Business context and reporting period
This is Leucadia National Corporation’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2009. The filing is for Leucadia, not a standalone Jefferies Financial Group filing. Leucadia reported across diversified operating businesses and investments, including an approximately 29% interest in Jefferies Group, Inc.
Financial performance and position
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Revenue and other income | $280.8 million | $251.6 million | $815.5 million | $914.0 million |
| Income from continuing operations | $345.8 million | $89.3 million | $616.6 million | $180.2 million |
| Net income attributable to common shareholders | $370.2 million | $89.5 million | $641.2 million | $180.4 million |
| Diluted earnings per share | $1.50 | $0.37 | $2.61 | $0.76 |
| Cash from operating activities | Not separately provided for the quarter | $(121.6) million | $(39.8) million |
Reported earnings were heavily influenced by investments in associated companies: after-tax income from those investments was $379.5 million in Q3 and $867.2 million for the nine months. Much of the uplift reflected unrealized fair-value gains on Jefferies and AmeriCredit shares; the nine-month gains were $639.9 million and $268.3 million, respectively. Leucadia’s loss from continuing operations before taxes and income from associated companies was $32.1 million in Q3 and $244.1 million for the nine months.
At September 30, 2009, cash and cash equivalents were $232.7 million; current assets were $817.2 million and current liabilities $572.6 million. Total debt was $1.976 billion, comprising $310.3 million due within one year and $1.665 billion of long-term debt. Total equity was $4.267 billion. The filing identifies $1.898 billion of liquidity as available to the parent after excluding $484 million that was pledged, non-public, or restricted. No consolidated operating margin is presented as a headline measure in the filing.
Changes versus prior comparable periods
- Nine-month revenue and other income fell about 11% year over year, while attributable net income rose to $641.2 million from $180.4 million, principally reflecting unrealized investment gains and the very different tax effects between periods.
- Net securities losses improved to $20.3 million for the nine months from $38.2 million; securities impairment charges declined to $29.6 million from $74.9 million.
- Accumulated other comprehensive income moved from a $29.3 million deficit at year-end 2008 to $791.4 million, largely reflecting unrealized investment gains. Non-current investments increased to $1.872 billion from $1.028 billion.
- Operating cash use increased to $121.6 million from $39.8 million. Investing activities provided $132.5 million, compared with $453.9 million used in the prior-year period; financing activities used $15.8 million, versus $198.9 million provided.
- Total debt declined to $1.976 billion from $2.081 billion at December 31, 2008. Leucadia repurchased $35.6 million principal amount of 7% Senior Notes and induced conversion of $120.3 million principal amount of convertible notes, issuing 5.24 million shares and paying holders an additional $25.3 million.
Outlook, risks, contingencies and unusual items
- Management said weak economic conditions were affecting most businesses and investments. Housing weakness pressured manufacturing, property services and real estate; management anticipated continued pressure on several operations. No consolidated earnings guidance was provided.
- Leucadia recorded a $67.8 million impairment in Q2 on its Myrtle Beach mixed-use property; carrying value was $69.8 million at September 30. The property’s $100.4 million nonrecourse loan matured in October and remained unpaid, with default notices issued. Leucadia said it had no obligation or intention to fund repayment; lenders had not begun foreclosure.
- Garcadia recorded $32.3 million of goodwill and intangible impairment included in Leucadia’s equity-method results. Further impairment was identified as possible if dealership sales underperform projections or locations close.
- Fortescue and Inmet market-value gains substantially contributed to equity growth. Fortescue-related interest and mining revenue were being deferred in cash under project debt restrictions; accrued interest receivable on the FMG note was $90.6 million.
- A potential Berkadia/Capmark transaction remained conditional: Capmark could require Berkadia to acquire mortgage businesses for $490 million and loans and servicing advances estimated at approximately $600 million. Leucadia and Berkshire each guaranteed Berkadia’s obligations and expected to contribute approximately $165 million of equity each if the deal proceeded. The put right expired December 24, 2009.
- Two energy projects were selected for further DOE due diligence for possible loan guarantees of up to $3.6 billion combined; approval was not assured, and projects would require substantial equity, supply and purchase commitments, and technical development.
- Federal deferred tax assets remained fully reserved. The nine-month 2008 comparison included a $222.2 million tax benefit from a valuation-allowance release, making tax and earnings comparisons notably nonrecurring.
- Management cited market-price volatility, recession and housing risks, impairment uncertainty, liquidity and capital-market conditions, commodity prices, and the ability to realize tax assets. It said current litigation was not expected to materially harm financial position, results or liquidity, though litigation outcomes remained uncertain.
Investor verification priorities
- Confirm the filing entity and period: this 10-Q is Leucadia National Corporation’s, and Jefferies results are included through an investment interest rather than as the filing registrant.
- Assess the quality and cash realization of earnings, particularly the large unrealized fair-value gains from Jefferies, AmeriCredit, Fortescue and Inmet.
- Review parent-available liquidity, investment collateral and restrictions, and upcoming debt maturities, including the November 2009 repurchase agreements.
- Track the unpaid MB1 loan, lender actions, property leasing and any further impairment or foreclosure effects.
- Verify whether Berkadia’s Capmark put was exercised and the resulting guarantees, funding requirements and transaction exposure.
- Consider the nonrecurring 2008 tax benefit when comparing reported earnings and evaluate future impairment, tax valuation allowance and contingent-loss assumptions.