Leucadia National Corporation — Form 10-Q summary
Entity clarification: The supplied filing is Leucadia National Corporation’s 10-Q, not a standalone Jefferies Financial Group filing. Leucadia reported owning approximately 28.6% of Jefferies at September 30, 2012. The reporting period ended September 30, 2012; financial statements are unaudited. Amounts below are in U.S. dollars.
Business context and reporting period
Leucadia is a diversified holding company with investments and operating businesses. National Beef, acquired in December 2011, contributed substantially to 2012 consolidated revenue and had no corresponding reported revenue in the 2011 periods. Results also reflect investment gains, including sales of Fortescue shares, and volatility in income from associated companies.
Financial performance and position
| Metric | Three months ended September 30, 2012 | Nine months ended September 30, 2012 |
|---|---|---|
| Revenue and other income | $2.187 billion, versus $199.8 million in 2011 | $6.683 billion, versus $1.173 billion in 2011 |
| Income from continuing operations | $116.9 million, versus a $293.8 million loss | $415.8 million, versus a $101.4 million loss |
| Net income attributable to Leucadia common shareholders | $106.7 million; $0.44 basic EPS and $0.43 diluted EPS | $400.3 million; $1.64 basic EPS and $1.62 diluted EPS |
| Operating cash flow | $263.1 million for the nine-month period, versus $23.0 million in 2011 | |
| Investing cash flow | $929.9 million provided for the nine-month period, versus $112.8 million used in 2011 | |
| Financing cash flow | $589.4 million used for the nine-month period, versus $45.3 million used in 2011 |
- At September 30, cash and equivalents were $772.1 million, current assets $2.139 billion, and current liabilities $1.303 billion. The filing states that $1.992 billion of cash and investments was available for liquidity needs after exclusions for pledged, restricted, non-public, or otherwise unavailable assets.
- Total debt and repurchase-agreement obligations were approximately $1.752 billion, compared with approximately $2.321 billion at December 31, 2011. Leucadia redeemed two debt issues for $528.3 million in March and reported a $24.0 million pretax redemption loss. Interest expense was $71.3 million for the first nine months, down from $84.2 million.
- Total assets were $8.740 billion and total equity was $6.193 billion at September 30, 2012. Accumulated other comprehensive income was $518.7 million, down from $912.4 million at year-end, principally reflecting investment-market movements.
Material changes versus the prior comparable period
- Comparisons of revenue are substantially affected by National Beef’s acquisition: 2012 includes $5.615 billion of nine-month beef-processing revenue, while 2011 does not. National Beef generated $71.3 million of pretax income in the first nine months of 2012.
- Leucadia’s associated-company results improved to $53.7 million pretax income for the third quarter and $105.4 million for the nine months, from losses of $458.3 million and $728.4 million, respectively, in 2011. Jefferies’ contribution was $45.0 million for the quarter and $9.6 million for the nine months, versus losses of $431.8 million and $751.3 million.
- Net securities gains were $581.7 million for the first nine months, including $543.7 million from Fortescue share sales. Fortescue gains were $125.8 million in the third quarter. The timing of realized securities gains is not predictable.
- In September, Mueller repurchased Leucadia’s entire investment for $427.3 million; the shares had cost $408.6 million. Leucadia also invested a further $50 million in Sangart during May.
Outlook, commentary, risks, and unusual items
- No general earnings guidance was provided. Management cautioned that interim results may not indicate full-year performance and that economic weakness, market volatility, and a prolonged recession could adversely affect businesses and investments.
- After quarter-end, Chichester redeemed the Fortescue-related note for $715 million in cash, settling pending disputes. Leucadia expects to record an approximately $526 million pretax gain in the fourth quarter; it will no longer receive interest on the note.
- Leucadia agreed to sell Keen for $100 million cash plus a four-year promissory note valued at $37.5 million; the sale closed in October. A $19.3 million pretax disposal loss was recorded in the September-period results. The company also sold a small Caribbean telecommunications business in September for $28.0 million.
- National Beef reported that Wal-Mart intends to discontinue using it as a case-ready products provider in 2013. Case-ready products represented about 7% of National Beef revenue but historically a greater share of gross margin; replacement business is not assured. The carrying value of the two affected facilities was $46.6 million.
- National Beef’s profitability depends on the spread between cattle costs and beef-product selling prices. Management said the boxed-beef-to-cattle-price ratio was at a ten-year low for the comparable nine-month period; record cattle prices and drought-related herd reductions could further pressure margins.
- A federal court certified classes in the Sykes debt-collection litigation. Leucadia says it was an investor without involvement in the alleged conduct, but considers a loss reasonably possible; the potential loss cannot be reasonably estimated and no accrual was recorded. The parties agreed to mediation.
- Leucadia reported a net deferred tax asset and said approximately $4.4 billion of future U.S. pretax income, in addition to reversal of deferred tax liabilities on unrealized gains, would be needed to realize it fully. Realization depends on uncertain future taxable income.
- Other notable items include $3.6 million of real-estate impairment charges in the quarter, Hurricane Isaac-related expenses at Premier, and ongoing Sangart clinical development costs. Sangart completed enrollment in its Phase 2b trauma study in October and expected results in the first quarter of 2013; later development would require additional costly trials. Premier expected to begin a $32.5 million hotel-tower project in the fourth quarter, with completion targeted by year-end 2013.
Important facts for investors to verify
- Confirm the filing entity: this is Leucadia’s 10-Q, and Jefferies is discussed as an associated-company investment, not as the registrant.
- Review the sustainability and cash impact of gains from Fortescue share sales and the expected fourth-quarter note-redemption gain.
- Assess National Beef’s cattle-to-beef margin outlook and its plans to replace Wal-Mart case-ready business, including any potential facility impairment.
- Monitor the Sykes litigation, mediation and any change in the estimated loss exposure or accrual.
- Evaluate the assumptions supporting the deferred tax asset and the realizability of the required future taxable income.
- Check subsequent-period results for the Fortescue redemption, Keen sale, debt reduction, liquidity and changes in investment values.