Business context and reporting period
The filing is Leucadia National Corporation’s Form 10-K for the fiscal year ended December 31, 2011, not a 10-K filed under the name Jefferies Financial Group. Leucadia was a diversified holding company with operating businesses and significant investments, including approximately 28.2% of Jefferies Group and 27.3% of Mueller Industries.
On December 30, 2011, Leucadia acquired 78.9% of National Beef for net cash consideration of $867.9 million. Because the acquisition occurred at year-end, National Beef’s post-acquisition operations were not significant enough to be included in 2011 consolidated operating results.
Financial performance and position
Unless otherwise noted, amounts are in U.S. dollars. Consolidated results combine operating businesses, investment income, realized security gains and losses, and equity-accounted investments, so reported revenue and earnings are affected by portfolio activity.
| Metric | 2011 | 2010 |
|---|---|---|
| Revenue and other income | $1.571 billion | $1.320 billion |
| Income from continuing operations before income taxes and associated-company results | $681.0 million | $369.0 million |
| Income (loss) from associated companies, before tax | $(612.4) million | $375.0 million |
| Continuing-operations income before tax | $68.6 million | $744.0 million |
| Income from continuing operations | $16.7 million | $1.889 billion |
| Net income attributable to Leucadia common shareholders | $25.2 million | $1.939 billion |
| Operating cash flow | $9.1 million | $431.3 million |
| Total assets | $9.263 billion | $9.350 billion |
| Leucadia shareholders’ equity | $6.174 billion | $6.957 billion |
| Indebtedness, including current maturities | $2.323 billion | $2.092 billion |
Basic and diluted net income per share were both $0.10 in 2011, versus $7.97 basic and $7.85 diluted in 2010. The 2011 fourth quarter reported revenue and other income of $297.2 million, continuing-operations income of $113.0 million, and net income of $119.4 million; net income per share was $0.49 basic and $0.48 diluted.
Cash and investments totaled $2.546 billion at year-end; management identified $1.851 billion as available for liquidity needs after excluding $694.3 million that was pledged, restricted, non-public, or otherwise unavailable. The company reported $168.5 million of cash and cash equivalents. Consolidated balance-sheet debt was $1.906 billion, plus $417.5 million of securities sold under repurchase agreements. The filing reports total contractual cash obligations of $3.174 billion.
No consolidated operating margin is presented as a central performance measure; results span distinct businesses and include substantial investment and securities items. Segment pre-tax results included $80.9 million for domestic real estate, $12.6 million for gaming, $3.5 million for oil and gas drilling, and a $42.7 million loss for medical product development.
Material changes versus the prior comparable period
- Revenue and other income increased 19% to $1.571 billion, while attributable net income fell sharply from $1.939 billion to $25.2 million.
- The 2010 result included a $1.157 billion deferred-tax valuation-allowance reversal. In contrast, 2011 included a $684.4 million unrealized loss on the fair value of Leucadia’s Jefferies investment, recorded through associated-company results.
- 2011 corporate securities gains were $641.5 million, including a $628.2 million gain from Fortescue share sales. 2010 corporate securities gains were $179.5 million; 2010 also included a $383.4 million gain on the sale of Las Cruces in investment and other income.
- Operating cash flow declined to $9.1 million from $431.3 million. The filing attributes the change in part to different investment distributions, tax payments and interest receipts, and the absence of the 2010 ACF sale-related cash contribution.
- Shareholders’ equity declined by $782.4 million. Accumulated other comprehensive income fell to $912.4 million from $1.687 billion, principally reflecting investment valuation changes.
- At year-end, National Beef added $1.787 billion of identifiable assets and $357.5 million of long-term debt in its preliminary purchase-price allocation. Its results were not materially included in 2011 consolidated earnings.
Outlook, management commentary, risks and unusual items
- Outlook: The filing provides no consolidated earnings or revenue guidance. Management says the mix of businesses and investments may change and cautions that reported cash-flow patterns are not generally predictable or necessarily recurring.
- Liquidity and debt: In January 2012, Leucadia called $511.3 million principal amount of notes for redemption and expected to pay $528.3 million, excluding accrued interest, in March 2012. The company said it had no current intention to seek additional bond financing.
- Fortescue: Leucadia’s FMG Note pays interest based on 4% of specified project revenue. Fortescue disputes whether it may issue additional identical notes that could dilute Leucadia’s interest; litigation was pending. The company received $171.7 million net of withholding taxes in 2011 and a further $97.1 million in January 2012 for the second half of 2011. Future receipts depend on iron-ore volumes and prices and the litigation outcome.
- Portfolio volatility: The value of major public holdings—Fortescue, Inmet, Jefferies and Mueller—can materially affect equity and earnings. Fortescue and Inmet market-value declines are generally reflected in other comprehensive income; Jefferies and Mueller fair-value changes affect earnings.
- Berkadia exposure: Leucadia agreed to reimburse Berkshire Hathaway for one-half of losses under a $2.5 billion surety policy and corporate guaranty supporting Berkadia-affiliate commercial paper. Outstanding commercial paper was $2.0 billion at year-end. Berkadia also faces risks from servicing ratings, government-sponsored mortgage programs, loan losses and bridge-loan exposure.
- Operating and development risks: Management cited weak housing demand affecting manufacturing and real estate; cyclical drilling markets; cattle-cost, food-safety, export, customer-concentration and labor risks at National Beef; and hurricane exposure at the Biloxi casino. Wal-Mart and Sam’s Club represented about 9% of National Beef revenue, and National Beef’s top ten customers about 30%.
- Contingencies and projects: Sangart had no product sales and incurred a $42.7 million pre-tax loss; additional funding and successful clinical trials and regulatory approvals are needed. Energy projects remain contingent on financing, permits, feedstock and customer commitments; the proposed Lake Charles project was estimated at $2.3–$2.6 billion, with awards and grants conditional on numerous requirements.
- Tax asset: Leucadia reported a net deferred tax asset of $1.585 billion and federal NOLs of approximately $4.738 billion, but estimated that about $4.6 billion of future U.S. pre-tax income would be needed to fully realize the net deferred tax asset. Realization depends on uncertain future income and investment gains.
- Unusual items: The 2011 domestic real estate result included an $81.8 million gain from forgiveness of Myrtle Beach project debt. National Beef’s purchase-price allocation was preliminary. Management reported no significant 2011 long-lived-asset impairment charges; securities impairment charges were $3.6 million.
Most important facts for investors to verify
- Verify that the correct issuer and filing are being reviewed: this is Leucadia National Corporation’s 2011 Form 10-K, while the request metadata names Jefferies Financial Group Inc.
- Reconcile 2011 earnings to the large Jefferies fair-value loss, Fortescue realized gains, Myrtle Beach debt-forgiveness gain and the prior-year tax valuation-allowance reversal.
- Review the quality and availability of the reported $1.851 billion of available liquidity, the $528.3 million note redemption, and the timing and sources of debt repayments.
- Assess Fortescue litigation and the sustainability of FMG Note receipts; verify post-year-end Fortescue share sales and the reported expected gain.
- Review the Berkadia reimbursement commitment, the $2.0 billion commercial-paper balance, National Beef’s customer and labor exposures, and National Beef acquisition accounting and financing.
- Test the assumptions supporting the $1.585 billion net deferred tax asset and the company’s ability to generate the taxable income needed to realize it.