
Leucadia was litigating Fortescue’s asserted right to issue additional notes that could dilute the company’s 4% share of specified iron-ore revenue under the FMG Note. An adverse outcome could materially reduce future cash flows and results. The company stated that current litigation was not expected to materially harm its financial position, results, or liquidity, while acknowledging that an adverse resolution above recorded reserves could be significant.
The net deferred tax asset was $1.194 billion. Management said realization depends on future taxable income and that further valuation-allowance changes were possible. Unrecognized tax benefits, including interest, totaled $9.4 million; New York State and City tax returns for 2006–2008 were under audit. A Premier noteholder dispute was settled in April for $9.0 million.
Management reported disclosure controls were effective as of March 31, 2011, with no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Confirm the filing entity: this source is Leucadia National Corporation, while the request identifies Jefferies Financial Group Inc.
- Assess earnings quality, separating the Myrtle Beach debt-forgiveness gain and investment fair-value movements from recurring operating performance.
- Review Jefferies’ contribution and the effect of its share-price decline, the subsequent $125 million purchase, and the changed ownership percentage.
- Evaluate parent-level liquidity after restrictions and collateral, and the near-term maturities and refinancing implications of repo agreements.
- Monitor the Fortescue Note litigation and possible dilution of future interest receipts, along with deferred-tax-asset realizability and potential impairments.
- Compare operating trends by segment, particularly housing-sensitive manufacturing and real estate, drilling activity, gaming, and Sangart’s clinical-development spending.