Leucadia National Corporation — Q1 2010 Form 10-Q
Entity clarification: The supplied filing is Leucadia National Corporation’s 10-Q, not Jefferies Financial Group’s. Leucadia reported its investment in Jefferies Group as an associated-company investment. The quarter ended March 31, 2010; comparisons are with Q1 2009. Figures below are in millions of dollars unless noted.
Business context and key financial metrics
Leucadia is a diversified holding company with operating businesses and substantial investment holdings. Its reported quarterly results were significantly affected by securities gains and changes in the market value of investments.
| Metric | Q1 2010 | Q1 2009 / prior date |
|---|---|---|
| Revenue and other income | $374.4 | $250.3 |
| Net income (loss) | $191.5 | $(140.1) |
| Net income (loss) attributable to common shareholders | $191.5 | $(140.0) |
| Basic / diluted EPS | $0.79 / $0.78 | $(0.59) / $(0.59) |
| Cash from operating activities | $(72.0) | $(65.8) |
| Cash from investing activities | $127.1 | $37.0 |
| Cash from financing activities | $9.8 | $(4.0) |
| Cash and cash equivalents, quarter-end | $219.0 | $154.1 at Dec. 31, 2009 |
| Total assets, quarter-end | $6,988.1 | $6,762.4 at Dec. 31, 2009 |
| Total debt, quarter-end | $1,981.7 | $1,970.4 at Dec. 31, 2009 |
| Total equity, quarter-end | $4,579.5 | $4,374.5 at Dec. 31, 2009 |
Consolidated income before taxes was $200.1 million, including $157.1 million of pre-tax income from associated companies; income before taxes and associated-company results was $43.0 million. The filing does not present a single consolidated operating-margin measure.
Material changes versus the prior comparable period
- Net income swung from a $140.1 million loss to $191.5 million of income. The improvement was primarily investment-driven, not a broad-based operating turnaround.
- Net securities gains were $99.1 million, versus losses of $26.3 million a year earlier. The 2010 total included a $94.9 million gain from selling Fortescue shares; securities impairment charges were $1.0 million versus $22.7 million.
- Associated-company results improved to $151.2 million after tax from an $83.0 million loss. ACF contributed approximately $158.5 million, largely from unrealized fair-value gains; Jefferies contributed approximately $0.7 million.
- Revenue increased 50%, but operating performance varied: Idaho Timber and Conwed Plastics reported higher revenue; telecommunications revenue fell to $91.6 million from $118.8 million; property-management revenue declined; and Keen, consolidated since November 2009, recorded an $11.3 million pre-tax loss.
- Operating cash use widened to $72.0 million from $65.8 million, which management attributed principally to lower distributions from associated companies and higher income-tax payments. Cash nevertheless rose by $64.9 million, mainly reflecting investing cash inflows.
Liquidity, debt, and investments
- Current assets were $662.0 million and current liabilities $638.7 million. Debt totaled $1.982 billion, including $324.3 million due within one year and $1.657 billion long-term.
- Management identified $1.960 billion as available liquidity, including cash and marketable securities. This is not equivalent to cash: $472.4 million of the broader $2.433 billion pool of cash and investments was pledged, non-public, or otherwise restricted from parent use. Available liquidity included Fortescue shares valued at $1.115 billion and Inmet shares valued at $325.5 million.
- Current debt included $210.8 million of repurchase agreements maturing in April 2010, collateralized by investments with a carrying value of $218.0 million.
- Investments in associated companies totaled $2.914 billion, including $1.150 billion in Jefferies (approximately 28% ownership) and $805.5 million in ACF (approximately 25% ownership). Jefferies reported Q1 revenue of $658.6 million and net income of $74.1 million, compared with $405.9 million and $38.3 million, respectively, in Q1 2009.
Outlook, risks, contingencies, and unusual items
- No specific consolidated earnings or revenue guidance was provided. Management cautioned that interim results are not necessarily indicative of full-year results and described broad exposure to economic, market, and operating uncertainty.
- Management cited continuing risks from recessionary conditions, housing and real-estate weakness, volatile securities and commodity prices, natural-gas prices and drilling demand, competition, consumer-credit availability, and funding and regulatory requirements for energy projects and clinical trials.
- Fortescue’s accrued interest income reflects a 4% revenue-based entitlement from its Pilbara project. Cash interest was being deferred under project debt covenants; accrued interest receivable was $128.2 million at quarter-end. The related FMG note is unsecured and subordinated to senior secured project debt.
- In May 2010, Leucadia agreed to sell its Light and Power Holdings investment for $85 million cash and expected a pre-tax gain of approximately $66 million in Q2 2010.
- Leucadia had a full valuation allowance against its net federal deferred tax asset. Unrecognized tax benefits were $9.1 million; certain New York tax years were under audit.
- Management said current litigation was not expected to materially affect consolidated financial position, results, or liquidity, though excess payments over reserves could be material. In the Ramirez matter, settlement discussions continued; a potentially material loss was considered reasonably possible but not estimable. Another disclosed action was settled with claims against Leucadia and STi Prepaid released with prejudice.
- Management reported effective disclosure controls as of March 31, 2010, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of the $191.5 million quarterly profit reflects realized, recurring operating earnings versus securities gains and unrealized associated-company fair-value changes?
- Whether the $1.960 billion of stated available liquidity remains accessible, and how concentrated it is in Fortescue and Inmet shares.
- Repayment or refinancing of the April 2010 repurchase agreements and the terms and liquidity of other debt.
- Collection timing and credit exposure related to the $128.2 million accrued Fortescue interest receivable and deferred cash payments.
- Whether the LPH sale closed on the expected terms and whether the anticipated gain was recognized in Q2.
- Developments in the Ramirez litigation and New York tax audits, along with any changes in tax valuation allowances or contingencies.