Jefferies Financial Group Inc. (filing registrant: Leucadia National Corporation) — Q2 2009 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2009. The filing identifies Leucadia National Corporation as the registrant. Financial statement figures below are in U.S. dollars; amounts converted from thousands are shown in millions.
Business context and key financial metrics
Leucadia was a diversified holding company with manufacturing, telecommunications, property management, gaming, real estate, medical-product development, and investment activities. Its results were materially affected by its public-market investments and equity-method investees.
| Metric | Q2 2009 | Q2 2008 | Six months 2009 | Six months 2008 |
|---|---|---|---|---|
| Revenue and other income | $284.3 million | $337.6 million | $534.7 million | $662.4 million |
| Loss before taxes and associated-company results | $(130.5) million | $(35.7) million | $(212.0) million | $(68.6) million |
| Income from associated companies, net of tax | $570.6 million | $(25.2) million | $487.7 million | $(99.6) million |
| Net income attributable to common shareholders | $411.0 million | $186.8 million | $271.0 million | $91.0 million |
| Diluted earnings per share | $1.67 | $0.76 | $1.11 | $0.39 |
| Operating cash flow | Not presented quarterly | $(62.3) million | $10.5 million |
- Revenue fell about 16% in Q2 and 19% for the first half year over year. Q2 net income rose substantially, but mainly reflected fair-value gains in Jefferies and AmeriCredit (ACF), not stronger consolidated operating results.
- Six-month cash flows: investing activities provided $21.5 million, while financing activities used $40.6 million. Cash and cash equivalents declined $81.3 million from year-end to $156.2 million.
- At June 30, total assets were $6.054 billion, total liabilities $2.349 billion, and total equity $3.704 billion. Debt was $1.951 billion, including $276.2 million due within one year and $1.675 billion long-term; year-end 2008 debt was $2.081 billion.
- Current assets were $745.4 million and current liabilities $567.8 million. Management identified $1.494 billion as available for parent-company liquidity needs, after excluding $686.7 million of investments that were pledged, non-public, or otherwise restricted.
- No consolidated operating margin is reported as a headline measure; the filing reports materially different businesses and substantial investment-related gains and losses.
Material changes versus the prior comparable period
- Associated-company results swung to income, led by unrealized fair-value gains of $353.2 million on Jefferies and $195.0 million on ACF for the first six months. The company held approximately 28% of Jefferies and 25% of ACF and elected fair-value accounting for both.
- Available-for-sale investment gains increased accumulated other comprehensive income to $586.3 million from a $29.3 million accumulated loss at year-end. Fortescue’s market value rose to $849.6 million from $377.0 million, and Inmet’s to $205.6 million from $90.0 million.
- Operating performance weakened in several businesses: manufacturing revenue declined, Idaho Timber recorded a first-half loss, telecommunications and gaming pretax income fell for the first half, and property-management results also weakened. Conwed Plastics remained profitable despite lower revenue.
- The 2008 comparison included significant tax benefits, including a $222.2 million valuation-allowance reversal; 2009 had a full valuation allowance against the net federal deferred tax asset. This makes reported net-income comparisons less representative of underlying operating trends.
Outlook, risks, contingencies and unusual items
- Real estate impairment and debt: The company recorded a $67.8 million impairment on the Myrtle Beach MB1 project, reducing its real estate carrying value to $71.3 million. More than 20 retail tenants sought rent reductions; MB1 received loan-default notices and its $100.4 million nonrecourse loan matured in October 2009. Leucadia said it did not intend to contribute capital to repay it and had no obligation to make MB1’s payments. Further impairment or a foreclosure-related gain was possible, depending on outcomes and assumptions.
- Other impairments: First-half securities impairment charges were $26.9 million. Garcadia’s equity-method results included $32.3 million of impairment charges for goodwill and intangibles; further charges were possible if dealership sales underperformed or locations closed. Idaho Timber recorded $1.0 million of long-lived-asset impairment.
- Debt conversion and repurchases: The company issued about 5.19 million shares to convert $119.1 million principal of 3¾% convertible notes and paid noteholders an additional $25.0 million, recorded as expense. It repurchased $35.6 million principal of 7% Senior Notes and recorded $6.0 million of first-half gains.
- Fortescue-related income: First-half income included $30.5 million of accrued project-related interest, but FMG was deferring cash payments under its senior-debt covenants. Accrued interest receivable was $70.9 million at June 30.
- Business outlook: Management said the recession and weak housing market were adversely affecting most operations and investments, and that a prolonged downturn could lead to further impairment charges. It expected ongoing pressure on Idaho Timber and housing-related markets; Premier warned of continued weakness and competition in the Biloxi gaming market. Real estate development and sales plans were deferred pending improved conditions.
- Energy projects: In July, two prospective gasification projects advanced to U.S. Department of Energy due diligence and negotiations for conditional loan guarantees of up to $3.6 billion in aggregate. Guarantees were not assured; projects still required equity, supply and offtake commitments, and substantial technical and financing work. Leucadia said it did not intend to fund the required equity alone.
- The filing cited market-price volatility, economic and housing conditions, liquidity and credit-market risks, commodity prices, regulation, competition, and the ability to realize deferred tax assets among principal risks. The IDT trial date had been rescheduled to October 2009, but its timing remained uncertain; another disclosed action was settled for an amount described as immaterial.
Most important facts for investors to verify
- How much of reported earnings reflects unrealized Jefferies and ACF gains, investment marks, and tax accounting rather than recurring operating cash generation.
- Whether available parent liquidity remains adequate after considering collateral, restrictions, investment concentration, and near-term debt maturities.
- The October 2009 outcome for MB1’s nonrecourse loan, including any foreclosure, additional impairment, or effects on reported results.
- Whether FMG can resume cash payments on accrued interest and how investment values in Fortescue and Inmet respond to market conditions.
- Whether the DOE gasification projects secure guarantees, financing, required commitments, and partners, and what capital the company may need to provide.
- Potential further securities, real estate, or investee impairments if economic recovery and management’s cash-flow assumptions do not materialize.