Filing identity and reporting period
Important identity mismatch: The supplied filing is Leucadia National Corporation’s Form 10-K, filed February 26, 2010, for the fiscal year ended December 31, 2009. It is not a Jefferies Financial Group filing. The requested “2009 Q4” is not the filing’s reporting period; fourth-quarter figures below are unaudited quarterly data included in the 10-K.
Leucadia was a diversified holding company with operating businesses and significant investments, including approximately 29% stakes in Jefferies Group and AmeriCredit. Its results were materially influenced by investment valuations as well as operating performance.
Financial performance and condition
Unless noted otherwise, amounts are U.S. dollars. Consolidated revenue and other income includes investment income and securities gains or losses, so it is not a straightforward measure of operating sales.
| Metric | FY 2009 | FY 2008 |
|---|---|---|
| Revenue and other income | $1.119 billion | $1.081 billion |
| Income (loss) from continuing operations | $522.1 million | $(2.581) billion |
| Net income (loss) attributable to common shareholders | $550.3 million | $(2.535) billion |
| Diluted earnings (loss) per share | $2.25 | $(11.00) |
| Cash flow from operating activities | $(133.4) million | $8.8 million |
| Total assets | $6.762 billion | $5.198 billion |
| Debt, including current maturities | $1.970 billion | $2.081 billion |
| Shareholders’ equity | $4.362 billion | $2.677 billion |
| Book value per common share | $17.93 | $11.22 |
Fourth quarter 2009: Revenue and other income was $303.5 million; continuing-operations loss was $94.5 million; net loss was $90.9 million; and basic and diluted loss per share were each $0.37. The filing does not provide a meaningful consolidated operating-margin measure for this diversified business.
Year-end cash and cash equivalents were $154.1 million. Cash and investments totaled $2.367 billion, of which management considered $1.883 billion available for parent-company liquidity needs after excluding amounts pledged, invested in non-public securities, or otherwise restricted. Parent-company long-term debt principal was $1.629 billion; scheduled principal maturities included $439.4 million in 2013, $500 million in 2015, and $500 million in 2017. Interest expense was $128.8 million in 2009. The filing lists contractual cash obligations of $2.999 billion, including estimated interest.
Material changes and key drivers
- The return to annual profitability was driven chiefly by $846.3 million of unrealized fair-value gains on the Jefferies and AmeriCredit investments, recorded in income from associated companies. Associated-company income before tax was $805.8 million, versus a $536.8 million loss in 2008. These market-value gains are not equivalent to realized cash earnings.
- Available-for-sale shares in Fortescue and Inmet also appreciated substantially in 2009; those unrealized gains were generally reflected in other comprehensive income and equity rather than operating income.
- 2008 results included a $1.672 billion deferred-tax valuation allowance charge. Leucadia reported approximately $5.985 billion of federal NOL carryforwards at year-end 2009 and maintained a valuation allowance against substantially all of its net deferred tax asset.
- Operating cash flow weakened to a $133.4 million use of cash, reflecting lower trading-portfolio cash generation and fewer distributions from associated companies. Investing activities provided $72.0 million, while financing activities used $21.9 million.
- In November 2009 Leucadia acquired the remaining interest in Keen Energy Services and began consolidating it. Reported 2009 Keen revenue covers only the period after acquisition; the $46.7 million segment pretax income included a $49.3 million bargain-purchase gain.
Outlook, risks and unusual items
- Operating outlook: Management described recessionary conditions as adverse for several businesses and offered no specific consolidated earnings guidance. It expected housing weakness to continue affecting Idaho Timber, and economic conditions, competition, and credit availability to remain important risks across its businesses. Management also said market dislocation could create investment opportunities, while acknowledging financing could be difficult.
- Asset impairments and credit stress: Leucadia recorded a $67.8 million impairment on the Myrtle Beach MB1 property. Its $100.5 million nonrecourse loan matured unpaid in October 2009; lenders had issued default notices but had not begun foreclosure. The company reported no obligation or intention to fund repayment.
- Guarantees and contingencies: Leucadia guaranteed 50% of Berkadia’s five-year facility; its reported guarantee was $290.3 million against $580.5 million outstanding at year-end. It also guaranteed $72.0 million, representing 30% of CLC’s $240.1 million intercompany loan. Total guarantees and letters of credit were reported at $387.5 million.
- Legal matters: A $13.7 million Premier noteholder damages claim was escrowed, with no loss accrued because the potential loss could not be reasonably estimated. A separate $1.0 million escrow for trustee legal fees was fully reserved. In the STi Prepaid class action, management said a potentially material loss was reasonably possible but could not be estimated. The filing also reported that claims against STi Prepaid in a separate action had been dismissed on summary judgment, subject to potential further proceedings.
- Sangart funding and development: Sangart had no product sales and was conducting a Phase II trauma trial, with enrollment expected to finish by the third quarter of 2010. Existing cash was expected to fund activities only into that quarter; further development required substantial additional funding of undetermined source.
- Other high-risk projects: Large energy projects remained subject to financing, permitting, and development uncertainty. Leucadia noted that several would require substantial third-party financing and could take years to advance. CLC expected to reach commercial production at about 60% of design capacity in May 2010, subject to execution and funding risks.
- Cash distributions and dividends: Fortescue note interest was being deferred under project-debt covenants. Leucadia paid no common dividend in 2008 or 2009. The company disclosed no current intention to seek additional bond financing and said future investments might be funded from existing liquidity or asset sales.
Important facts for investors to verify
- Confirm the issuer and filing period: this is Leucadia National Corporation’s FY 2009 10-K, not a Jefferies Financial Group 10-K or a standalone Q4 filing.
- Review how much of 2009 earnings and equity growth came from unrealized investment gains, and distinguish those gains from cash generation.
- Reconcile parent-available liquidity with pledged or restricted investments, near-term maturities, and the full contractual-obligations schedule.
- Track the status and potential exposure of the MB1 default, Berkadia and CLC guarantees, and Premier and STi Prepaid legal matters.
- Assess whether Sangart can secure funding and meet clinical milestones, and whether the assumed improvement in economic conditions underlying property valuations and operating outlooks occurs.