Icahn Enterprises L.P. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. Icahn Enterprises is a diversified holding partnership with interests in Investment, Automotive, Energy, Railcar, Gaming, Metals, Mining, Food Packaging, Real Estate and Home Fashion businesses. Icahn Enterprises Holdings owns substantially all operating assets and liabilities, so its results are substantially the same.
Financial performance
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Total revenues | $5.445 billion | $4.667 billion; up 17% |
| Net income (loss) | $423 million | $(160) million |
| Net income (loss) attributable to Icahn Enterprises | $137 million | $(18) million |
| Basic and diluted income (loss) per LP unit | $0.77 | $(0.12) |
| Cash distributions declared per LP unit | $1.75 | $1.50 |
| Net cash used in operating activities | $(595) million | $(411) million |
| Net cash used in investing activities | $(202) million | $(473) million |
| Net cash provided by financing activities | $225 million | $1.243 billion |
Investment activity was a major driver of the earnings turnaround: the Investment segment reported $401 million of net income versus a $192 million loss a year earlier, with fund returns of 5.3% versus (2.7%). The segment reported a $544 million gain on its Herbalife investment and a $52 million loss on Hertz. These investment results can be volatile and are not indicative of future performance.
Selected operating margins: Automotive gross margin was $503 million, or 18% of relevant sales and service revenue, versus $494 million and 19%; Energy gross margin was $107 million, or 7% of sales, versus $88 million and 6%. Railcar gross margin fell to $29 million from $96 million, largely reflecting the 2017 sale of most of its leasing fleet. The filing does not present a single consolidated operating margin that is useful across its diversified businesses.
Financial position and liquidity
- At March 31, 2018, total assets were $30.498 billion and total liabilities were $18.743 billion, compared with $31.801 billion and $20.433 billion at year-end 2017.
- Cash and cash equivalents were $1.250 billion; cash held at consolidated affiliated partnerships and restricted cash was another $643 million. Combined cash, cash equivalents and restricted cash totaled $1.893 billion, down from $2.468 billion at year-end.
- Investments were $8.364 billion, down from $10.369 billion at year-end. Securities sold, not yet purchased declined to $299 million from $1.023 billion, while due to brokers fell to $38 million from $1.057 billion.
- Total debt was $11.208 billion, slightly above $11.185 billion at year-end. This included $5.506 billion of Holding Company senior unsecured notes and $5.702 billion of segment debt. The Holding Company reported $199 million of cash and approximately $5.5 billion of debt.
- Subsidiaries reported $1.070 billion of additional borrowing availability under certain revolving credit facilities; the Company said it and its subsidiaries were in compliance with applicable debt covenants.
- Operating cash flow was negative, reflecting investment-related cash movements and changes in operating assets and liabilities. Capital expenditures were $220 million. Cash flow therefore should not be inferred from net income alone.
Material changes and management commentary
- Revenue growth included higher Automotive and Energy sales. Automotive revenue and service revenue rose 6%, with favorable foreign exchange and acquisitions contributing; its gross margin percentage declined amid pricing pressure. Energy sales rose 2%, and petroleum margins improved, while fertilizer performance weakened.
- Railcar revenue and gross margin were lower following the 2017 sale of American Railcar Leasing and much of its fleet. The segment had a backlog of 3,144 railcars at quarter-end.
- Consolidated interest expense declined to $197 million from $223 million, primarily due to lower Investment segment broker balances and the Railcar fleet sale, partly offset by higher Automotive interest expense.
- The Company adopted the new revenue-recognition standard on January 1, 2018. It recorded a $20 million reduction to equity at adoption, primarily related to Automotive; management said the effect on current-quarter revenue was immaterial.
- On April 10, 2018, the Company agreed to sell Federal-Mogul for approximately $5.4 billion in cash and Tenneco shares, with Federal-Mogul debt assumed by the buyer. On April 16, it agreed to sell Tropicana’s real estate and merge its gaming and hotel operations for approximately $1.85 billion, subject to adjustments and conditions. Both transactions were expected to close in the second half of 2018; neither was completed as of the filing date.
- Management warned that after the Federal-Mogul sale, the Company would likely be considered an investment company absent an Investment Company Act exemption. It expects to take steps to avoid registration but gave no assurance of success.
- The Board declared a further $1.75-per-unit quarterly distribution in May 2018, payable in cash or additional units at each holder’s election. The filing provides no formal consolidated earnings guidance.
Risks, contingencies and unusual items
- Investment performance and the value of securities and derivatives are exposed to market, concentration, counterparty and liquidity risks. A 10% adverse change in relevant quarter-end investment values was estimated to reduce the values of securities owned, securities sold short and derivatives by approximately $752 million, $30 million and $703 million, respectively; effects on the Company’s share would be partly offset by non-controlling interests.
- Renewable Fuel Standard credit costs and requirements expose the Energy business to regulatory and market volatility. The filing reports a $60 million RIN asset and a $21 million biofuel blending obligation at quarter-end.
- Environmental liabilities totaled $49 million. The Railcar segment retained a $9 million reserve related to an FRA tank-car directive. Federal-Mogul estimated possible additional environmental losses of approximately $24 million beyond its recorded best estimate.
- Because of common-control pension rules, the Company may have exposure to pension obligations of entities in the Icahn-controlled group. ACF and Federal-Mogul pension plans were underfunded by approximately $417 million on a termination basis at March 31, 2018; Starfire’s indemnity does not cover all such exposure and may not be able to fund its obligations.
- The U.S. Attorney’s Office for the Southern District of New York requested information concerning Renewable Fuel Standard activities and Mr. Icahn’s role as a presidential advisor. The Company said it was cooperating and that no claims or allegations had been made against it or Mr. Icahn.
- The $1.75-per-unit distribution declared in February was recorded as a $310 million liability at quarter-end; holders could elect cash or units. The filing also notes that Mr. Icahn and affiliates owned approximately 91% of outstanding units at March 31.
Most important facts for investors to verify
- Whether and when the Federal-Mogul and Tropicana transactions close, the final consideration and adjustments, and the resulting cash proceeds and remaining ownership interests.
- How the proposed Federal-Mogul sale affects Investment Company Act status, what steps are taken during the exemption period, and whether those steps succeed.
- Whether investment gains—particularly the large Herbalife-related gain—are repeatable, and how portfolio exposure, collateral requirements and market movements affect liquidity.
- How the Company funds its substantial Holding Company debt service and distributions while operating cash flow is negative, and whether subsidiary transfer restrictions constrain available cash.
- Developments in pension, environmental, FRA, litigation and federal inquiry matters, including any changes to recorded reserves or potential exposure.