Icahn Enterprises L.P. — FY2017 Form 10-K
Reporting period: Year ended December 31, 2017. This joint filing covers Icahn Enterprises L.P. and Icahn Enterprises Holdings L.P.; their results are substantially similar. Icahn Enterprises is a diversified holding partnership with investment activities and operating businesses across ten segments.
Financial performance and position
| Metric | FY2017 | FY2016 |
|---|---|---|
| Net sales | $17.303 billion | $15.511 billion |
| Total revenues | $21.744 billion | $16.348 billion |
| Net income (loss) | $2.591 billion | $(2.220) billion |
| Net income (loss) attributable to Icahn Enterprises | $2.430 billion | $(1.128) billion |
| Basic and diluted income (loss) per LP unit | $14.80 | $(8.07) |
| Cash distributions declared per LP unit | $6.00 | $6.00 |
| Net cash from operating activities | $(1.436) billion | $1.655 billion |
| Net cash from investing activities | $414 million | $(1.854) billion |
| Net cash from financing activities | $743 million | $87 million |
- Cash and liquidity: Year-end cash and cash equivalents were $1.682 billion, down from $1.833 billion. A further $786 million was held at affiliated partnerships or restricted. Reported unused availability under certain subsidiary revolving facilities was $1.076 billion.
- Debt: Total debt was $11.185 billion, compared with $11.119 billion a year earlier: $5.507 billion at the Holding Company and $5.678 billion across reporting segments. The Holding Company had $526 million of cash and approximately $3.0 billion invested in the Investment Funds. The filing reports covenant compliance at year-end.
- Margins: Automotive gross margin was $1.847 billion, or 19% of segment net sales, unchanged as a percentage year over year. Energy gross margin was $261 million, or 4% of net sales, versus $164 million and 3%. Railcar gross margin fell to $252 million from $363 million.
- Balance sheet: Total assets were $31.801 billion, down from $33.371 billion; total equity increased to $11.368 billion from $8.017 billion.
Material changes and drivers
- Icahn Enterprises returned to profit after two loss years. Investment Funds returned 2.1% in 2017, compared with negative 20.3% in 2016; gains on long positions were partly offset by losses on short positions, including broad-market hedges.
- Net sales rose about 12%, primarily reflecting higher Automotive sales and higher Energy selling prices. Automotive sales increased 6%, with contributions from organic growth, acquisitions and foreign exchange.
- Asset disposals substantially boosted reported earnings: the sale of American Railcar Leasing and its fleet generated approximately $1.8 billion in net proceeds and a $1.7 billion pretax gain. Real Estate sales included a Las Vegas property sale for $600 million, partly seller-financed, with a $456 million pretax gain. Total net gain on disposition of assets was $2.166 billion.
- The $438 million income tax benefit included a provisional $496 million benefit from remeasuring deferred tax balances under the Tax Cuts and Jobs Act; the filing also recorded $2 million of transition tax expense. Tax accounting remained subject to further analysis and guidance.
- Railcar manufacturing revenue and gross margin declined amid lower shipments, competitive pricing and lower production volumes. The lease fleet fell to 13,103 railcars from 45,761 following the ARL sale.
- Operating cash flow turned negative, with management attributing the year-over-year change in operating-segment cash flows partly to working-capital movements, including inventory purchases and lower biofuel blending obligations. The cash flow statement also reflects investment-securities activity.
Outlook, risks and unusual items
- Guidance: No consolidated earnings or revenue guidance is provided. Management estimated 2018 capital expenditures of approximately $950 million to $1.0 billion, including about $500 million for Automotive and $231 million for Energy.
- Management describes its strategy as investing in undervalued businesses and using activism or operational control to seek to unlock value. It states that operating-subsidiary cash flows and asset coverage are expected to support balance-sheet strength and liquidity, but subsidiary transfers may be restricted by law or debt covenants.
- Key exposures include volatile investment performance and leverage; refinancing and debt-service requirements; commodity prices and refining margins; volatile Renewable Identification Number (RIN) costs; environmental and regulatory compliance; foreign currency; cyclical end markets; and integration of acquisitions.
- RIN expense was $249 million in 2017, versus $206 million in 2016. A court remanded the EPA’s 2016 renewable-fuel obligation rule for reconsideration; future obligations and RIN prices remain uncertain.
- Mr. Icahn and affiliates held approximately 91% of outstanding depositary units, creating significant control and potential affiliate-conflict risks. Unitholders have limited governance rights, and the partnership is exempt from certain NASDAQ governance requirements.
- Under controlled-group pension rules, Icahn Enterprises could be liable for certain affiliate pension obligations. ACF and Federal-Mogul plans would have been underfunded by approximately $424 million if voluntarily terminated at year-end; an affiliate indemnity has limitations and may not be sufficient.
- The company disclosed a U.S. Attorney’s Office request for information concerning Renewable Fuel Standard activities and Mr. Icahn’s role as an adviser to the President. The filing says no claims or allegations had been made and management did not expect a material impact.
- Other contingencies include a $9 million reserve for railcar inspections and repairs under an FRA directive, with potential additional costs not reasonably estimable; environmental liabilities; and litigation concerning the Federal-Mogul transaction. The filing states the audit was unqualified and internal control over financial reporting was effective.
Important facts for investors to verify
- How much of 2017 earnings is repeatable operating performance versus the $2.166 billion asset-disposal gain and provisional tax benefit.
- Underlying Investment Funds’ exposures, leverage, liquidity and performance; the reported 2.1% return does not assure future results.
- Debt maturities, subsidiary borrowing availability and restrictions on upstreaming cash; total contractual obligations were $18.361 billion, including debt, interest, leases, pensions and purchase obligations.
- Whether planned 2018 capital spending and ongoing distributions can be supported by recurring cash flow. The board declared a subsequent quarterly distribution of $1.75 per unit, payable in cash or additional units at each holder’s election.
- Potential changes to tax estimates, RIN obligations and costs, pension liabilities, and the outcome or cost of the disclosed legal, regulatory and environmental matters.