Business context and reporting period
Icahn Enterprises L.P. filed a joint annual report with Icahn Enterprises Holdings L.P. for the fiscal year ended December 31, 2015. It is a diversified holding company spanning investment, automotive, energy, metals, railcar, gaming, mining, food packaging, real estate and home fashion. Icahn Enterprises owns 99% of Icahn Enterprises Holdings; Carl Icahn and affiliates held approximately 89% of Icahn Enterprises’ outstanding units at year-end.
Financial performance and key metrics
Unless otherwise stated, amounts are for Icahn Enterprises L.P. and are in U.S. dollars. The filing reports full-year results, not a separate fourth-quarter filing.
| Metric | 2015 | 2014 |
|---|---|---|
| Total revenues | $15.272 billion | $19.157 billion |
| Net sales | $14.604 billion | $18.072 billion |
| Net loss | $2.127 billion | $529 million |
| Net loss attributable to Icahn Enterprises | $1.194 billion | $373 million |
| Basic loss per unit | $9.29 | $3.08 |
| EBITDA attributable to Icahn Enterprises | $197 million | $705 million |
| Adjusted EBITDA attributable to Icahn Enterprises | $929 million | $1.018 billion |
| Cash from operating activities | $714 million | $(390) million |
| Cash used in investing activities | $2.351 billion | $1.957 billion |
| Cash and cash equivalents at year-end | $2.078 billion | $2.908 billion |
| Total debt at year-end | $12.633 billion | $11.588 billion |
At year-end, the balance sheet also included $1.282 billion of cash held at consolidated affiliated partnerships and restricted cash, $7.317 billion due to brokers and $794 million of securities sold but not yet purchased. These balances are not equivalent to unrestricted parent-company liquidity. The Holding Company reported $166 million cash and approximately $5.5 billion debt; it was unable to incur additional indebtedness under its senior-note covenants. Consolidated interest expense was $1.154 billion, up from $847 million. The filing does not present a single consolidated operating-margin measure that is readily comparable across its diverse businesses.
Icahn Enterprises declared distributions of $6.00 per unit in 2015, the same as in 2014. Unitholders could elect cash or additional units; the company paid $114 million in cash and issued approximately 8.3 million units for 2015 distributions. A $1.50-per-unit quarterly distribution was declared in February 2016, subject to the board’s ongoing review of liquidity, financing restrictions and other factors.
Segment highlights
- Investment: The Investment Funds returned negative 18.0% in 2015, compared with negative 7.4% in 2014. Icahn Enterprises’ share of fund results was a $760 million loss, and the segment reported a $1.665 billion net loss. Management attributed the fund decline mainly to losses in long equity positions, including energy holdings, partly offset by short-position gains.
- Automotive: Segment revenue was $7.853 billion and net loss was $352 million; net loss attributable to Icahn Enterprises was $299 million. Acquisitions lifted sales, while currency translation reduced Federal-Mogul sales by $642 million. Gross margin rose to 16% of net sales from 14%, partly reflecting the higher-margin IEH Auto acquisition. The segment recorded a $312 million Motorparts goodwill impairment.
- Energy: Segment revenue was $5.442 billion and net income was $7 million. Petroleum sales fell sharply with lower fuel prices, but refining margin adjusted for FIFO effects increased to $15.31 per throughput barrel from $13.62. Fertilizer goodwill was fully impaired, with a $253 million charge. The petroleum business incurred $124 million in RIN costs in 2015.
- Metals: Net sales fell 49% to $361 million; gross margin was negative $45 million and the segment reported a $51 million net loss. Lower shipment volumes and prices reflected weak demand, market pressure and reduced scrap availability.
- Railcar: Segment revenue was $948 million and net income attributable to Icahn Enterprises was $137 million. The lease fleet increased to about 45,050 railcars, while year-end backlog declined to about 7,080 from 11,730 a year earlier.
- Gaming: Segment revenue was $811 million and net income attributable to Icahn Enterprises was $26 million, down from $185 million. Results benefited from the Lumière acquisition and higher volumes at Tropicana Atlantic City, but the business remained exposed to intense regional and online competition.
- Mining: Consolidated from June 1, 2015, the segment recorded $28 million revenue and a $195 million net loss; the loss attributable to Icahn Enterprises was $150 million. Ferrous Resources had $14 million cash at year-end, and its Esperança and Santanense operations were suspended amid weak iron ore prices.
- Real estate and other items: Real Estate sold 14 commercial properties and the Oak Harbor development, recognizing a $40 million aggregate gain. Home Fashion reported improved gross margin percentage, from 14% to 16%, but continued to face difficult industry conditions.
Material changes versus the prior comparable period
- Total revenues declined 20% and net sales declined 19%. The consolidated net loss widened to $2.127 billion from $529 million, largely reflecting investment losses and substantially higher impairment charges.
- Impairment expense rose to $788 million from $135 million. Major charges included $312 million for Automotive Motorparts, $253 million for Energy fertilizer goodwill, and mining asset impairments; management said some impairment assessments would be finalized in the first quarter of 2016.
- Debt increased by approximately $1.045 billion. Operating cash flow improved to $714 million from negative $390 million, but investing outflows increased to $2.351 billion, including $1.359 billion of capital expenditures and $855 million of business acquisitions, net of cash acquired.
- Automotive expanded through the TRW valvetrain and IEH Auto acquisitions; Icahn Enterprises acquired Pep Boys for approximately $1.2 billion in February 2016, after year-end. Ferrous Resources was also acquired and consolidated during 2015.
Outlook, risks, contingencies and unusual items
- Outlook and spending: Management emphasized continued opportunistic acquisitions and activist investing, but provided no consolidated earnings guidance. Segment estimates included 2016 capital expenditures of $390–$440 million for Federal-Mogul, approximately $220 million for CVR, $117 million for Railcar, $81 million for Gaming and $22 million for Food Packaging. CVR estimated 2016 RIN costs of $140–$190 million.
- Near-term financing and leverage: Contractual debt obligations were $779 million in 2016 and $1.563 billion in 2017, before interest and other commitments. Risk disclosures cite approximately $2.0 billion of required payments over the three years ending December 31, 2018. CVR Partners’ $125 million term loan and revolving facility matured in April 2016; refinancing was being considered. The company reported compliance with debt covenants at year-end.
- Investment and liquidity risk: The Investment Funds had substantial derivative, short-position and broker financing exposures; adverse market movements or counterparty actions could require collateral or forced liquidation. Consolidated cash includes restricted and affiliated-fund balances, while subsidiary debt agreements can limit upstream distributions.
- Operating and commodity risks: Refining margins, RIN prices, crude supply and refinery outages; fertilizer prices, feedstock and seasonal demand; scrap prices and volumes; railcar order cycles; and iron ore prices are significant sensitivities. Ferrous Resources was not profitable, had limited cash, and required substantial financing for planned mine development.
- Pension and environmental exposures: Controlled-group pension rules could expose the partnership to affiliates’ obligations. ACF and Federal-Mogul pension plans were estimated to be underfunded by $589 million on a voluntary termination basis at year-end; the Starfire indemnity may not be sufficient to fund its obligations. Federal-Mogul also disclosed up to $44 million of reasonably possible additional environmental losses above its recorded estimate; PSC Metals recorded $29 million of environmental liabilities.
- Other unusual matters: A $27 million flood-insurance recovery was recorded in 2015; 2015 included $102 million of Coffeyville refinery turnaround expense. Real Estate’s property sales generated the $40 million gain noted above. The proposed CVR Partners–Rentech Nitrogen merger faced litigation; parties reached a proposed settlement subject to court approval. Icahn Enterprises proposed buying the Federal-Mogul shares it did not own for $7 per share in February 2016.
- Controls and audit: Federal-Mogul identified a material weakness in IT general controls during 2015, involving change-management and system-access controls. Icahn Enterprises management concluded its consolidated internal control over financial reporting was effective, and its auditor issued an unqualified opinion on the financial statements and Icahn Enterprises’ internal controls.
Most important facts an investor should verify
- Whether investment performance, especially concentrated long positions and leverage, recovered after the 18.0% fund loss in 2015.
- Unrestricted parent-company liquidity, broker obligations, restricted cash, debt maturities and the ability of subsidiaries to distribute cash upstream.
- Final impairment measurements, particularly Automotive, Energy fertilizer and Mining asset valuations, and any further write-downs.
- Refinancing and covenant outcomes for CVR Partners and other subsidiaries, along with the effect of debt service on distributions and capital spending.
- Progress and cost of the Federal-Mogul IT-control remediation, and the status of the CVR merger litigation, environmental matters and controlled-group pension exposure.
- Whether the $6.00 annual distribution remains supportable from recurring cash generation, given acquisition spending, debt obligations and unit issuance in lieu of cash.