Icahn Enterprises L.P. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. Icahn Enterprises is a diversified holding company spanning investment, automotive, energy, metals, railcar, gaming, mining, food packaging, real estate and home fashion. Icahn Enterprises Holdings conducts substantially all operations, so the two partnerships’ results are substantially the same. Unless noted, amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 / prior year-end |
|---|---|---|
| Total reported revenues | $3.127 billion | $4.511 billion |
| Net sales | $3.548 billion | $3.565 billion |
| Net income (loss) | $(1.609) billion | $422 million |
| Net income (loss) attributable to Icahn Enterprises | $(837) million | $161 million |
| Basic loss (income) per LP unit | $(6.21) | $1.28 |
| Operating cash flow | $610 million | $(186) million |
| Cash and cash equivalents | $1.876 billion | $2.078 billion at Dec. 31, 2015 |
| Total debt | $12.530 billion | $12.594 billion at Dec. 31, 2015 |
| Total assets / total equity | $32.282 billion / $8.508 billion | $36.403 billion / $10.033 billion at Dec. 31, 2015 |
Reported revenues include investment activity: the company recorded a $936 million net loss from investment activities versus a $591 million gain a year earlier. Excluding that line, the filing does not present a single comparable operating-revenue measure. Cost of goods sold was $3.123 billion; gross margin on automotive net sales was 18%, up from 14%. Energy petroleum refining margin was $112 million, or $6.67 per throughput barrel, compared with $248 million, or $13.68 per barrel. The filing does not provide a consolidated operating margin or EBITDA figure.
Operating cash flow was more than offset by $1.178 billion of investing outflows, including $952 million for business acquisitions and $210 million of capital expenditures. Financing provided $364 million, including $490 million of contributions to Investment Funds from Mr. Icahn’s affiliates, partly offset by net debt repayments. Cash declined by $202 million during the quarter. Cash held at consolidated affiliated partnerships and restricted cash was $751 million, including $564 million of restricted cash.
Debt’s estimated fair value was approximately $12.1 billion versus its $12.5 billion carrying value. The filing states the partnerships were in compliance with applicable debt covenants; however, Icahn Enterprises was not permitted to incur additional indebtedness under covenants governing its senior unsecured notes. Holding Company cash was $212 million and Holding Company debt approximately $5.5 billion.
Material changes versus the prior comparable period
- Attributable results swung to an $837 million loss from $161 million of income, led by investment losses and a $577 million impairment charge. The impairment included $574 million to write off remaining goodwill in the Energy Petroleum reporting unit; the assessment was still being finalized.
- Net sales were nearly flat overall. Automotive sales rose 26% to $2.321 billion, primarily reflecting the acquisitions of IEH Auto in 2015 and Pep Boys in February 2016. Energy sales fell to $906 million from $1.389 billion, principally due to lower product prices. Metals sales fell 45% to $58 million; railcar manufacturing activity weakened, while leasing revenues increased.
- The Investment Funds returned negative 12.8%, compared with positive 4.3% in Q1 2015. Management attributed the decline to losses on short positions, including market hedges, and losses in long equity positions. Icahn Enterprises’ interest in the funds was valued at $1.8 billion, down from $3.4 billion at year-end.
- Pep Boys became a wholly owned subsidiary in February for an indicated total acquisition value of approximately $1.2 billion. Trump Entertainment emerged from bankruptcy on February 26; Icahn Enterprises converted its $286 million face amount of secured debt into 100% of Trump’s new common stock and began consolidating its results.
- Goodwill fell by $310 million overall, mainly due to the Energy impairment, partially offset by acquisition-related additions. Total assets declined by $4.1 billion, largely alongside the reduction in investment assets and cash held at affiliated partnerships.
Outlook, commentary, risks and unusual items
- No consolidated earnings or revenue guidance is provided. Energy estimated 2016 Renewable Identification Number (RIN) costs of approximately $160–$190 million, based on then-current prices and assumptions; RIN prices and availability are volatile and regulatory requirements may change.
- Management described 2016 as challenging for iron ore and steel, citing slowing growth, overcapacity and competition. Automotive results are exposed to global vehicle demand and currency movements; Energy earnings depend on volatile refining and fertilizer margins; railcar manufacturing is adjusting production to customer demand.
- CVR Partners completed its merger with East Dubuque on April 1, 2016, issuing approximately 40.2 million units and paying $99 million. A related $320 million senior term loan from an Icahn Enterprises subsidiary may fund an offer or redemption for East Dubuque’s notes.
- Quarterly distributions were declared at $1.50 per depositary unit, with holders permitted to elect cash or additional units. A $202 million distribution payable was recorded at quarter-end. A further $1.50 distribution was declared April 29, payable on or about June 16, 2016.
- Investment activities involve substantial market, leverage, counterparty and liquidity risks. At quarter-end, maximum payout on certain written put options was $830 million, versus approximately $5.9 billion at year-end; derivative liabilities were $467 million and collateral posted was $476 million. Contractual triggers could require counterparties to demand prompt payment on certain derivatives.
- Disclosed contingencies include environmental matters, litigation and controlled-group pension exposure. Federal-Mogul and ACF pension plans were underfunded by approximately $584 million on a voluntary termination basis; the filing notes Icahn Enterprises could have exposure under controlled-group rules, subject in part to a Starfire indemnity that may not be able to fund its obligations. PSC Metals also reported radioactive-material contamination at three facilities and was pursuing remediation, which it believed was insured.
- Icahn Enterprises proposed buying the remaining Federal-Mogul shares for $7.00 per share; a special committee was evaluating the proposal and alternatives. Management reported effective disclosure controls and no material change in internal control during the quarter.
Important facts for investors to verify
- Final amount, assumptions and any subsequent adjustment to the $574 million Energy goodwill impairment.
- Investment Fund performance, short and derivative exposures, collateral requirements, and potential liquidity demands.
- Debt maturities, subsidiary borrowing availability, covenant restrictions and the capacity to fund distributions at the Holding Company level.
- Integration and operating results of Pep Boys and Trump, and the status and terms of the Federal-Mogul proposal and East Dubuque financing.
- Actual RIN costs and refining margins, together with developments in environmental, litigation and controlled-group pension exposures.