SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2009
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission File Number 1-5721
LEUCADIA NATIONAL CORPORATION
(Exact name of registrant as specified in its Charter)
New York 13-2615557
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
315 Park Avenue South, New York, New York 10010-3607
(Address of principal executive offices) (Zip Code)
(212) 460-1900
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
----------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
------- -------
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss. 232.405
of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files).
YES NO
------- -------
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of "large accelerated filer," "accelerated filer" and
"smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer X Accelerated filer
------ -------
Non-accelerated filer Smaller reporting company
------ -------
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
YES NO X
------ ------
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding
of each of the issuer's classes of common stock, at May 1, 2009: 238,503,098.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, 2009 and December 31, 2008
(Dollars in thousands, except par value)
(Unaudited)
March 31, December 31,
2009 2008
---------- ----------
ASSETS
------
Current assets:
Cash and cash equivalents $ 204,685 $ 237,503
Investments 294,330 366,464
Trade, notes and other receivables, net 157,957 138,363
Prepaids and other current assets 120,913 124,308
---------- -----------
Total current assets 777,885 866,638
Non-current investments ($187,145 and $164,675 collateralizing current liabilities) 1,216,329 1,028,012
Notes and other receivables, net 14,215 17,756
Intangible assets, net and goodwill 83,345 84,848
Deferred tax asset, net 39,234 40,235
Other assets 610,897 619,790
Property, equipment and leasehold improvements, net 524,870 534,640
Investments in associated companies ($863,510 and $933,057 measured
using fair value option) 1,846,027 2,006,574
---------- -----------
Total $5,112,802 $ 5,198,493
========== ===========
LIABILITIES
-----------
Current liabilities:
Trade payables and expense accruals $ 161,560 $ 205,870
Deferred revenue 95,649 98,453
Other current liabilities 11,090 9,880
Debt due within one year 273,104 248,713
---------- -----------
Total current liabilities 541,403 562,916
Other non-current liabilities 106,534 107,443
Long-term debt 1,800,220 1,832,743
---------- -----------
Total liabilities 2,448,157 2,503,102
---------- -----------
Commitments and contingencies
EQUITY
------
Common shares, par value $1 per share, authorized 600,000,000 shares;
238,498,598 shares issued and outstanding, after deducting
46,888,660 shares held in treasury 238,499 238,499
Additional paid-in capital 1,414,416 1,413,595
Accumulated other comprehensive income (loss) 78,398 (29,280)
Retained earnings 913,976 1,053,983
---------- -----------
Total Leucadia National Corporation shareholders' equity 2,645,289 2,676,797
---------- -----------
Noncontrolling interest 19,356 18,594
---------- -----------
Total equity 2,664,645 2,695,391
---------- -----------
Total $5,112,802 $ 5,198,493
========== ===========
See notes to interim consolidated financial statements.
2
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For the three months ended March 31, 2009 and 2008
(In thousands, except per share amounts)
(Unaudited)
2009 2008
----------- ---------
Revenues and Other Income:
Manufacturing $ 51,611 $ 85,147
Telecommunications 118,761 119,425
Property management and service fees 28,251 39,556
Gaming entertainment 26,656 27,342
Investment and other income 51,347 45,097
Net securities gains (losses) (26,283) 8,282
----------- ----------
250,343 324,849
----------- ----------
Expenses:
Cost of sales:
Manufacturing 45,330 74,253
Telecommunications 103,492 106,114
Direct operating expenses:
Property management and services 24,547 27,419
Gaming entertainment 19,647 24,588
Interest 33,387 35,782
Salaries and incentive compensation 20,699 22,514
Depreciation and amortization 15,277 11,446
Selling, general and other expenses 69,447 55,691
----------- ----------
331,826 357,807
----------- ----------
Loss before income taxes and losses
related to associated companies (81,483) (32,958)
Income taxes (24,304) (11,350)
----------- ----------
Loss before losses related to associated companies (57,179) (21,608)
Losses related to associated companies, net of taxes (82,954) (74,381)
----------- ----------
Net loss (140,133) (95,989)
Net loss attributable to the noncontrolling interest 126 165
----------- ----------
Net loss attributable to Leucadia National Corporation common shareholders $ (140,007) $ (95,824)
=========== ==========
Basic and diluted net loss per common share attributable to Leucadia National
Corporation common shareholders $ (.59) $ (.43)
====== ======
See notes to interim consolidated financial statements.
3
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the three months ended March 31, 2009 and 2008
(In thousands)
(Unaudited)
2009 2008
---------- -----------
Net cash flows from operating activities:
Net loss $ (140,133) $ (95,989)
Adjustments to reconcile net loss to net cash used for operations:
Deferred income tax benefit (60,583) (52,533)
Depreciation and amortization of property, equipment and leasehold improvements 14,945 12,756
Other amortization 5,297 2,750
Share-based compensation 2,739 2,481
Excess tax benefit from exercise of stock options -- (182)
Provision for doubtful accounts 454 (95)
Net securities (gains) losses 26,283 (8,282)
Losses related to associated companies 118,214 113,752
Distributions from associated companies 21,026 11,612
Net (gains) losses related to real estate, property and equipment, and other assets 1,254 (14,533)
Income related to Fortescue's Pilbara project (13,501) --
Gain on buyback of debt (5,320) --
Investments classified as trading, net (1,485) 29,163
Net change in:
Restricted cash (5,000) (9,725)
Trade, notes and other receivables 9,246 173
Prepaids and other assets 7,071 (3,387)
Trade payables and expense accruals (50,638) (32,830)
Other liabilities 688 (658)
Deferred revenue (2,804) 635
Income taxes payable 5,780 (1,249)
Other 598 78
---------- -----------
Net cash used for operating activities (65,869) (46,063)
---------- -----------
Net cash flows from investing activities:
Acquisition of property, equipment and leasehold improvements (6,185) (11,047)
Acquisitions of and capital expenditures for real estate investments (4,154) (34,340)
Proceeds from disposals of real estate, property and equipment, and other assets 1,069 1,848
Collection of Premier Entertainment Biloxi, LLC's insurance proceeds -- 11,089
Advances on notes and other receivables -- (6,754)
Collections on notes, loans and other receivables 7,576 9,407
Investments in associated companies (19,521) (411,589)
Capital distributions from associated companies 23,833 33,348
Purchases of investments (other than short-term) (890,821) (1,827,228)
Proceeds from maturities of investments 68,044 56,458
Proceeds from sales of investments 857,565 1,973,171
Other (399) 665
---------- -----------
Net cash provided by (used for) investing activities 37,007 (204,972)
---------- -----------
Net cash flows from financing activities:
Issuance of debt, net of issuance costs 24,582 47,913
Reduction of debt (27,532) (1,834)
Issuance of common shares -- 616
Excess tax benefit from exercise of stock options -- 182
Other (1,030) 5,217
---------- -----------
Net cash provided by (used for) financing activities (3,980) 52,094
---------- -----------
Effect of foreign exchange rate changes on cash 24 63
---------- -----------
Net decrease in cash and cash equivalents (32,818) (198,878)
Cash and cash equivalents at January 1, 237,503 456,970
---------- -----------
Cash and cash equivalents at March 31, $ 204,685 $ 258,092
========== ===========
See notes to interim consolidated financial statements.
4
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Equity
For the three months ended March 31, 2009 and 2008
(In thousands, except par value)
(Unaudited)
Leucadia National Corporation Common Shareholders
-----------------------------------------------------------------
Common Accumulated
Shares Additional Other
$1 Par Paid-In Comprehensive Retained Noncontrolling
Value Capital Income (Loss) Earnings Subtotal Interest Total
-------- ---------- ------------- ---------- ---------- --------------- ---------
Balance, January 1, 2008 $ 222,574 $ 783,145 $ 975,365 $3,589,408 $5,570,492 $ 20,974 $5,591,466
---------- --------- ----------
Comprehensive loss:
Net change in unrealized gain
(loss) on investments, net of
taxes of $78,599 (137,433) (137,433) (137,433)
Net change in unrealized foreign
exchange gain (loss), net of
taxes of $4,012 7,013 7,013 7,013
Net change in unrealized gain
(loss) on derivative
instruments, net of taxes
of $84 (147) (147) (147)
Net change in pension
liability and postretirement
benefits, net of taxes
of $69 120 120 120
Net loss (95,824) (95,824) (165) (95,989)
---------- --------- ----------
Comprehensive loss (226,271) (165) (226,436)
---------- --------- ----------
Contributions from noncontrolling
interests 5,931 5,931
Distributions to noncontolling
interests (5,376) (5,376)
Share-based compensation expense 2,481 2,481 2,481
Exercise of options to purchase
common shares, including excess
tax benefit 37 761 798 798
--------- ---------- ---------- ---------- ---------- --------- ----------
Balance, March 31, 2008 $ 222,611 $ 786,387 $ 844,918 $3,493,584 $5,347,500 $ 21,364 $5,368,864
========= ========== ========== ========== ========== ========= ==========
Balance, January 1, 2009 $ 238,499 $1,413,595 $ (29,280) $1,053,983 $2,676,797 $ 18,594 $2,695,391
---------- --------- ----------
Comprehensive loss:
Net change in unrealized gain
(loss) on investments, net of
taxes of $62,827 109,854 109,854 109,854
Net change in unrealized foreign
exchange gain (loss), net of
taxes of $1,608 (2,811) (2,811) (2,811)
Net change in unrealized gain
(loss) on derivative instruments,
net of taxes of $167 291 291 291
Net change in pension liability
and postretirement benefits,
net of taxes of $198 344 344 344
Net loss (140,007) (140,007) (126) (140,133)
---------- --------- ----------
Comprehensive loss (32,329) (126) (32,455)
---------- --------- ----------
Contributions from noncontrolling
interests 226 226
Distributions to noncontrolling
interests (1,256) (1,256)
Change in interest in consolidated
subsidiary (1,918) (1,918) 1,918 --
Share-based compensation expense 2,739 2,739 2,739
--------- ---------- ---------- ---------- ---------- --------- ----------
Balance, March 31, 2009 $ 238,499 $1,414,416 $ 78,398 $ 913,976 $2,645,289 $ 19,356 $2,664,645
========= ========== ========== ========== ========== ========= ==========
See notes to interim consolidated financial statements.
5
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements
1. Significant Accounting Policies
The unaudited interim consolidated financial statements, which reflect all
adjustments (consisting of normal recurring items or items discussed
herein) that management believes necessary to present fairly results of
interim operations, should be read in conjunction with the Notes to
Consolidated Financial Statements (including the Summary of Significant
Accounting Policies) included in the Company's audited consolidated
financial statements for the year ended December 31, 2008, which are
included in the Company's Annual Report filed on Form 10-K, as amended, for
such year (the "2008 10-K"). Results of operations for interim periods are
not necessarily indicative of annual results of operations. The
consolidated balance sheet at December 31, 2008 was extracted from the
audited annual financial statements and does not include all disclosures
required by accounting principles generally accepted in the United States
of America ("GAAP") for annual financial statements.
As of January 1, 2009, the Company adopted Statement of Financial
Accounting Standards No. 160, "Noncontrolling Interests in Consolidated
Financial Statements" ("SFAS 160"). SFAS 160 materially changes the
accounting and reporting for minority interests in the future, and requires
retrospective application of its presentation and disclosure requirements
for all periods presented. Minority interests have been reclassified as
noncontrolling interests and included as a component of net worth;
previously minority interests were separately classified on the
consolidated balance sheet and not included as a component of consolidated
net worth.
Effective January 1, 2009, the Company adopted Statement of Financial
Accounting Standards No. 161, "Disclosures about Derivative Instruments and
Hedging Activities - an amendment of FASB Statement No. 133" ("SFAS 161").
SFAS 161 requires enhanced disclosures about an entity's derivative and
hedging activities, including the objectives and strategies for using
derivatives, disclosures about fair value amounts of, and gains and losses
on, derivative instruments, and disclosures about credit-risk-related
contingent features in derivative agreements. Adoption of SFAS 161 did not
have any impact on the Company's consolidated financial statements other
than expanded disclosures.
2. Segment Information
The primary measure of segment operating results and profitability used by
the Company is income (loss) from continuing operations before income taxes
and income (losses) related to associated companies. Certain information
concerning the Company's segments for the three month periods ended March
31, 2009 and 2008 is presented in the following table.
6
2009 2008
----------- ---------
(In thousands)
Revenues and other income (a):
Manufacturing:
Idaho Timber $ 31,652 $ 58,470
Conwed Plastics 20,073 26,739
Telecommunications 118,795 119,684
Property Management and Services 28,264 39,700
Gaming Entertainment (b) 26,681 39,531
Domestic Real Estate 4,057 (713)
Medical Product Development 5,042 274
Other Operations 12,633 15,473
Corporate 3,146 25,691
----------- ----------
Total consolidated revenues and other income $ 250,343 $ 324,849
=========== ==========
Loss before income taxes and losses related to associated companies:
Manufacturing:
Idaho Timber $ (4,223) $ (979)
Conwed Plastics 2,742 3,873
Telecommunications (1,309) 3,187
Property Management and Services (3,403) 4,283
Gaming Entertainment 1,365 9,395
Domestic Real Estate (5,578) (4,846)
Medical Product Development (1,955) (8,533)
Other Operations (c) (15,893) (2,630)
Corporate (53,229) (36,708)
----------- ----------
Total consolidated loss before income taxes and
losses related to associated companies $ (81,483) $ (32,958)
=========== ==========
(a) Revenues and other income for each segment include amounts for
services rendered and products sold, as well as segment reported
amounts classified as investment and other income and net securities
gains (losses) on the Company's consolidated statements of operations.
(b) For the three month 2008 period, the gaming entertainment segment's
revenues and other income includes a $7,300,000 gain from the
settlement of an insurance claim and $4,700,000 resulting from capital
contributions from the noncontrolling interest. In prior periods, the
Company recorded 100% of the losses from this segment after cumulative
loss allocations to the noncontrolling interest (classified as
minority interest prior to the adoption of SFAS 160) had reduced the
noncontrolling interest to zero. Since the noncontrolling interest
remained at zero after considering the capital contributions, the
entire capital contribution was recorded as income, effectively
reimbursing the Company for a portion of the noncontrolling interest
losses that were not previously allocated to the noncontrolling
interest.
(c) Other operations includes pre-tax losses of $8,900,000 and $4,800,000
for the 2009 and 2008 periods, respectively, for investigation and
evaluation of various energy related projects. There were no material
operating revenues associated with these activities.
For the three months ended March 31, 2009 and 2008, results include
depreciation and amortization expenses of $19,200,000 and $15,400,000,
respectively; such amounts are primarily comprised of Corporate ($3,900,000
and $2,500,000, respectively), manufacturing ($4,200,000 and $4,400,000,
respectively, including amounts classified as cost of sales), gaming
entertainment ($4,200,000 and $4,200,000, respectively), domestic real
estate ($2,400,000 and $700,000, respectively), property management and
services ($1,000,000 and $1,300,000, respectively) and other operations
($2,500,000 and $2,100,000, respectively, including amounts classified as
cost of sales). Depreciation and amortization expenses for other segments
are not material.
7
For the three months ended March 31, 2009 and 2008, results include
interest expense of $33,400,000 and $35,800,000, respectively; such amounts
are primarily comprised of Corporate ($32,600,000 and $35,400,000,
respectively). Interest expense for other segments is not material.
3. Investments in Associated Companies
A summary of investments in associated companies at March 31, 2009 and
December 31, 2008 is as follows:
March 31, December 31,
2009 2008
----------- ------------
(In thousands)
Investments in associated companies accounted for under the equity method
of accounting (a):
Jefferies High Yield Holdings, LLC ("JHYH") $ 275,620 $ 280,923
Goober Drilling, LLC 229,905 252,362
Cobre Las Cruces, S.A. ("CLC") 165,662 165,227
Garcadia 71,866 72,135
HomeFed Corporation 43,961 44,093
Wintergreen Partners Fund, L.P. 37,481 42,895
Pershing Square IV, L.P. ("Pershing Square") 21,732 36,731
HFH ShortPLUS Fund L.P. ("Shortplus") 20,209 39,942
IFIS Limited ("IFIS") -- 14,590
Brooklyn Renaissance Plaza 31,789 31,217
Other 84,292 93,402
----------- ----------
Total accounted for under the equity method of accounting 982,517 1,073,517
----------- ----------
Investments in associated companies carried at fair value (b):
Jefferies Group, Inc. ("Jefferies") 670,479 683,111
AmeriCredit Corp. ("ACF") 193,031 249,946
----------- ----------
Total accounted for at fair value 863,510 933,057
----------- ----------
Total investments in associated companies $ 1,846,027 $2,006,574
=========== ==========
(a) Investments accounted for under the equity method of accounting
are initially recorded at their original cost and subsequently
increased for the Company's share of the investees' earnings,
decreased for the Company's share of the investees' losses,
reduced for dividends received and impairment charges recorded,
if any, and increased for any additional investment of capital.
(b) As more fully discussed in the 2008 10-K, during 2008 the Company
elected to account for its investments in Jefferies and ACF at
fair value commencing on the dates these investments became
subject to the equity method of accounting. The original cost for
the Jefferies shares was $794,400,000 and the original cost for
the ACF shares was $406,700,000.
At December 31, 2008, the Company had a 26% interest in the common shares
of IFIS, a private Argentine company, which was classified as an investment
in an associated company and accounted for under the equity method of
accounting. In January 2009, IFIS raised a significant amount of new equity
in a rights offering in which the Company did not participate. As a result,
the Company's ownership interest in IFIS was reduced to 8% and the Company
no longer applies the equity method of accounting for this investment. At
March 31, 2009, the Company's investment in IFIS was classified as a
non-current investment.
8
The Company owns approximately 25% of the outstanding voting securities of
ACF, a company listed on the New York Stock Exchange ("NYSE") (Symbol:
ACF). ACF is an independent auto finance company that is in the business of
purchasing and servicing automobile sales finance contracts, historically
to consumers who are typically unable to obtain financing from other
sources. Losses related to associated companies include unrealized losses
resulting from changes in the fair value of ACF of $58,300,000 and
$78,500,000 for the three month periods ended March 31, 2009 and 2008,
respectively.
The Company owns approximately 29% of the outstanding voting securities of
Jefferies, a company listed on the NYSE (Symbol: JEF). Jefferies is a
full-service global investment bank and institutional securities firm
serving companies and their investors. Losses related to associated
companies include unrealized losses resulting from changes in the fair
value of Jefferies of $12,600,000 for the three months ended March 31,
2009.
Statement of Financial Accounting Standards No. 159, "The Fair Value Option
for Financial Assets and Financial Liabilities - Including an amendment of
FASB Statement No. 115" ("SFAS 159"), permits entities to choose to measure
many financial instruments and certain other items at fair value (the "fair
value option") and to report unrealized gains and losses on items for which
the fair value option is elected in earnings. The Company's investments in
ACF and Jefferies are the only eligible items for which the fair value
option identified in SFAS 159 was elected, commencing on the date the
investments became subject to the equity method of accounting. If these
investments were accounted for under the equity method, the Company would
have to record its share of their results of operations employing a
quarterly reporting lag because of the investees' public reporting
requirements. In addition, electing the fair value option eliminates some
of the uncertainty involved with impairment considerations, since quoted
market prices for these investments provides a readily determinable fair
value at each balance sheet date. The Company's investment in HomeFed is
the only other investment in an associated company that is also a publicly
traded company but for which the Company did not elect the fair value
option. HomeFed's common stock is not listed on any stock exchange, and
price information for the common stock is not regularly quoted on any
automated quotation system. It is traded in the over-the-counter market
with high and low bid prices published by the National Association of
Securities Dealers OTC Bulletin Board Service; however, trading volume is
minimal. For these reasons the Company did not elect the fair value option
for HomeFed.
The following tables provide summarized data with respect to significant
investments in associated companies for the periods the investments were
owned by the Company. The information is provided for those investments
whose relative significance to the Company could result in the Company
including separate audited financial statements for such investments in its
Annual Report on Form 10-K for the year ended December 31, 2009 (in
thousands).
March 31, March 31,
2009 2008
----------- ---------
ACF:
Total revenues $ 495,800 $638,700
Income from continuing operations before extraordinary items 9,800 38,200
Net income 9,800 38,200
Jefferies (a):
Total revenues $ 405,900 $ --
Income from continuing operations before extraordinary items 38,300 --
Net income 38,300 --
(a) The Company's investment in Jefferies did not qualify as and was
not accounted for as an investment in an associated company
during the first quarter of 2008.
9
4. Investments
A summary of investments classified as current assets at March 31, 2009 and
December 31, 2008 is as follows (in thousands):
March 31, 2009 December 31, 2008
------------------------------ ------------------------------
Carrying Value Carrying Value
Amortized and Estimated Amortized and Estimated
Cost Fair Value Cost Fair Value
---------- ------------- ----------- --------------
Investments available for sale:
Bonds and notes:
United States Government and agencies $ 208,454 $ 208,827 $ 251,895 $ 252,820
U.S. Government-Sponsored Enterprises 48,136 48,173 72,273 72,319
All other corporates 33,865 34,319 36,646 37,489
---------- ----------- ----------- -----------
Total current investments available for sale 290,455 291,319 360,814 362,628
---------- ----------- ----------- -----------
Other investments 3,141 3,011 3,966 3,836
---------- ----------- ----------- -----------
Total current investments $ 293,596 $ 294,330 $ 364,780 $ 366,464
========== =========== =========== ===========
A summary of non-current investments at March 31, 2009 and December 31,
2008 is as follows (in thousands):
March 31, 2009 December 31, 2008
------------------------------ ------------------------------
Carrying Value Carrying Value
Amortized and Estimated Amortized and Estimated
Cost Fair Value Cost Fair Value
---------- ------------- ----------- --------------
Investments available for sale:
Bonds and notes:
United States Government and agencies $ 12,763 $ 12,663 $ 11,839 $ 11,445
U.S. Government-Sponsored Enterprises 332,267 332,970 284,696 281,745
All other corporates 36 123 4,648 4,501
---------- ----------- ----------- -----------
Total fixed maturities 345,066 345,756 301,183 297,691
---------- ----------- ----------- -----------
Equity securities:
Common stocks:
Banks, trusts and insurance companies 11,305 16,229 13,750 16,640
Industrial, miscellaneous and all other 374,695 678,612 408,289 544,791
---------- ----------- ----------- -----------
Total equity securities 386,000 694,841 422,039 561,431
---------- ----------- ----------- -----------
Total non-current investments available for sale 731,066 1,040,597 723,222 859,122
---------- ----------- ----------- -----------
Other investments 175,732 175,732 168,890 168,890
---------- ----------- ----------- -----------
Total non-current investments $ 906,798 $ 1,216,329 $ 892,112 $ 1,028,012
========== =========== =========== ===========
Non-current available for sale investments include 5,600,000 common shares
of Inmet Mining Corporation ("Inmet"), a Canadian-based global mining
company traded on the Toronto Stock Exchange (Symbol: IMN), which have a
cost of $78,000,000 and carrying values of $138,700,000 and $90,000,000 at
March 31, 2009 and December 31, 2008, respectively. Although the Inmet
shares have registration rights, they may not be sold until August 2009.
10
In August 2006, pursuant to a subscription agreement with Fortescue Metals
Group Ltd ("Fortescue") and its subsidiary, FMG Chichester Pty Ltd ("FMG"),
the Company invested an aggregate of $408,000,000, including expenses, in
Fortescue's Pilbara iron ore and infrastructure project in Western
Australia. In exchange for its cash investment, the Company received
264,000,000 common shares of Fortescue and a $100,000,000 note of FMG that
matures in August 2019. In July 2007, Fortescue sold new common shares in
an underwritten public offering to raise additional capital for its mining
project and to fund future growth. In connection with this offering, the
Company exercised its pre-emptive rights to maintain its ownership position
and acquired an additional 13,986,000 common shares of Fortescue for
$44,200,000. Non-current available for sale investments includes
277,986,000 common shares of Fortescue, representing approximately 9.8% of
the outstanding Fortescue common stock at March 31, 2009. In April 2009,
the Company's interest was reduced to 9% upon the closing of a transaction
in which Fortescue sold 260,000,000 new common shares to Hunan Valin Iron &
Steel Company Ltd, a Chinese company. Fortescue is a publicly traded
company listed on the Australian Stock Exchange (Symbol: FMG), and the
shares held by the Company may be sold without restriction on the
Australian Stock Exchange or in accordance with applicable securities laws.
The Fortescue shares have a cost of $246,300,000 and market values of
$490,000,000 and $377,000,000 at March 31, 2009 and December 31, 2008,
respectively.
Interest on the FMG note is calculated as 4% of the revenue, net of
government royalties, invoiced from the iron ore produced from the
project's Cloud Break and Christmas Creek areas, which commenced production
in May 2008. The note is unsecured and subordinate to the project's senior
secured debt. Interest is payable semi-annually within 30 days of June 30th
and December 31st of each year; however, cash interest payments on the note
are currently being deferred due to covenants contained in the project's
senior secured debt. Any interest payment that is deferred will earn simple
interest at 9.5%. The Company recorded interest on the FMG note of
$13,500,000 for the three month period ended March 31, 2009; the aggregate
accrued interest receivable balance was $54,000,000 at March 31, 2009. For
accounting purposes, the Company allocated its initial Fortescue investment
to the common shares acquired (based on the market value at acquisition), a
13 year zero-coupon note and a prepaid mining interest. The prepaid mining
interest was initially classified with other non-current assets and is
being amortized to expense as the 4% of revenue is earned. Depreciation and
amortization expense for the period ended March 31, 2009 includes prepaid
mining interest amortization of $1,200,000; the prepaid mining interest
balance was $180,400,000 and $181,600,000 at March 31, 2009 and December
31, 2008, respectively.
At March 31, 2009 and December 31, 2008, the carrying value of other
non-current investments include private equity fund investments where the
Company's voting interest isn't large enough to apply the equity method of
accounting ($55,400,000 and $52,100,000, respectively), a portfolio of
non-agency mortgage backed bond securitizations where the underlying assets
are various individual mortgage loans ($32,700,000 and $43,200,000,
respectively), the zero coupon note payable by FMG discussed above
($29,500,000 and $28,700,000, respectively), a stock interest in the Light
and Power Holdings, Ltd., the electric utility in Barbados ($18,800,000 in
both periods) and various other non-publicly traded interests in equity and
debt securities.
5. Inventory
A summary of inventory (which is included in the caption prepaids and other
current assets) at March 31, 2009 and December 31, 2008 is as follows (in
thousands):
March 31, December 31,
2009 2008
----------- -----------
Raw materials $ 7,648 $ 9,148
Work in process 11,042 15,436
Finished goods 49,601 52,319
----------- -----------
$ 68,291 $ 76,903
=========== ===========
11
6. Intangible Assets, Net and Goodwill
A summary of intangible assets, net and goodwill at March 31, 2009 and
December 31, 2008 is as follows (in thousands):
March 31, December 31,
2009 2008
----------- ----------
Intangibles:
Customer relationships, net of accumulated amortization of $29,664 and $27,473 $ 52,714 $ 55,670
Licenses, net of accumulated amortization of $1,148 and $991 10,790 10,947
Trademarks and tradename, net of accumulated amortization of $692 and $593 5,462 3,689
Patents, net of accumulated amortization of $651 and $611 1,709 1,749
Other, net of accumulated amortization of $2,467 and $2,344 3,354 3,477
Goodwill 9,316 9,316
-------- --------
$ 83,345 $ 84,848
======== ========
Trademarks and tradename increased by $1,900,000 during 2009 due to an
acquisition by STi Prepaid; the asset is being amortized on a straight line
basis over its estimated useful life of ten years. During 2009, Idaho
Timber impaired certain long-lived assets, including $400,000 of customer
relationships intangibles; for further information, see Note 15.
Amortization expense on intangible assets was $2,600,000 and $2,400,000 for
the three month periods ended March 31, 2009 and 2008, respectively. The
estimated aggregate future amortization expense for the intangible assets
for each of the next five years is as follows (in thousands): 2009 (for the
remaining nine months) - $7,800; 2010 - $10,100; 2011 - $9,600; 2012 -
$9,000; and 2013 - $8,800.
The goodwill in the above table relates to Conwed Plastics ($8,100,000) and
STi Prepaid ($1,200,000).
7. Accumulated Other Comprehensive Income (Loss)
Activity in accumulated other comprehensive income (loss) is reflected in
the consolidated statements of equity but not in the consolidated
statements of operations. A summary of accumulated other comprehensive
income (loss), net of taxes at March 31, 2009 and December 31, 2008 is as
follows (in thousands):
March 31, December 31,
2009 2008
---------- ----------
Net unrealized gains on investments $ 133,856 $ 24,002
Net unrealized foreign exchange gains (losses) (2,389) 422
Net unrealized gains (losses) on derivative instruments 171 (120)
Net minimum pension liability (53,898) (54,263)
Net postretirement benefit 658 679
---------- ----------
$ 78,398 $ (29,280)
========== ==========
12
8. Derivative Financial Instruments
The Company reflects its derivative financial instruments in its balance
sheet at fair value. The Company has utilized derivative financial
instruments to manage the impact of changes in interest rates on certain
debt obligations, hedge net investments in foreign subsidiaries and manage
foreign currency risk on certain available for sale securities. Although
the Company believes that these derivative financial instruments are
practical economic hedges of the Company's risks, except for the hedge of
the net investment in foreign subsidiaries, they do not meet the
effectiveness criteria under GAAP, and therefore are not accounted for as
hedges.
At March 31, 2009, the Company's derivative instruments, which are not
designated as hedges, are interest rate swap contracts that are included in
other non-current liabilities at aggregate fair value of $10,500,000. The
total notional amount of these pay fixed/receive variable interest rate
swaps was $152,500,000. Investment and other income includes changes in the
fair values of these derivatives of $900,000 and $(4,700,000) for the three
month periods ended March 31, 2009 and 2008, respectively.
At March 31, 2009, the Company's derivative instrument that is designated
as and qualifies as a hedge was not material.
9. Pension Plans and Postretirement Benefits
Pension expense charged to operations for the three month periods ended
March 31, 2009 and 2008 related to defined benefit pension plans included
the following components (in thousands):
2009 2008
-------- -------
Interest cost $ 3,107 $ 3,096
Expected return on plan assets (1,943) (2,667)
Actuarial loss 93 168
Amortization of prior service cost 445 1
-------- -------
Net pension expense $ 1,702 $ 598
======== =======
The Company did not make any contributions to its defined benefit pension
plans during the first quarter of 2009.
Several subsidiaries provide certain healthcare and other benefits to
certain retired employees under plans which are currently unfunded. The
Company pays the cost of postretirement benefits as they are incurred.
Amounts charged to expense were not material in each of the three month
periods ended March 31, 2009 and 2008.
10. Share-Based Compensation
For the three months ended March 31, 2009 and 2008, salaries and incentive
compensation expense included $2,700,000 and $2,500,000, respectively, for
share-based compensation expense relating to grants previously made under
the Company's senior executive warrant plan and fixed stock option plan. No
grants were made during 2009.
11. Income Taxes
The aggregate amount of unrecognized tax benefits related to uncertain tax
positions reflected in the Company's consolidated balance sheet was
$11,300,000 (including $3,300,000 for interest); if recognized, such
amounts would lower the Company's effective tax rate. Unrecognized tax
benefits were not materially different at December 31, 2008. Over the next
twelve months, the Company believes it is reasonably possible that the
aggregate amount of unrecognized tax benefits related to uncertain tax
positions will decrease by approximately $1,000,000 upon the resolution of
certain assessments. The statute of limitations with respect to the
Company's federal income tax returns has expired for all years through
2004. The Company's New York State and New York City income tax returns are
currently being audited for the 2003 to 2005 period.
For the three month period ended March 31, 2009, loss from operations
reflects a federal income tax benefit only to the extent of the federal tax
provision recorded in accumulated other comprehensive income (loss). As
more fully discussed below, the Company did not record a full federal
income tax benefit for its loss from operations, and has recorded a full
valuation allowance against its net federal deferred tax asset, since the
Company does not believe it is more likely than not that it will be able to
realize its net federal deferred tax asset.
13
12. Loss Per Common Share
Basic and diluted loss per share amounts were calculated by dividing net
loss by the weighted average number of common shares outstanding. There is
no difference between basic and diluted loss per share amounts because the
effect of increasing the weighted average number of common shares for
incremental shares issuable upon exercise of outstanding options and
warrants and for the assumed conversion of the 3 3/4% Convertible Notes is
antidilutive. The numerators and denominators used to calculate basic and
diluted loss per share for the three month periods ended March 31, 2009 and
2008 are as follows (in thousands):
2009 2008
----------- ------------
Numerator - net loss attributable to Leucadia National Corporation common shareholders $ (140,007) $ (95,824)
=========== ===========
Denominator - weighted average shares 238,499 222,584
=========== ===========
If the effect of stock options and warrants were not antidilutive, weighted
average shares outstanding would have increased by 1,000 and 1,506,000 for
the three month periods ended March 31, 2009 and 2008, respectively. If the
effect of the 3 3/4% Convertible Notes were not antidilutive, net loss
would be decreased by $1,400,000 and $2,300,000 for the three month periods
ended March 31, 2009 and 2008, respectively, for reduced interest expense,
and weighted average shares outstanding would have increased by 9,627,000
and 15,239,000 for the three month periods ended March 31, 2009 and 2008,
respectively.
13. Supplementary Cash Flow Information
Cash paid for interest and income taxes (net of refunds) was $61,600,000
and $(4,800,000), respectively, for the three months ended March 31, 2009
and $61,000,000 and $3,100,000, respectively, for the three months ended
March 31, 2008.
14. Indebtedness
In February 2009, the Board of Directors authorized the Company, from time
to time, to purchase its outstanding debt securities through cash purchases
in open market transactions, privately negotiated transactions or
otherwise. Such repurchases, if any, will depend upon prevailing market
conditions, the Company's liquidity requirements and other factors; such
purchases may be commenced or suspended at any time without notice. During
March 2009, the Company repurchased $30,900,000 principal amount of its 7%
Senior Notes due 2013 and recognized a pre-tax gain of $5,300,000, which is
reflected in investment and other income.
Debt due within one year includes $173,200,000 and $151,100,000 as of March
31, 2009 and December 31, 2008, respectively, relating to repurchase
agreements. At March 31, 2009, these fixed rate repurchase agreements have
a weighted average interest rate of approximately 0.7%, mature in April
2009 and are collateralized by non-current investments with a carrying
value of $187,100,000.
In April 2009, one of the Company's subsidiaries received a notice of
default with respect to $92,800,000 of nonrecourse indebtedness that is
collateralized by a real estate project. The notice specified certain
non-payment related violations, and the lenders did not seek to accelerate
payment of the debt obligation. The contractual maturity of the debt
obligation is October 2009, and as such has been classified as a current
liability as of March 31, 2009 and December 31, 2008. The Company's net
investment in this subsidiary is $40,800,000 at March 31, 2009.
15. Fair Value
Aggregate information concerning assets and liabilities at March 31, 2009
and December 31, 2008 that are measured at fair value on a recurring basis
is presented below (in thousands):
14
March 31, 2009
-------------------------------------------------------------------
Fair Value Measurements Using
----------------------------------------------
Quoted Prices in Active
Total Markets for Identical Significant Other
Fair Value Assets or Liabilities Observable Inputs
Measurements (Level 1) (Level 2)
------------ ----------------------- -----------------
Investments classified as current assets:
Investments available for sale $ 291,319 $ 257,000 $ 34,319
Non-current investments:
Investments available for sale 1,040,597 707,091 333,506
Investments in associated companies (a) 863,510 863,510 --
------------ ----------- -----------
Total $ 2,195,426 $ 1,827,601 $ 367,825
============ =========== ===========
Other current liabilities (b) $ (3,113) $ (2,102) $ (1,011)
Other non-current liabilities (c) (10,530) -- (10,530)
------------ ----------- -----------
Total $ (13,643) $ (2,102) $ (11,541)
============ =========== ===========
December 31, 2008
------------------------------------------------------------------
Fair Value Measurements Using
----------------------------------------------
Quoted Prices in Active
Total Markets for Identical Significant Other
Fair Value Assets or Liabilities Observable Inputs
Measurements (Level 1) (Level 2)
------------ --------------------- ----------------
Investments classified as current assets:
Investments available for sale $ 362,628 $ 329,317 $ 33,311
Non-current investments:
Investments available for sale 859,122 564,903 294,219
Investments in associated companies (a) 933,057 933,057 --
------------ ----------- -----------
Total $ 2,154,807 $ 1,827,277 $ 327,530
============ =========== ===========
Other current liabilities (b) $ (259) $ (259) $ --
Other non-current liabilities (c) (13,132) -- (13,132)
------------ ----------- -----------
Total $ (13,391) $ (259) $ (13,132)
============ =========== ===========
(a) As discussed above, the Company elected to account for its
investments in ACF and Jefferies at fair value. During the three
months ended March 31, 2009, changes in fair value of ACF and
Jefferies aggregating $(71,000,000) are reflected in losses
related to associated companies in the consolidated statement of
operations. During the three months ended March 31, 2008, a
change in fair value of ACF of $(78,500,000) is reflected in
losses related to associated companies.
(b) During the three months ended March 31, 2009 and 2008, changes in
fair value of $(300,000) and $100,000, respectively, are
reflected in net securities gains (losses) in the consolidated
statement of operations.
(c) Comprised of derivative financial instruments. During the three
months ended March 31, 2009 and 2008, changes in fair value of
$900,000 and $(4,700,000), respectively, are reflected in
investment and other income in the consolidated statement of
operations.
(d) At March 31, 2009 and December 31, 2008, the Company did not have
material fair value measurements using unobservable inputs (Level
3) for assets and liabilities measured at fair value on a
recurring basis.
Aggregate information concerning assets and liabilities at March 31, 2009
and December 31, 2008 that are measured at fair value on a nonrecurring
basis is presented below (in thousands):
15
March 31, 2009
---------------------------------------------------------------------------------------
Fair Value Measurements Using
----------------------------------------------------------------
Quoted Prices in
Active Markets for Significant Other Significant
Total Fair Value Identical Assets Observable Inputs Unobservable Inputs
Measurements (Level 1) (Level 2) (Level 3)
------------ ----------------- ----------------- ---------------
Long-lived assets held and used (a) $ 1,100 $ -- $ -- $ 1,100
Intangible assets (a) 900 -- -- 900
Other non-current investments (b) 15,000 -- 11,200 3,800
December 31, 2008
--------------------------------------------------------------------------------------
Fair Value Measurements Using
----------------------------------------------------------------
Quoted Prices in
Active Markets for Significant Other Significant
Total Fair Value Identical Assets Observable Inputs Unobservable Inputs
Measurements (Level 1) (Level 2) (Level 3)
------------ ----------------- ----------------- ---------------
Long-lived assets held and used (a) $ 1,400 $ -- $ -- $ 1,400
Other non-current investments (b) 56,000 -- -- 56,000
Long-lived assets held for sale (c) 2,300 -- 2,300 --
(a) During the three months ended March 31, 2009, Idaho Timber
discontinued remanufacturing of dimension lumber at one of its
plants, and as a result evaluated for impairment the plant's
long-lived assets, comprised of buildings, machinery and
equipment, and customer relationships intangibles. The carrying
values of long-lived assets held and used and intangible assets
of $1,700,000 and $1,300,000, respectively, were written down to
fair values of $1,100,000 and $900,000, respectively, resulting
in an aggregate impairment charge of $1,000,000, which is
included in selling, general and other expenses in the
consolidated statement of operations. The fair values were
determined using the expected present value of future cash flows.
During the three months ended March 31, 2008, the Company did not
record any impairment losses on long-lived assets.
As of December 31, 2008, the Company evaluated for impairment
principally within its other operations segment certain
long-lived assets (wine futures contracts) as events or changes
in circumstances indicated that the carrying amount for these
assets may not have been recoverable. The fair values for these
assets were primarily based upon information obtained from market
participants concerning sales of bottled wine of other vintages
for similar types of wine.
(b) At March 31, 2009, includes investments aggregating $3,800,000 in
non-agency mortgage backed bond securitizations and $11,200,000
for a non-public equity security. At December 31, 2008, includes
$11,000,000 in non-agency mortgage backed bond securitizations,
$44,600,000 of investments in private equity funds and a
non-public security. The investments in private equity funds and
non-public equity securities are accounted for under the cost
method of accounting. The investments in non-agency mortgage
backed bond securitizations are acquisitions of impaired loans,
generally at a significant discount to face amounts, and are
accounted for in accordance with AICPA Statement of Position
03-3. The market for these securities is highly illiquid and they
rarely trade. The fair values were primarily determined using an
income valuation model to calculate the present value of expected
future cash flows, which incorporated assumptions regarding
potential future rates of delinquency, prepayments, defaults,
collateral losses and interest rates. For the investments in
non-public securities and private equity funds, the Company
primarily reviewed issuer financial statements to determine the
fair value of its investment. The non-public security investment
at March 31, 2009 owns a variety of publicly traded securities
which it accounts for at fair value. The private equity funds
account for their underlying investments at fair value, which are
principally based on Level 2 or Level 3 inputs.
16
Included in net securities gains (losses) in the consolidated
statement of operations for the three months ended March 31, 2009
is an impairment charge aggregating $8,300,000 ($6,100,000 for
non-agency mortgage backed bond securitizations and $2,200,000
for the non-public equity security and a private equity fund),
and for the three months ended March 31, 2008, an impairment
charge of $800,000 for a non-public equity security.
(c) Consisted of real estate properties for which the fair values
were based on prices for similar assets.
16. Other
During the first quarter of 2009, the Company invested an additional
$28,500,000 in Sangart, Inc. ("Sangart") upon the exercise of its remaining
warrants, which increased its ownership interest from approximately 89% to
approximately 92%. The acquisition of a portion of the noncontrolling
interest was accounted for under SFAS 160, resulting in a change to the
noncontrolling interest of $1,900,000.
As more fully discussed in the 2008 10-K, during 2008, the Lake Charles
Harbor and Terminal District of Lake Charles, Louisiana sold $1,000,000,000
in tax exempt bonds to support the development of a $1,600,000,000
petroleum coke gasification plant project by the Company's wholly-owned
subsidiary, Lake Charles Cogeneration LLC ("LCC"). The bond proceeds were
initially escrowed and held by the bond trustee; however, during the first
quarter of 2009 the bond trustee used the escrowed funds to fully redeem
the bonds. Pursuant to LCC's agreements with the local municipality, upon
the completion of pending permitting, regulatory approval, design
engineering and the satisfaction of certain other conditions of the
financing agreements, the bonds will be marketed on a long-term basis and
the proceeds will be released to LCC to use for the payment of development
and construction costs for the project.
17
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations.
The following should be read in conjunction with the Management's Discussion and
Analysis of Financial Condition and Results of Operations included in the 2008
10-K.
Liquidity and Capital Resources
The Company's investment portfolio, equity and results of operations can be
significantly impacted by the changes in market values of certain securities,
particularly during times of increased volatility in security prices. Changes in
the market values of publicly traded available for sale securities are reflected
in other comprehensive income (loss) and equity. However, changes in the market
prices of investments for which the Company has elected the fair value option,
and declines in the fair values of public and non-public securities that the
Company deems to be other than temporary are reflected in the consolidated
statements of operations and equity. The Company also has non-controlling
investments in entities that are engaged in investing and/or securities
transactions activities that are accounted for on the equity method of
accounting (classified as investments in associated companies), for which the
Company records its share of the entities' profits or losses in its consolidated
statements of operations. These entities typically invest in public securities,
with changes in market values reflected in their earnings, which increases the
Company's exposure to volatility in the public securities markets.
The Company's largest publicly traded available for sale equity securities with
changes in market values reflected in other comprehensive income (loss) are
Fortescue and Inmet. During the first quarter of 2009, the Company's investment
in the common shares of Fortescue increased in value from $377,000,000 at
December 31, 2008 to $490,000,000 at March 31, 2009, and the market value of the
Company's investment in the common shares of Inmet increased from $90,000,000 at
December 31, 2008 to $138,700,000 at March 31, 2009. The market values of the
Company's investments in ACF and Jefferies, for which the fair value option was
elected, declined during this period with unrealized losses reflected in
operations as a component of losses related to associated companies. During the
three months ended March 31, 2009, the Company recognized unrealized losses
related to its investments in ACF and Jefferies of $58,300,000 and $12,600,000,
respectively. The Company also recorded impairment losses for declines in value
of securities deemed to be other than temporary in its consolidated statement of
operations of $22,700,000, reflected as a component of net securities gains
(losses).
In addition to cash and cash equivalents, the Company also considers investments
classified as current assets and investments classified as non-current assets on
the face of its consolidated balance sheet as being generally available to meet
its liquidity needs. Securities classified as current and non-current
investments are not as liquid as cash and cash equivalents, but they are
generally easily convertible into cash within a short period of time. As of
March 31, 2009, the sum of these amounts aggregated $1,715,300,000. However,
since $633,700,000 of this amount is pledged as collateral pursuant to various
agreements, represents investments in non-public securities or is held by
subsidiaries that are party to agreements that restrict the Company's ability to
use the funds for other purposes (including the Inmet shares), the Company does
not consider those amounts to be available to meet the Parent's liquidity needs.
The $1,081,600,000 that is available is comprised of cash and short-term bonds
and notes of the U.S. Government and its agencies, U.S. Government-Sponsored
Enterprises and other publicly traded debt and equity securities (including the
Company's $490,000,000 investment in Fortescue common shares). The Parent's
available liquidity, and the investment income realized from the Parent's cash,
cash equivalents and marketable securities is used to meet the Parent company's
short-term recurring cash requirements, which are principally the payment of
interest on its debt and corporate overhead expenses.
In February 2009, the Board of Directors authorized the Company, from time to
time, to purchase its outstanding debt securities through cash purchases in open
market transactions, privately negotiated transactions or otherwise. Such
repurchases, if any, will depend upon prevailing market conditions, the
Company's liquidity requirements and other factors; such purchases may be
commenced or suspended at any time without notice. During March 2009, the
Company repurchased $30,900,000 principal amount of its 7% Senior Notes due
2013.
18
In the first quarter of 2009, the Company invested an additional $28,500,000 in
Sangart upon the exercise of its remaining warrants, which increased its
ownership interest to approximately 92%. The acquisition of a portion of the
noncontrolling interest was accounted for under SFAS 160, resulting in a change
to the noncontrolling interest of $1,900,000.
In April 2009, one of the Company's subsidiaries received a notice of default
with respect to $92,800,000 of nonrecourse indebtedness that is collateralized
by a real estate project. The notice specified certain non-payment related
violations, and the lenders did not seek to accelerate payment of the debt
obligation. The contractual maturity of the debt obligation is October 2009, and
as such has been classified as a current liability as of March 31, 2009 and
December 31, 2008.
Consolidated Statements of Cash Flows
Net cash of $65,900,000 and $46,100,000 was used for operating activities in the
three month periods ended March 31, 2009 and 2008, respectively. The change in
operating cash flows reflects decreased funds generated from activity in the
trading portfolio and increased distributions of earnings from associated
companies. STi Prepaid's telecommunications operations used funds of $1,600,000
during the 2009 period and generated funds from operating activities of
$5,200,000 during the 2008 period. The Company's property management and
services segment used funds of $1,300,000 during the 2009 period and generated
funds of $3,000,000 during the 2008 period. Premier generated funds of
$7,100,000 and $5,200,000 during the 2009 and 2008 periods, respectively. For
2009, funds used by the Company's manufacturing segments were $100,000 as
compared to $7,700,000 in the 2008 period, principally reflecting a lower net
investment in working capital. Funds used by Sangart, a development stage
company, decreased to $3,200,000 during 2009 from $6,900,000 during the 2008
period. In 2009, distributions from associated companies principally include
earnings distributed by Shortplus ($14,500,000), Goober Drilling ($3,600,000)
and Garcadia ($1,800,000). In 2008, distributions from associated companies
principally include earnings distributed by JHYH ($4,300,000) and Goober
Drilling ($4,500,000).
Net cash of $37,000,000 was provided by investing activities in the first
quarter of 2009 as compared to $205,000,000 of cash used for investing
activities in the first quarter of 2008. Investments in associated companies
include CLC ($12,500,000) in 2009 and IFIS ($83,900,000) and ACF ($303,800,000)
in 2008. Capital distributions from associated companies include $19,000,000
from Goober Drilling and $4,800,000 from Shortplus in 2009 and $17,300,000 from
Safe Harbor Domestic Partners L.P., $9,000,000 from Goober Drilling and
$7,000,000 from EagleRock Capital Partners (QP), LP in 2008.
Net cash of $4,000,000 was used for financing activities in the first quarter of
2009 as compared to $52,100,000 of cash provided by financing activities in the
first quarter of 2008. Reduction of debt for 2009 includes $25,600,000 for the
buyback of $30,900,000 principal amount of the 7% Senior Notes. Issuance of
long-term debt for 2009 and 2008 primarily reflects the increase in repurchase
agreements of $22,100,000 and $20,800,000, respectively, and for 2008,
$27,000,000 for the Myrtle Beach project's debt obligation. Issuance of common
shares for 2008 principally reflects the exercise of employee stock options.
Critical Accounting Estimates
The Company's discussion and analysis of its financial condition and results of
operations are based upon its consolidated financial statements, which have been
prepared in accordance with GAAP. The preparation of these financial statements
requires the Company to make estimates and assumptions that affect the reported
amounts in the financial statements and disclosures of contingent assets and
liabilities. On an on-going basis, the Company evaluates all of these estimates
and assumptions. The following areas have been identified as critical accounting
estimates because they have the potential to have a material impact on the
Company's financial statements, and because they are based on assumptions which
are used in the accounting records to reflect, at a specific point in time,
events whose ultimate outcome won't be known until a later date. Actual results
could differ from these estimates.
Income Taxes - At March 31, 2009, the Company's net deferred tax asset before
valuation allowances was $2,346,500,000, of which $2,089,000,000 represents the
potential future tax savings from federal and state net operating loss
carryforwards ("NOLs"). In accordance with Financial Accounting Standards No.
109, "Accounting for Income Taxes" ("SFAS 109"), the Company records a valuation
allowance to reduce its deferred tax asset to the net amount that is more likely
than not to be realized. The amount of any valuation allowance recorded does not
in any way adversely affect the Company's ability to use its NOLs to offset
taxable income in the future. If in the future the Company determines that it is
more likely than not that the Company will be able to realize its net deferred
tax asset in excess of its net recorded amount, an adjustment to increase the
net deferred tax asset would increase income in such period. If in the future
the Company were to determine that it would not be able to realize all or part
of its net recorded deferred tax asset, an adjustment to decrease the net
deferred tax asset would be charged to income in such period. SFAS 109 requires
the Company to consider all available evidence, both positive and negative, and
to weight the evidence when determining whether a valuation allowance is
required. Generally, greater weight is required to be placed on objectively
verifiable evidence when making this assessment, in particular on recent
historical operating results.
19
During the second half of 2008 the Company recorded significant unrealized
losses on many of its largest investments, recognized other than temporary
impairments for a number of other investments and reported reduced profitability
from substantially all of its operating businesses. The worldwide economic
downturn has adversely affected many of the Company's operating businesses and
investments, and the nature of the current economic difficulties make it
impossible to reliably project how long the downturn will last. Additionally,
the recent losses recognized by the Company result in a cumulative loss in total
comprehensive income (loss) during the past three years. In assessing the
realizability of the net deferred tax asset, the Company concluded that its
operating losses for the more recent periods and current economic conditions
worldwide should be given more weight than its projections of future taxable
income during the period that it has NOLs available (until 2028), and be given
more weight than the Company's long track record of generating taxable income.
As a result, the Company has concluded that a valuation allowance is required
against substantially all of the net deferred tax asset.
Pursuant to SFAS 109, the Company will continue to evaluate the realizability of
its net deferred tax asset in future periods. However, before the Company would
reverse any portion of its valuation allowance in excess of taxes recorded on
reported income, it will need historical positive cumulative taxable income over
a period of years to overcome the recent negative evidence. At that time, any
decrease to the valuation allowance would be based upon the Company's
projections of future taxable income, which are inherently uncertain.
The Company also records reserves for contingent tax liabilities based on the
Company's assessment of the probability of successfully sustaining its tax
filing positions.
Impairment of Long-Lived Assets - In accordance with Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets", the Company evaluates its long-lived assets for impairment whenever
events or changes in circumstances indicate, in management's judgment, that the
carrying value of such assets may not be recoverable. When testing for
impairment, the Company groups its long-lived assets with other assets and
liabilities at the lowest level for which identifiable cash flows are largely
independent of the cash flows of other assets and liabilities (or asset group).
The determination of whether an asset group is recoverable is based on
management's estimate of undiscounted future cash flows directly attributable to
the asset group as compared to its carrying value. If the carrying amount of the
asset group is greater than the undiscounted cash flows, an impairment loss
would be recognized for the amount by which the carrying amount of the asset
group exceeds its estimated fair value.
The Company recorded impairment losses on long-lived assets aggregating
$1,000,000 during the three months ended March 31, 2009; none were recorded
during the comparable 2008 period. Idaho Timber discontinued remanufacturing of
dimension lumber at one of its plants and as a result evaluated for impairment
the plant's long-lived assets, comprised of buildings, machinery and equipment,
and customer relationships intangibles. The carrying values of long-lived assets
held and used and intangible assets of $1,700,000 and $1,300,000, respectively,
were written down to fair values of $1,100,000 and $900,000, respectively. The
fair values were determined using the expected present value of future cash
flows.
Current economic conditions have adversely affected most of the Company's
operations and investments. A worsening of current economic conditions or a
prolonged recession could cause a decline in estimated future cash flows
expected to be generated by the Company's operations and investments. If future
undiscounted cash flows are estimated to be less than the carrying amounts of
the asset groups used to generate those cash flows in subsequent reporting
periods, particularly for those with large investments in property and equipment
(for example, manufacturing, gaming entertainment and certain associated company
investments), impairment charges would have to be recorded.
Impairment of Securities - Investments with an impairment in value considered to
be other than temporary are written down to estimated fair value. The
write-downs are included in net securities gains (losses) in the consolidated
statements of operations. The Company evaluates its investments for impairment
on a quarterly basis.
20
The Company's determination of whether a security is other than temporarily
impaired incorporates both quantitative and qualitative information; GAAP
requires the exercise of judgment in making this assessment, rather than the
application of fixed mathematical criteria. The various factors that the Company
considers in making its determination are specific to each investment. For
publicly traded debt and equity securities, the Company considers a number of
factors including, but not limited to, the length of time and the extent to
which the fair value has been less than cost, the financial condition and near
term prospects of the issuer, the reason for the decline in fair value, changes
in fair value subsequent to the balance sheet date, the ability and intent to
hold investments to maturity, and other factors specific to the individual
investment. For investments in private equity funds and non-public securities,
the Company bases its determination upon financial statements, net asset values
and/or other information obtained from fund managers or investee companies.
The Company has a portfolio of non-agency mortgage backed bond securitizations,
which are accounted for in accordance with AICPA Statement of Position 03-3 and
carried on the balance sheet at amortized cost. The market for these securities
is highly illiquid and they rarely trade. On a regular basis, the Company
re-estimates the future cash flows of these securities and records impairment
charges if appropriate. The fair values for these securities are primarily
determined using an income valuation model to calculate the present value of
expected future cash flows, which incorporates assumptions regarding potential
future rates of delinquency, prepayments, defaults, collateral losses and
interest rates.
The Company recorded the following impairment charges for securities during the
three months ended March 31, 2009 and 2008 (in thousands):
2009 2008
---------- ----------
Publicly traded securities $ 14,400 $ 5,900
Non-public securities and private equity funds 2,200 800
Non-agency mortgage backed bond securitizations 6,100 --
--------- ---------
Totals $ 22,700 $ 6,700
========= =========
Impairment of Equity Method Investments - In accordance with Accounting
Principles Board Opinion No. 18, "The Equity Method of Accounting for
Investments in Common Stock", the Company evaluates equity method investments
for impairment when operating losses or other factors may indicate a decrease in
value which is other than temporary. The Company did not recognize any
impairment losses for its equity method investments for the three months ended
March 31, 2009 and 2008.
For investments in investment partnerships that are accounted for under the
equity method, the Company obtains from the investment partnership financial
statements, net asset values and other information on a quarterly basis and
annual audited financial statements. On a quarterly basis, the Company also
makes inquiries and discusses with investment managers whether there were
significant procedural, valuation, composition and other changes at the
investee. Since these investment partnerships record their underlying
investments at fair value, after application of the equity method the carrying
value of the Company's investment is equal to its share of the investees'
underlying net assets at their fair values. Absent any unusual circumstances or
restrictions concerning these investments, which would be separately evaluated,
it is unlikely that any additional impairment charge would be required.
For equity method investments in operating businesses, the Company considers a
variety of factors including economic conditions nationally and in their
geographic areas of operation, adverse changes in the industry in which they
operate, declines in business prospects, deterioration in earnings, increasing
costs of operations and other relevant factors specific to the investee.
Whenever the Company believes conditions or events indicate that one of these
investments might be materially impaired, the Company will obtain from such
investee updated cash flow projections and impairment analyses of the investee
assets. The Company will use this information and, together with discussions
with the investee's management, evaluate if the book value of its investment
exceeds its fair value, and if so and the situation is deemed other than
temporary, record an impairment charge.
21
Business Combinations - At acquisition, the Company allocates the cost of a
business acquisition to the specific tangible and intangible assets acquired and
liabilities assumed based upon their fair values. Significant judgments and
estimates are often made to determine these values, and may include the use of
appraisals, consider market quotes for similar transactions, employ discounted
cash flow techniques or consider other information the Company believes
relevant. The finalization of the purchase price allocation will typically take
a number of months to complete, and if final values are materially different
from initially recorded amounts adjustments are recorded. Any excess of the cost
of a business acquisition over the fair values of the net assets and liabilities
acquired is recorded as goodwill, which is not amortized to expense. Recorded
goodwill of a reporting unit is required to be tested for impairment on an
annual basis, and between annual testing dates if events or circumstances change
that would more likely than not reduce the fair value of a reporting unit below
its net book value. At March 31, 2009, the book value of goodwill was
$9,300,000.
Subsequent to the finalization of the purchase price allocation, any adjustments
to the recorded values of acquired assets and liabilities would be reflected in
the Company's consolidated statement of operations. Once final, the Company is
not permitted to revise the allocation of the original purchase price, even if
subsequent events or circumstances prove the Company's original judgments and
estimates to be incorrect. In addition, long-lived assets recorded in a business
combination like property and equipment, amortizable intangibles and goodwill
may be deemed to be impaired in the future resulting in the recognition of an
impairment loss. The assumptions and judgments made by the Company when
recording business combinations will have an impact on reported results of
operations for many years into the future.
Use of Fair Value Estimates - Effective January 1, 2008 (except as described
below), the Company adopted Statement of Financial Accounting Standards No. 157,
"Fair Value Measurements" ("SFAS 157"). SFAS 157 defines fair value, establishes
a framework for measuring fair value, establishes a hierarchy that prioritizes
inputs to valuation techniques and expands disclosures about fair value
measurements. The fair value hierarchy gives the highest priority to unadjusted
quoted prices in active markets for identical assets or liabilities (Level 1),
the next priority to inputs that don't qualify as Level 1 inputs but are
nonetheless observable, either directly or indirectly, for the particular asset
or liability (Level 2), and the lowest priority to unobservable inputs (Level
3). Effective January 1, 2009, the Company adopted SFAS 157 with respect to
nonfinancial assets and nonfinancial liabilities that are recognized or
disclosed at fair value in the financial statements on a nonrecurring basis.
Over 85% of the Company's investment portfolio is classified as available for
sale securities, which are carried at estimated fair value in the Company's
consolidated balance sheet. The estimated fair values are principally based on
publicly quoted market prices (Level 1 inputs), which can rise or fall in
reaction to a wide variety of factors or events, and as such are subject to
market-related risks and uncertainties. The Company has a segregated portfolio
of mortgage pass-through certificates issued by U.S. Government agencies (GNMA)
and by U.S. Government-Sponsored Enterprises (FHLMC or FNMA) which are carried
on the balance sheet at their estimated fair value of $333,400,000 at March 31,
2009. Although the markets that these types of securities trade in are generally
active, market prices are not always available for the identical security. The
fair value of these investments are based on observable market data including
benchmark yields, reported trades, issuer spreads, benchmark securities, bids
and offers. These estimates of fair value are considered to be Level 2 inputs,
and the amounts realized from the disposition of these investments has not been
materially different from their estimated fair values.
The Company has a segregated portfolio of corporate bonds, which are carried on
the balance sheet at their estimated fair value of $33,400,000 at March 31,
2009. Although these bonds trade in brokered markets, the market for certain
bonds is sometimes inactive. The fair values of these investments are based on
reported trading prices, bid and ask prices and quotes obtained from independent
market makers in the securities. These estimates of fair values are also
considered to be Level 2 inputs. The fair values of the Company's portfolio of
non-agency mortgage backed bond securitizations which are discussed above under
Impairment of Securities, are considered to be Level 3 inputs.
Contingencies - The Company accrues for contingent losses when the contingent
loss is probable and the amount of loss can be reasonably estimated. Estimates
of the likelihood that a loss will be incurred and of contingent loss amounts
normally require significant judgment by management, can be highly subjective
and are subject to material change with the passage of time as more information
becomes available. Estimating the ultimate impact of litigation matters is
inherently uncertain, in particular because the ultimate outcome will rest on
events and decisions of others that may not be within the power of the Company
to control. The Company does not believe that any of its current litigation will
have a material adverse effect on its consolidated financial position, results
of operations or liquidity; however, if amounts paid at the resolution of
litigation are in excess of recorded reserve amounts, the excess could be
material to results of operations for that period. As of March 31, 2009, the
Company's accrual for contingent losses was not material.
22
Results of Operations
Three Months Ended March 31, 2009 Compared to the Three Months
Ended March 31, 2008
General
Substantially all of the Company's operating businesses sell products or
services that are impacted by general economic conditions in the U.S. and to a
lesser extent internationally. Poor general economic conditions have reduced the
demand for products or services sold by the Company's operating subsidiaries
and/or resulted in reduced pricing for products or services. Troubled industry
sectors, like the residential real estate market, have had an adverse direct
impact not only on the Company's real estate and property management and
services segments, but have also had an adverse indirect impact on some of the
Company's other operating segments, including manufacturing and gaming
entertainment. The discussions below and in the 2008 10-K concerning revenue and
profitability by segment consider current economic conditions and the impact
such conditions have had and may continue to have on each segment; however,
should general economic conditions worsen and/or if the country experiences a
prolonged recession, the Company believes that all of its businesses would be
adversely impacted.
A summary of results of operations for the Company for the three month periods
ended March 31, 2009 and 2008 is as follows (in thousands):
2009 2008
------------- -----------
Loss before income taxes and losses related to associated companies:
Manufacturing:
Idaho Timber $ (4,223) $ (979)
Conwed Plastics 2,742 3,873
Telecommunications (1,309) 3,187
Property Management and Services (3,403) 4,283
Gaming Entertainment 1,365 9,395
Domestic Real Estate (5,578) (4,846)
Medical Product Development (1,955) (8,533)
Other Operations (15,893) (2,630)
Corporate (53,229) (36,708)
----------- ---------
Total consolidated loss before income taxes and
losses related to associated companies (81,483) (32,958)
----------- ---------
Losses related to associated companies before
income taxes (118,214) (113,752)
----------- ---------
Total consolidated loss before income taxes (199,697) (146,710)
----------- ---------
Income tax benefit:
Loss before losses related to associated companies 24,304 11,350
Associated companies 35,260 39,371
----------- ---------
Total income taxes 59,564 50,721
----------- ---------
Net loss $ (140,133) $ (95,989)
=========== =========
Manufacturing - Idaho Timber
A summary of results of operations for Idaho Timber for the three month periods
ended March 31, 2009 and 2008 is as follows (in thousands):
2009 2008
----------- -----------
Revenues and other income $ 31,652 $ 58,470
----------- -----------
Expenses:
Cost of sales 31,610 55,697
Salaries and incentive compensation 1,403 1,790
Depreciation and amortization 1,092 1,121
Selling, general and other expenses 1,770 841
----------- -----------
35,875 59,449
----------- -----------
Loss before income taxes $ (4,223) $ (979)
=========== ===========
23
Idaho Timber's revenues for the first quarter of 2009 continued to reflect the
weak demand resulting from reductions in housing starts and the abundant supply
of high-grade lumber in the marketplace. Shipment volume and average selling
prices in 2009 decreased approximately 42% and 8%, respectively, as compared to
the first quarter of 2008. Idaho Timber expects that the abundance of existing
homes available for sale in the market will continue to negatively impact
housing starts and Idaho Timber's revenues during 2009. Until housing starts
begin to increase, annual dimension lumber shipping volume may remain flat or
could decline further. Curtailment of production at primary sawmills due to
their operating losses could reduce excess supply to some degree; however,
spread (as discussed below) may not improve since price pressure for low-grade
lumber may increase if supplies are reduced. Idaho Timber's revenues for 2009
also reflect the loss of a large home center board customer, which discontinued
purchasing pine boards through its vendor managed inventory program effective
July 1, 2008. Revenues from this customer pursuant to this program were
$4,100,000 for the three months ended March 31, 2008.
Raw material costs, the largest component of cost of sales (approximately 76% of
cost of sales), declined for the first quarter of 2009 as compared to the first
quarter of 2008, principally due to the same market conditions that negatively
impacted revenues. Raw material cost per thousand board feet decreased
approximately 10% in the first quarter of 2009 as compared to the same period in
2008. Although the difference between Idaho Timber's selling price and raw
material cost per thousand board feet (spread) did not significantly change for
2009 as compared to the first quarter of 2008, Idaho Timber's gross profit for
2009 was negligible. Idaho Timber was able to reduce its variable manufacturing
costs in response to the low shipment volume, but gross profit declined due to
fixed manufacturing costs. To the extent that shipment volume remains depressed
and cost of raw material remain high relative to selling price, Idaho Timber
could experience little or negative gross profit in future quarters.
Salaries and incentive compensation expense declined in 2009 as compared to the
same period in 2008 principally due to a decrease in estimated incentive bonus
expense. Selling, general and other expenses for 2009 reflect impairment losses
on long-lived assets of $1,000,000, which relate to Idaho Timber's decision to
discontinue remanufacturing of dimension lumber at one of its plants.
Manufacturing - Conwed Plastics
A summary of results of operations for Conwed Plastics for the three month
periods ended March 31, 2009 and 2008 is as follows (in thousands):
2009 2008
----------- ----------
Revenues and other income $ 20,073 $ 26,739
----------- -----------
Expenses:
Cost of sales 13,720 18,556
Salaries and incentive compensation 1,746 2,022
Depreciation and amortization 72 41
Selling, general and other expenses 1,793 2,247
----------- -----------
17,331 22,866
----------- -----------
Income before income taxes $ 2,742 $ 3,873
=========== ===========
Revenues declined in substantially all of Conwed Plastics' markets in 2009 as
compared to 2008. Conwed Plastics' revenues in 2009 were particularly adversely
impacted in those markets related to the housing industry, which include the
carpet cushion, building and construction, erosion control and turf
reinforcement markets. Conwed Plastics expects revenues to continue to be
adversely impacted in those markets related to housing, and also expects that
the poor domestic and international economic conditions will continue to
adversely affect its other markets in the future. Raw material costs decreased
by approximately 59% in the first quarter of 2009 as compared to the same period
in 2008. The primary raw material in Conwed Plastics' products is a
polypropylene resin, which is a byproduct of the oil refining process, whose
price tends to fluctuate with the price of oil. The increasing volatility of oil
and natural gas prices along with current general economic conditions worldwide
make it difficult to predict future raw material costs. Although raw material
costs decreased, the gross margin was largely unchanged in the first quarter of
2009 as compared to the same period in 2008 primarily due to product mix and
lower sales volumes. Pre-tax results for 2009 also reflect a decline in salaries
and incentive compensation expense principally due to a decrease in headcount.
24
Telecommunications
A summary of results of operations for the telecommunications business of STi
Prepaid for the three month periods ended March 31, 2009 and 2008 is as follows
(in thousands):
2009 2008
----------- -----------
Revenues and other income $ 118,795 $ 119,684
----------- -----------
Expenses:
Cost of sales 103,492 106,114
Interest 10 26
Salaries and incentive compensation 3,324 2,114
Depreciation and amortization 893 206
Selling, general and other expenses 12,385 8,037
----------- -----------
120,104 116,497
----------- -----------
Income (loss) before income taxes $ (1,309) $ 3,187
=========== ===========
Prepaid calling card revenue, which increased from $93,200,000 for the first
quarter of 2008 to $104,800,000 for 2009, includes $26,000,000 of revenues from
acquisitions. The decline in prepaid calling card revenues in 2009 (exclusive of
the revenues from acquisitions) as compared to the same period in 2008 is due to
poor economic conditions in the markets that STi Prepaid operates. The gross
margin improved during 2009 principally due to fewer launches of new prepaid
calling cards with low introductory rates and a reduction in certain
unprofitable prepaid calling card business. Carrier wholesale service business,
which has lower gross margins than the prepaid calling card business, decreased
from $23,400,000 for the 2008 period to $12,400,000 for 2009 primarily due to
the loss of a large customer in the second quarter of 2008 and reduced business
from a large customer in the current quarter. Pre-tax results for 2009 also
reflect $1,100,000 of higher salaries and incentive compensation expense and
$2,000,000 of higher selling, general and other expenses from businesses
acquired. Selling, general and other expenses for 2009 also reflect greater
regulatory fees and increased legal and other professional fees of $1,900,000.
Property Management and Services
A summary of results of operations for the property management and services
segment for the three month periods ended March 31, 2009 and 2008 is as follows
(in thousands):
2009 2008
----------- -----------
Revenues and other income $ 28,264 $ 39,700
----------- -----------
Expenses:
Direct operating expenses 24,547 27,419
Salaries and incentive compensation 1,245 1,390
Depreciation and amortization 1,007 1,339
Selling, general and other expenses 4,868 5,269
----------- -----------
31,667 35,417
----------- -----------
Income (loss) before income taxes $ (3,403) $ 4,283
=========== ===========
25
ResortQuest's average daily rates ("ADR") and occupancy percentage for the three
months ended March 31, 2009 declined as compared to those for the same period in
2008, principally due to poor economic conditions. The ADR and occupancy
percentage in 2009 declined 19% and 13%, respectively, as compared to the first
quarter in 2008. These declines primarily reflect rate discounts given in all
markets due to competition and excess availability, and fewer reservations for
its ski locations, which typically have higher ADRs than beach locations.
ResortQuest's net real estate brokerage revenues also declined from $4,800,000
for 2008 to $600,000 for 2009. The 2008 revenue was recorded upon the completion
of certain large development projects. As more fully discussed in the 2008 10-K,
ResortQuest's real estate brokerage business, which is concentrated in Northwest
Florida, tends to be cyclical, and has been and will continue to be negatively
impacted by the depressed real estate market.
Direct operating expenses per occupied night did not significantly change in
2009 as compared to the same period in 2008. The reduction in selling, general
and other expenses in 2009 primarily reflects lower advertising costs.
Gaming Entertainment
A summary of results of operations for Premier for the three month periods ended
March 31, 2009 and 2008 is as follows (in thousands):
2009 2008
----------- -------------
Revenues and other income $ 26,681 $ 39,531
----------- -----------
Expenses:
Direct operating expenses 19,647 24,588
Interest 140 364
Salaries and incentive compensation 516 839
Depreciation and amortization 4,155 4,171
Selling, general and other expenses 858 174
----------- -----------
25,316 30,136
----------- -----------
Income before income taxes $ 1,365 $ 9,395
=========== ===========
Revenues and other income for 2008 include a $7,300,000 gain from the settlement
and collection of Premier's remaining insurance claim relating to Hurricane
Katrina and $4,700,000 resulting from capital contributions from the
noncontrolling interest. In prior periods, the Company recorded 100% of the
losses after cumulative loss allocations to the noncontrolling interest
(classified as minority interest prior to the adoption of SFAS 160) had reduced
the noncontrolling interest to zero. Since the noncontrolling interest remained
at zero after considering the capital contributions, the entire capital
contribution was recorded as income, effectively reimbursing the Company for a
portion of the noncontrolling interest losses that were not previously allocated
to the noncontrolling interest.
Premier's gaming revenues for the first quarter of 2009 were largely unchanged
as compared to the first quarter of 2008, while the local gaming market
declined. The decrease in direct operating expenses in 2009 as compared to the
same period in 2008 reflects reductions in workforce and other cost reductions
implemented by Premier during the fourth quarter of 2008. Premier believes that
current adverse economic conditions are likely to continue to have a negative
impact on the local gaming market in 2009, which could cause competition among
gaming operations in Biloxi to escalate. Since Premier's competitors in the Gulf
Coast gaming market have been in operation longer, they have more established
gaming operations and customer databases, and many are larger and have greater
financial resources.
26
Domestic Real Estate
A summary of results of operations for the domestic real estate segment for the
three month periods ended March 31, 2009 and 2008 is as follows (in thousands):
2009 2008
----------- ------------
Revenues and other income $ 4,057 $ (713)
----------- -----------
Expenses:
Interest 623 1
Depreciation and amortization 2,369 721
Other operating expenses 6,643 3,411
----------- -----------
9,635 4,133
----------- -----------
Loss before income taxes $ (5,578) $ (4,846)
=========== ===========
Pre-tax results for the domestic real estate segment are largely dependent upon
the performance of the segment's operating properties, the current status of the
Company's real estate development projects and non-recurring gains or losses
recognized when real estate assets are sold. As a result, pre-tax results for
this segment for any particular period are not predictable and do not follow any
consistent pattern. Real estate revenues and other income for the three month
periods ended March 31, 2009 and 2008 include $700,000 and $(3,500,000),
respectively, of income (charges) related to the accounting for the
mark-to-market value of an interest rate derivative relating to the Myrtle Beach
project's debt obligation. The increase in expenses for this segment primarily
relate to the Myrtle Beach project. Other operating expenses also includes
$1,400,000 representing the net book value of land and buildings that was
contributed to a local municipality in the first quarter of 2009.
Residential property sales volume, prices and new building starts have declined
significantly in many U.S. markets, including markets in which the Company has
real estate operations in various stages of development. The slowdown in
residential sales has been exacerbated by the turmoil in the mortgage lending
and credit markets during the past two years, which has resulted in stricter
lending standards and reduced liquidity for prospective home buyers. The Company
has deferred its development plans for certain of its real estate development
projects, and is not actively soliciting bids for its fully developed projects.
The Company intends to wait for market conditions to improve before marketing
certain of its projects for sale.
Medical Product Development
A summary of results of operations for Sangart for the three month periods ended
March 31, 2009 and 2008 is as follows (in thousands):
2009 2008
----------- -----------
Revenues and other income $ 5,042 $ 274
----------- -----------
Expenses:
Salaries and incentive compensation 2,616 2,655
Depreciation and amortization 194 53
Selling, general and other expenses 4,187 6,099
----------- -----------
6,997 8,807
----------- -----------
Loss before income taxes $ (1,955) $ (8,533)
=========== ===========
27
Revenues and other income for 2009 includes $5,000,000 for insurance proceeds
received upon the death of Sangart's former chief executive officer. Sangart's
losses for 2009 and 2008 reflect research and development costs (which are
included in selling, general and other expenses) of $600,000 and $4,300,000,
respectively. Research and development costs declined in 2009 primarily due to
the completion during 2008 of the Phase III clinical trials in Europe of
Hemospan(R), Sangart's current medical product candidate. Selling, general and
other expenses for 2009 also reflect $600,000 of increased costs for severance,
$400,000 of increased professional fees and $400,000 of greater royalty
expenses.
Sangart is a development stage company that does not have any revenues from
product sales. As more fully discussed in the 2008 10-K, Sangart has decided not
to pursue at this time marketing approval to use Hemospan for the purposes for
which the Phase III clinical trials were conducted, but plans to conduct
additional clinical trials of Hemospan in a different therapeutic area that may
better demonstrate its clinical benefit and strengthen the likelihood of
regulatory approval. Such studies will take several years to complete at
substantial cost, and until they are successfully completed, if ever, Sangart
will not be able to request marketing approval and generate revenues from
Hemospan sales. In the first quarter of 2009, the Company invested an additional
$28,500,000 in Sangart upon the exercise of its remaining warrants. The Company
is unable to predict when, if ever, it will report operating profits for this
segment.
Other Operations
A summary of results of operations for other operations for the three month
periods ended March 31, 2009 and 2008 is as follows (in thousands):
2009 2008
------------ -----------
Revenues and other income $ 12,633 $ 15,473
----------- -----------
Expenses:
Interest 9 9
Salaries and incentive compensation 2,220 2,727
Depreciation and amortization 1,568 1,330
Selling, general and other expenses 24,729 14,037
----------- -----------
28,526 18,103
----------- -----------
Loss before income taxes $ (15,893) $ (2,630)
=========== ===========
The decrease in revenues and other income principally reflects reduced revenues
at winery operations of $2,200,000, which reflects generally unfavorable
economic conditions. The increase in selling, general and other expenses
reflects $4,000,000 of greater expenses (largely professional fees and other
costs) related to the investigation and evaluation of energy projects, and
$4,200,000 of charges at winery operations to reduce the carrying amount of wine
inventory that is expected to be sold as bulk wine or used in lower value
bottled wine products. Selling, general and other expenses related to energy
projects were $8,300,000 and $4,300,000 for the three months ended March 31,
2009 and 2008, respectively.
28
Corporate
A summary of results of operations for corporate for the three month periods
ended March 31, 2009 and 2008 is as follows (in thousands):
2009 2008
------------ -----------
Revenues and other income (including net
securities gains (losses)) $ 3,146 $ 25,691
----------- -----------
Expenses:
Interest 32,605 35,382
Salaries and incentive compensation 7,246 7,902
Depreciation and amortization 3,927 2,464
Selling, general and other expenses 12,597 16,651
----------- -----------
56,375 62,399
----------- -----------
Loss before income taxes $ (53,229) $ (36,708)
=========== ===========
Net securities gains (losses) for Corporate aggregated $(26,300,000) and
$8,300,000 for the three months ended March 31, 2009 and 2008, respectively. Net
securities gains (losses) are net of impairment charges of $22,700,000 and
$6,700,000 during 2009 and 2008, respectively. The impaired securities
principally include the Company's investment in various available for sale
equity securities and, in 2009, certain non-agency mortgage backed bond
securitizations and non-public investments. The Company's decision to sell
securities and realize security gains or losses is generally based on its
evaluation of an individual security's value at the time and the prospect for
changes in its value in the future. The decision could also be influenced by the
status of the Company's tax attributes or liquidity needs; however, sales in
recent years have not been influenced by these considerations. Therefore, the
timing of realized security gains or losses is not predictable and does not
follow any pattern from year to year.
Investment and other income increased in the three month 2009 period as compared
to the same period in 2008 by $12,000,000, principally due to $13,500,000 of
increased other income related to Fortescue's Pilbara iron ore and
infrastructure project in Western Australia. The Company is entitled to receive
4% of the revenue, net of government royalties, invoiced from certain areas of
Fortescue's project, which commenced production in May 2008. Amounts are payable
semi-annually within thirty days of June 30th and December 31st of each year
subject to restricted payment provisions of Fortescue's debt agreements;
payments are currently being deferred pursuant to those agreements. Depreciation
and amortization expenses for 2009 include prepaid mining interest amortization
of $1,200,000, which is being amortized over time in proportion to the amount of
ore produced. Other income for 2009 also reflects a gain of $5,300,000 on the
repurchase of $30,900,000 principal amount of the Company's 7% Senior Notes. In
addition, investment and other income reflects income (charges) of $200,000 and
$(1,200,000) for 2009 and 2008, respectively, related to the accounting for
mark-to-market values of corporate derivatives. Investment and other income for
2008 includes $2,500,000 of foreign exchange gains. Investment income declined
$6,400,000 in 2009 principally due to lower interest rates on a lower amount of
fixed income securities.
The decrease in interest expense during the three months ended March 31, 2009 as
compared to the same period in 2008 primarily reflects decreased interest
expense related to the 3 3/4% Convertible Senior Subordinated Notes,
$128,900,000 of which were converted in the fourth quarter of 2008 and decreased
interest expense related to the fixed rate repurchase agreements.
29
Principally due to reductions in incentive bonus expense and lower headcount,
salaries and incentive compensation expense declined in the three months ended
March 31, 2009 as compared to the same period in 2008. The Company recorded
share-based compensation expense relating to grants made under the Company's
senior executive warrant plan and the fixed stock option plan of $2,700,000 and
$2,500,000 for the three months ended March 31, 2009 and 2008, respectively.
The decrease in selling, general and other expenses during the three months
ended March 31, 2009 as compared to the same period in 2008 reflects reduced
corporate aircraft expense of $2,200,000, primarily resulting from less usage
and lower fuel costs, and lower legal and other professional fees of $2,300,000.
For the three month period ended March 31, 2009, loss from operations reflects a
federal income tax benefit only to the extent of the federal tax provision
recorded in accumulated other comprehensive income (loss). The Company did not
record a full federal income tax benefit for its loss from operations, and has
recorded a full valuation allowance against its net federal deferred tax asset,
since the Company does not believe it is more likely than not that it will be
able to realize its net federal deferred tax asset. For the three month period
ended March 31, 2008, the Company's effective income tax rate is different than
the federal statutory rate primarily due to state income taxes.
Associated Companies
Income (losses) related to associated companies for the three month periods
ended March 31, 2009 and 2008 includes the following (in thousands):
2009 2008
------------ ------------
ACF $ (58,335) $ (78,496)
Pershing Square (14,999) (4,973)
Jefferies (12,632) --
JHYH (5,303) (20,952)
HomeFed Corporation (132) (395)
Wintergreen Partners Fund, L.P. (5,414) (5,843)
Highland Opportunity Fund L.P. -- (16,349)
Shortplus (397) 8,544
Garcadia 1,580 2,279
Goober Drilling 211 6,357
CLC (8,858) 3,861
Other (13,935) (7,785)
------------ -----------
Losses related to associated companies
before income taxes (118,214) (113,752)
Income tax benefit 35,260 39,371
----------- -----------
Losses related to associated companies,
net of taxes $ (82,954) $ (74,381)
=========== ===========
As discussed above, the Company accounts for its investments in ACF and
Jefferies at fair value, resulting in the recognition of unrealized losses for
the difference between the market value and the cost of the investments.
30
Cautionary Statement for Forward-Looking Information
Statements included in this Report may contain forward-looking statements. Such
statements may relate, but are not limited, to projections of revenues, income
or loss, development expenditures, plans for growth and future operations,
competition and regulation, as well as assumptions relating to the foregoing.
Such forward-looking statements are made pursuant to the safe-harbor provisions
of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements are inherently subject to risks and uncertainties,
many of which cannot be predicted or quantified. When used in this Report, the
words "estimates," "expects," "anticipates," "believes," "plans," "intends" and
variations of such words and similar expressions are intended to identify
forward-looking statements that involve risks and uncertainties. Future events
and actual results could differ materially from those set forth in, contemplated
by or underlying the forward-looking statements.
Factors that could cause actual results to differ materially from any results
projected, forecasted, estimated or budgeted or may materially and adversely
affect the Company's actual results include but are not limited to the
following: potential acquisitions and dispositions of our operations and
investments could change our risk profile; dependence on certain key personnel;
economic downturns and the current recession; changes in the market prices of
publicly traded securities, particularly during times of increased volatility in
securities prices; changes in the U.S. housing market; changes in
telecommunications laws and regulations; risks associated with the increased
volatility in raw material prices and the availability of key raw materials;
declines in the prices of base metals (primarily iron ore and copper);
compliance with government laws and regulations; changes in mortgage interest
rate levels or the lack of available consumer credit; lack of liquidity and
turmoil in the capital markets; substantial investments in companies whose
operating results are greatly affected by the economy and financial markets; a
decrease in consumer spending or general increases in the cost of living; proper
functioning of our information systems; intense competition in the operation of
our businesses; our ability to generate sufficient taxable income to fully
realize our net deferred tax asset; weather related conditions and significant
natural disasters, including hurricanes, tornadoes, windstorms, earthquakes and
hailstorms; our ability to insure certain risks economically; reduction or
cessation of dividend payments on our common shares. For additional information
see Part I, Item 1A. Risk Factors in the 2008 10-K and Part II, Item 1A. Risk
Factors contained herein.
Undue reliance should not be placed on these forward-looking statements, which
are applicable only as of the date hereof. The Company undertakes no obligation
to revise or update these forward-looking statements to reflect events or
circumstances that arise after the date of this Report or to reflect the
occurrence of unanticipated events.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Information required under this Item is contained in Item 7A of the Company's
Annual Report on Form 10-K for the year ended December 31, 2008, and is
incorporated by reference herein.
31
Item 4. Controls and Procedures.
Evaluation of disclosure controls and procedures
(a) The Company's management evaluated, with the participation of the Company's
principal executive and principal financial officers, the effectiveness of
the Company's disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act")), as of March 31, 2009. Based on their
evaluation, the Company's principal executive and principal financial
officers concluded that the Company's disclosure controls and procedures
were effective as of March 31, 2009.
Changes in internal control over financial reporting
(b) There has been no change in the Company's internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act) that occurred during the Company's fiscal quarter ended March 31,
2009, that has materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting.
Part II - OTHER INFORMATION
Item 1. Legal Proceedings.
Reference is made to the Company's disclosure in the 2008 Form 10-K concerning
legal proceedings.
The previously disclosed trial in the IDT action, which had been scheduled to
take place in April 2009, has been rescheduled to June 2009. Additionally, the
previously disclosed Adighibe and Ramirez actions have been consolidated, and
the Company has been dismissed from the Ramirez action and is no longer a
defendant in that action. However, the Ramirez action will continue against the
Company's subsidiary, STi Prepaid, and the other defendants.
Item 1A. Risk Factors.
The Company is adding to its risk factors the items listed below.
The Company has significant investments in publicly traded securities, and
changes in the market prices of these securities, particularly during times of
increased volatility in security prices, can have a material impact on the
Company's investment portfolio, equity and, for certain investments, on results
of operations. The Company has significant investments in publicly traded
securities (principally Fortescue, Jefferies, ACF and Inmet) and in investment
partnerships that invest in publicly traded securities. Changes in the market
values of publicly traded available for sale securities, such as Fortescue and
Inmet, are reflected in other comprehensive income (loss) and equity but not in
the consolidated statement of operations. However, changes in the market prices
of investments for which the Company has elected the fair value option
(Jefferies and ACF), and declines in the fair values of public and non-public
securities that the Company deems to be other than temporary are reflected in
the consolidated statements of operations and equity. Profits or losses related
to the Company's share of its investments in investment partnerships that are
accounted for on the equity method of accounting are reflected in the
consolidated statement of operations. Changes in market values of these
entities' investments are reflected in their earnings, which increases the
Company's exposure to volatility in the public securities markets. Global
securities markets have been highly volatile, and continued volatility may have
a material negative impact on the Company's consolidated financial position and
results of operations.
Current economic conditions have adversely affected most of the Company's
operations and investments. A worsening of current economic conditions or a
prolonged recession could cause a decline in estimated future cash flows
expected to be generated by certain of the Company's operations and investments,
potentially resulting in impairment charges for long-lived assets. Certain of
the Company's operating businesses and investments have significant investments
in long-lived assets, in particular manufacturing, gaming entertainment and
Goober Drilling. Current economic conditions have resulted in declining revenues
for these operations and their property and equipment is not being fully
utilized. The Company has reviewed certain of these assets and investments for
potential impairment, and except as otherwise disclosed has concluded that the
book values of these long-lived assets are recoverable, and that the carrying
amount of its investment in Goober Drilling is not more than its fair value. If
the operating revenues of these businesses deteriorate in the future, resulting
in lower estimates of future cash flows, impairment charges might have to be
recorded.
32
Item 6. Exhibits.
10.1 Deferred Compensation and Salary Continuation Agreement
dated March 2, 1977, by and among Ian M. Cumming and
Terracor.
10.2 First Amendment to Deferred Compensation and Salary
Continuation Agreement dated May 24, 1996, by and among
Ian M. Cumming and Leucadia Financial Corporation
(successor in interest to Terracor).
31.1 Certification of Chairman of the Board and Chief Executive
Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
31.2 Certification of President pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.3 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chairman of the Board and Chief Executive
Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
32.2 Certification of President pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.3 Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LEUCADIA NATIONAL CORPORATION
(Registrant)
Date: May 7, 2009
By: /s/ Barbara L. Lowenthal
-------------------------
Barbara L. Lowenthal
Vice President and Comptroller
(Chief Accounting Officer)
34
Exhibit Index
10.1 Deferred Compensation and Salary Continuation Agreement dated
March 2, 1977, by and among Ian M. Cumming and Terracor.
10.2 First Amendment to Deferred Compensation and Salary Continuation
Agreement dated May 24, 1996, by and among Ian M. Cumming and
Leucadia Financial Corporation (successor in interest to
Terracor).
31.1 Certification of Chairman of the Board and Chief Executive
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31.2 Certification of President pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.3 Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chairman of the Board and Chief Executive
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2 Certification of President pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.3 Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
35