Business context and reporting period
The supplied filing is Leucadia National Corporation’s unaudited Form 10-Q for the quarter ended September 30, 2010—not a Jefferies Financial Group filing. Leucadia reported Jefferies as an associated-company investment, owning approximately 28% of its voting securities. Amounts below are in U.S. dollars; financial statement figures are in millions unless otherwise noted.
Leucadia is a diversified holding company with investments and businesses spanning manufacturing, oil and gas drilling services, gaming, real estate, medical product development and other operations. ResortQuest and the power production business were classified as discontinued operations; STi Prepaid was sold after quarter-end and also classified as discontinued.
Financial performance and position
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Revenue and other income | $185.9 | $143.4 | $734.4 | $382.4 |
| Income from continuing operations | $262.5 | $341.2 | $212.5 | $616.9 |
| Net income attributable to Leucadia shareholders | $287.8 | $370.2 | $244.1 | $641.2 |
| Diluted earnings per share | $1.17 | $1.50 | $1.00 | $2.61 |
| Cash from operating activities | — | $45.9 | $(121.5) |
- Quarterly continuing-operations income included $324.7 million of after-tax income from associated companies, while the business excluding that income recorded a pretax loss of $58.7 million. Nine-month associated-company income was $154.0 million after tax.
- Reported earnings included significant investment-related and unusual items. Nine-month securities gains were $170.4 million, including gains of $94.9 million on Fortescue share sales and $66.2 million on the sale of LPH. Associated-company results included fair-value changes in ACF and Jefferies.
- At September 30, cash and cash equivalents were $323.3 million; total assets were $7.307 billion, total liabilities $2.518 billion and total equity $4.789 billion. Leucadia reported $1.608 billion of long-term debt, $134.9 million of debt due within one year and $410.3 million of repurchase agreements.
- Management identified $2.355 billion of available liquidity, including cash and marketable securities, after excluding amounts pledged, restricted, held in non-public securities or otherwise unavailable to the parent. This figure excludes the subsequent ACF sale proceeds.
- Cash from investing activities was a use of $44.9 million and financing activities provided $180.1 million in the first nine months. Cash and cash equivalents, including cash in discontinued operations, increased by $181.0 million.
Material changes versus the prior comparable period
- Nine-month revenue and other income rose to $734.4 million from $382.4 million, while net income attributable to shareholders declined to $244.1 million from $641.2 million. The prior-year comparison included substantially higher income from associated companies; 2010 results also benefited from realized securities gains.
- Q3 revenue and other income increased to $185.9 million from $143.4 million, but shareholder net income fell to $287.8 million from $370.2 million, principally reflecting lower associated-company income.
- Operating cash flow improved by $167.4 million year over year, from cash use of $121.5 million to cash generation of $45.9 million. Management attributed the change in part to FMG interest receipts, lower interest payments and higher distributions from associated companies.
- Available-for-sale investments increased to $2.586 billion from $2.128 billion at year-end 2009. Shareholders’ equity rose to $4.783 billion from $4.362 billion, including an increase in accumulated other comprehensive income from unrealized investment gains.
- Leucadia sold ResortQuest in September for $53.6 million and recorded a $35.3 million gain. It sold a Long Island shopping center for $17.1 million and recorded a $4.6 million gain. The power production business was written down by $25.3 million and held for sale.
Outlook, commentary, risks and unusual items
- No quantified company-wide earnings or revenue guidance was provided. Management cautioned that operating results are exposed to economic conditions, market prices of investments, housing and real estate markets, commodity prices and financing conditions.
- On October 1, 2010, Leucadia sold its ACF shares for $830.6 million cash. It had recorded a cumulative $403.4 million unrealized gain through September 30 and expected an additional $1.4 million gain in Q4. These proceeds were not included in September 30 liquidity.
- Leucadia disputed Fortescue’s claim that FMG could issue additional notes that would dilute the company’s contractual entitlement to 4% of specified net revenue. Leucadia filed suit seeking, among other relief, an injunction. An adverse result could materially reduce future FMG Note cash flows and earnings.
- In October, the Berkadia secured credit facility was increased from $1.0 billion to $1.5 billion, with Leucadia providing the additional funding. Losses under the facility continue to be shared equally with Berkshire Hathaway under the guaranty terms.
- Other notable items include a $12.7 million pension settlement charge, an $11.1 million expense for a disputed Premier noteholder award (appealed; payment deferred while the appeal is pending), and a $25.3 million impairment of the biomass power business.
- Leucadia said general economic weakness could adversely affect its operating businesses. It also cited uncertainty around investment valuations, impairment estimates, the FMG dispute, and the ability to realize deferred tax assets. It reported that disclosure controls were effective and that no material change in internal control occurred during the quarter.
Important facts for investors to verify
- Confirm the entity: this is Leucadia National Corporation’s 2010 Q3 10-Q, not Jefferies Financial Group’s filing.
- Assess how much reported earnings depended on ACF and Jefferies fair-value movements, securities gains and other non-recurring items, versus operating performance.
- Track the FMG Note litigation, any issuance of competing notes, and subsequent cash interest receipts.
- Review the ACF sale’s final proceeds and realized gain, and the effect of the Berkadia facility increase on parent liquidity and exposure.
- Monitor execution of planned disposals, including STi Prepaid and the power production business, as well as the Premier appeal and Myrtle Beach foreclosure proceedings.