Leucadia's Profit Declines - Analyst Blog

Leucadia National Corporation (LUK) reported its financial results for the second quarter of 2010. The company generated a net loss of $244.7 million, or $1.01 per share during the quarter compared with net earnings of $411.0 million, or $1.67 per share in the second quarter of 2009. The decline was attributable to losses related to Leucadia’s associated companies.
 
Revenue
 
In the second quarter, revenue increased by 45.1% year over year to $412.5 million. The improvement was attributable to net security gains at Corporate in the quarter against a loss in the second quarter of 2009 and contributions from Oil and gas drilling services.
 
In the second quarter, revenue from the Manufacturing segment rose 34.7% year over year to $77.2 million and accounted for 18.7% of the total revenue. Telecommunication revenue was $92.9 million, down 18.7% year over year and represented 22.5% of total revenue. Oil and Gas Drilling segment accounted for 7.1% of revenue and totaled $29.3 million.
 
Revenue generated from Gaming Entertainment operations, roughly 6.8% of total revenue, increased 7.6% to $28.1 million, while profit from Property Management and Services segment, roughly 7.4% of total revenue, decreased by 13.2% to $30.6 million. Domestic Real Estate segment accounted for 1.0% of revenue which dropped 7.7% to $4.2 million.
 
Revenue from Medical Product Developmental segment slipped to $3,000 from $30,000 in the year-ago quarter. Proceeds from Other operations were $24.4 million, up 101.6% year over year and accounted for 5.9% of total revenue, while Corporate segment revenue of $125.9 million accounted for 30.5% of revenue and climbed 262.1% year over year.
 
Margins
                                                     
Cost of sales, as a percentage of revenue dipped 14.8% to 35.6% in the second quarter 2010, while direct operating expenses increased 110 basis points to 15.0%. Selling, general and other expenses declined drastically from 53.0% in the second quarter of 2009 to 13.8% in the second quarter of 2010. Interest expenses were $31.5 million versus $32.4 million in the year-ago quarter.
 
Balance Sheet                                                                                                     
 
Exiting the second quarter, Leucadia’s cash and cash equivalents went up 13.4% sequentially to $248.2 million compared with $219.0 million in the first quarter of 2010. Long-term debt was approximately $1,625.1 million, down 1.9% from $1,657.4 million in the first quarter of 2010.
 
Cash Flow
 
Cash flow from operating activities was a net inflow of $14.4 million compared with just $3.6 million in the second quarter of 2009. Capital expenditure was $10.3 million compared with $9.4 million in the second quarter of 2010.
 
Our Take
 
Leucadia engages in manufacturing, telecommunications, oil and gas drilling services, property management and services, gaming entertainment, real estate activities, medical product development operations and various other investment activities in the United States. We believe that extensive diversification has not only helped the company flourish over the years but has also strengthened its future growth prospects.
 
However, investments in volatile materials such as base metals reduce the value of the company’s investments. Moreover, Leucadia faces intense competition from various companies in different industries. Prime competitors are Apollo Investment Corporation (AINV), The Blackstone Group (BX) and privately-held H Group Holding Inc.
 
We currently maintain our Neutral recommendation on Leucadia.

 

 
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