Business context and reporting period
The filing is Leucadia National Corporation and subsidiaries’ unaudited Form 10-Q for the quarter ended June 30, 2010; it is not a Jefferies Financial Group Inc. filing, despite the request metadata. Leucadia reported a diversified portfolio of operating businesses and investments, including an approximately 28% interest in Jefferies, accounted for at fair value.
Amounts below are in U.S. dollars; financial statement amounts have been converted from thousands to millions unless stated otherwise.
Financial results and position
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Revenue and other income | $412.5m | $284.3m | $786.9m | $534.7m |
| Income (loss) before tax and associated-company results | $80.8m | $(130.5)m | $123.8m | $(212.0)m |
| Income (loss) related to associated companies, after tax | $(321.9)m | $570.6m | $(170.7)m | $487.7m |
| Net income (loss) attributable to Leucadia shareholders | $(235.1)m | $411.0m | $(43.7)m | $271.0m |
| Basic EPS | $(0.97) | $1.70 | $(0.18) | $1.13 |
- Revenue and other income increased 45% in Q2 and 47% for the first half. This measure includes investment income and securities gains, so it is not a straightforward measure of operating sales.
- Q2’s loss was driven mainly by fair-value losses on associated-company investments, including ACF and Jefferies. For the first half, Leucadia recorded associated-company losses of $29.3m for ACF and $121.5m for Jefferies, versus substantial gains in the prior-year period.
- First-half net securities gains were $170.5m, including $94.9m from selling Fortescue shares and $66.2m from selling LPH. These gains supported results but did not offset investment valuation losses.
- Six-month operating cash flow was negative $57.6m, versus negative $62.3m in 2009. Investing activities provided $118.1m, and financing activities provided $33.7m; cash increased $94.1m to $248.2m.
- At June 30, total debt was approximately $2.006bn, including $380.7m due within one year and $1.625bn long term. Total liabilities were $2.446bn and total equity was $3.985bn. Interest expense was $63.0m for the first half, compared with $65.8m.
- Current assets were $764.5m against current liabilities of $729.7m. Management reported $1.722bn of available liquidity, excluding $473.5m of investments pledged, non-public, or otherwise restricted; this included substantial publicly traded Fortescue and Inmet positions.
Material changes versus the prior comparable period
- Reported earnings swung from profit to loss in both the quarter and first half, chiefly because fair-value gains on ACF and Jefferies in 2009 became losses in 2010. The fair-value changes are market-sensitive and can produce substantial earnings volatility.
- Operating businesses were mixed. First-half manufacturing revenue increased, while telecommunications and property-management revenue declined. Telecommunications reported a first-half pre-tax loss of $3.4m, compared with income of $1.4m; property management improved to $2.8m income from a $0.2m loss.
- Oil-and-gas drilling services, acquired and consolidated in November 2009, contributed $50.0m of first-half revenue and a $10.8m pre-tax loss; there is no comparable consolidated 2009 revenue figure.
- Accumulated other comprehensive income declined to $638.5m from $985.0m at year-end, principally reflecting lower unrealized investment gains. Total assets fell to $6.431bn from $6.762bn.
Outlook, commentary, risks and unusual items
- No consolidated earnings or revenue guidance is provided. Management cautioned that interim results are not necessarily indicative of full-year results and that market prices, economic conditions, and operating businesses could materially affect results.
- Management said the weak economy and recession could continue to pressure most operating businesses and investments. Risks highlighted include securities-market volatility; housing and commercial real estate weakness; competition and raw-material costs; natural-gas prices and drilling activity; and regulatory or tax changes.
- ResortQuest reported a decline in occupied nights in Northwest Florida associated with the Gulf Coast oil spill. It recognized $0.7m of BP claim advances in Q2 and said further claims were being pursued; future compensation was uncertain and management expected the spill to continue affecting revenues.
- In July, Leucadia agreed to vote its ACF shares for a proposed General Motors acquisition at $24.50 per share. If completed, consideration for Leucadia’s shares would be about $830.6m and the company estimated an additional gain of $212.9m; completion remained subject to conditions, including shareholder approval.
- FMG paid accrued interest on the Fortescue-related note in July. The filing reports $172.1m before withholding taxes in the note disclosure and $154.9m net of $17.2m withholding taxes in MD&A. Future interest payments remain subject to FMG debt covenants and depend on iron-ore volumes and prices.
- MB1’s Myrtle Beach property was in foreclosure proceedings. The subsidiary’s $100.5m nonrecourse loan was collateralized by the property; the company stated it was not obligated to repay the loan. Upon foreclosure, Leucadia expected to recognize a gain based on the difference between the loan balance and the property’s carrying value of $67.9m.
- Leucadia terminated a frozen defined-benefit plan in July, expected to contribute $9.0m in Q3, and forecast a related settlement charge of approximately $12.6m. The filing also reported a full valuation allowance against its net federal deferred tax asset and an ongoing New York State and City tax audit for 2006–2008.
- Management said current litigation was not expected to materially affect the company’s financial position, results, or liquidity; contingent-loss accruals were not material. A tentative settlement in the STi Prepaid class action was preliminarily approved, with final approval scheduled for November 2010.
Most important facts for investors to verify
- Confirm the issuer: this 10-Q is for Leucadia National Corporation, not Jefferies Financial Group Inc.
- Review the drivers and subsequent movement of the ACF and Jefferies fair values, which materially affected reported earnings.
- Check whether the proposed GM–ACF merger closed and whether the expected consideration and additional gain were realized.
- Verify FMG’s note-interest payments, future payment restrictions, and the effect of the proposed Australian mining tax on Fortescue’s value and cash flows.
- Assess the composition, marketability, collateral restrictions, and concentration of the $1.722bn reported available liquidity, alongside near-term debt maturities.
- Monitor Gulf Coast oil-spill impacts and BP claims, MB1 foreclosure outcomes, the pension settlement charge, and the medical-development program’s expected Phase II results.