Hi Hounds,

Leucadia reported full year 2009 results Friday.

10-K: http://www.sec.gov/Archives/edgar/data/96223/000009622310000...
Press Release: http://www.sec.gov/Archives/edgar/data/96223/000009622310000...

Revenue        $1119 million   up 3.5%
Net Income      $550 million   up from -$2535 million loss
Diluted EPS    $2.25           up from -$11.00

Net Income includes $26.5 million, or $0.11 per share, from discontinued operations.

Net income is up markedly more than revenue because of Leucadia's holding company accounting. Revenue only consists of wholly-owned companies, and certain securities. A large part of the earnings potential is from large minority holdings in hundreds of other companies, as well as huge chunks of securities recorded at fair market value.

Wholly-owned businesses improved, but are still struggling in this economy. Revenue was $1119 million, up from $1081 a year ago. Net income from the same group was -$251 million, compared to -$368 in 2008.

Income from minority owned companies was a positive $806 million, compared to a $537 million loss a year ago.

Fair market value of significant equity holdings:

- 25% of AmeriCredit (NYSE:ACF). Fair market value as of year end was $640 million.

- 29% of Jefferies Group (NYSE:JEF). Fair market value $1153 million.

- 10% of Inmet Mining, valued at $339 million.

- 8% Fortescue (iron mine), valued at $1108 million at year end. Since then, the company has sold 11% of their holding for $122 million cash.

That last bit is nice. Leucadia invested $452.2 million in Fortescue, back in 2006 IIRC. In exchange they received 278 million shares, and a $100 million unsecured, subordinated note maturing in 2019. Forget about the note for a moment. They just sold 30 million shares for $122 million. So, they've reduced the original investment by 26%, but still retain 90% of the shares (plus the note). Looked at another way, the compounded annual rate of return on the shares they just sold was 52%. Actually, that's the rate on all the shares, but 90% of it is as yet unrealized.

Now for the subordinate note. Payments -- 4% of the revenue from the mine -- are currently deferred, and are accruing interest (on interest) at 9.5%. The aggregate accrued balance receivable at year end was $106.5 million (yes, on a $100 million note with nine years to go). I have no idea what is the likelihood of ever getting paid on the note - I guess Fortescue could end up in bankruptcy and wipe the slate. But here's where I rely on Leucadia's savvy management. Remember, using our thumbnail shares analysis above, this note was free to start with.

Book Value as of December 31, 2009 was $17.93 per share. But this doesn't include the value of the NOLs (Net Operating Loss Carryforwards).

A quick refresher: Leucadia acquired Wiltel and in so doing also acquired their previous loss carryforwards. $1.6 billion worth. Leucadia gets to apply that $1.6 billion to any future tax bills. But they have to have taxable income for the NOLs to be of any benefit. Normally these NOLs would just sit on the balance sheet in Deferred Tax Assets, and be counted in equity, and in book value. But GAAP reporting (not the IRS) requires that if there's little likelihood of ever using the NOLs, they have to be written down, or reserved against. They can come back on the balance sheet as the company shows a history of positive earnings. (The IRS on the other hand, doesn't care about all this, and lets the company apply these against actual tax whether they're on the b/s or not).

So, a year ago, Leucadia reserved against the whole $1.6 billion. Now it sits there, not being counted as an asset. If, as I strongly suspect, it's just a matter of time, and distancing from the Great Bank Panic of 2008 :) before the company can use these, then it's true hidden value.

That said, last quarter I was too quick to count it all back in. Alex Scherer (better known as TMFEnochRoot) explained to me that a goodly portion of the NOLs had already found its way back on the b/s. Here's the deal: because of the reserved NOLs, unrealized securities gains, and gains in Accumulated Other Comprehensive Income (AOCI) (in our case also [other] securities gains: Fortescue) are not properly taxed.

Over the last year, Retained Earnings and AOCI have increased by $1.6 billion. The only tax applied so far is an alternative minimum of ~ 2%. If this had been taxed, say at 35%, it would represent $548 million, or about 1/3 of the outstanding NOLs.

The other 2/3, $1.1 billion, is still uncounted, but Alex reminded me that we need to discount that, since it's not cash in hand today, but a future benefit (reliant on there being future earnings). So, roughly, assuming a 10% discount rate, and that the remaining NOLs will not be applied at all for the next five years, and then they'll all be applied (hey, it's the back of a napkin), there is still about $700 million sitting off balance sheet. Or $2.89 per share.

Still with me? The result is that the reported book value of $17.93 is really closer to $21.00. At today's close of $24.37, the stock is 1.17x book.

No animals were harmed in the production of this report (well, except my bulldog, who wants his dinner). Any mistakes in the above, especially where I tried to explain Alex's work, are mine alone.

Bottom line is that Leucadia is doing just fine. As the economy improves, the owned businesses, and many of the minority holdings, will return to profitability, and this, with the tax-break tailwind will steadily increase book value. The main Leucadia asset, and completely off the balance sheet, is the management brain trust. I can't wait to see what interesting investments they find in the next few years. They'll certainly need to find some place to reinvest all those iron ore profits.

Best,
-joe