Icahn Enterprises L.P. — FY2014 Form 10-K
Business context and reporting period. This joint annual report covers Icahn Enterprises L.P. and Icahn Enterprises Holdings L.P. for the fiscal year ended December 31, 2014. The diversified holding company reports nine operating segments: Investment, Automotive, Energy, Metals, Railcar, Gaming, Food Packaging, Real Estate and Home Fashion. The two registrants’ results are substantially the same; differences mainly relate to debt and general-partner allocations.
Financial performance and liquidity
| Metric | FY2014 / Dec. 31, 2014 | Comparable period |
|---|---|---|
| Total revenues | $19.157 billion | $20.682 billion in FY2013 |
| Net income (loss) | $(529) million consolidated; $(373) million attributable to Icahn Enterprises | $2.444 billion consolidated; $1.025 billion attributable in FY2013 |
| Basic and diluted loss per LP unit | $(3.08) | Basic $9.14; diluted $9.07 in FY2013 |
| EBITDA / Adjusted EBITDA attributable to Icahn Enterprises | $705 million / $1.013 billion | $1.804 billion / $1.899 billion in FY2013 |
| Cash from operating activities | $(390) million | $717 million provided in FY2013 |
| Cash from investing activities | $(1.957) billion | $(1.456) billion in FY2013 |
| Cash from financing activities | $2.007 billion | $907 million in FY2013 |
| Cash and cash equivalents | $2.912 billion | $3.262 billion at Dec. 31, 2013 |
| Total debt | $11.588 billion | $9.295 billion at Dec. 31, 2013 |
| Total assets | $35.780 billion | $31.745 billion at Dec. 31, 2013 |
Revenue includes a $564 million net loss from investment activities, compared with a $1.694 billion gain in 2013; operating net sales were $18.072 billion, up from $17.785 billion. The filing reports $1.435 billion of cash held at consolidated affiliated partnerships and restricted cash, in addition to cash and cash equivalents; much of this balance is not freely available for general liquidity. The company also reported $5.197 billion due to brokers, primarily associated with investment activity.
Net cash decreased by $350 million during 2014. Capital expenditures were $1.411 billion, including $601 million for railcars built for lease; acquisitions used $558 million net of cash acquired. The company reported $607 million of cash interest payments. Adjusted EBITDA is a non-GAAP measure and excludes specified items; management cautions it is not a substitute for GAAP earnings or operating cash flow.
Material changes versus prior year
- Investment segment results weakened sharply: its share of Investment Funds’ net results was a $305 million loss, versus $812 million profit in 2013. Fund returns were negative 7.4% in 2014, compared with positive 30.8% in 2013; losses were attributed primarily to short equity exposure and certain long positions.
- Energy segment net sales rose to $9.109 billion from $8.986 billion, but gross margin fell to $335 million from $782 million. Petroleum refining margin, adjusted for FIFO effects, declined to $13.62 per crude-oil throughput barrel from $16.59. Lower refined-product prices, refinery disruptions and a $161 million unfavorable FIFO impact were key factors.
- Automotive net sales increased 6% to $7.317 billion. Gross margin rose 4% to $1.057 billion, while segment-attributable results were a loss of $87 million versus income of $250 million. Acquisitions contributed to sales growth; restructuring, integration costs and higher debt expense affected results.
- Metals net sales declined 23% to $711 million amid lower shipment volumes and weak scrap markets. Railcar segment-attributable income increased to $122 million from $30 million, supported by higher manufacturing and leasing activity. Gaming segment-attributable income rose to $185 million from $13 million, including the Lumière acquisition.
- Consolidated debt increased by $2.293 billion. The holding company issued new notes and used proceeds to refinance $3.5 billion principal of older notes; the refinancing resulted in a $108 million loss on extinguishment. Consolidated interest expense rose to $847 million from $560 million.
Outlook, commentary, risks and unusual items
Outlook and capital plans. The filing provides no consolidated earnings or revenue guidance. Management stated its intention to continue seeking undervalued investments, activist opportunities and acquisitions, and to grow existing businesses. The annualized distribution policy was increased to $6.00 per unit in 2014; distributions remain subject to quarterly board review, available cash, debt covenants and subsidiary restrictions. A $1.50-per-unit distribution for the next quarter was declared in February 2015, payable in cash or units at unitholder election. Management estimated 2015 capital expenditures of $280–$320 million for Energy, $570–$620 million for Railcar and $450–$500 million for Federal-Mogul.
- Energy: Management estimated 2015 RIN costs of approximately $95–$170 million; the estimate is subject to regulatory decisions and volatile credit prices. The Coffeyville refinery planned a staged turnaround beginning in late 2015. Refining margins remain exposed to crude/product spreads, crude differentials, outages and falling oil prices. Fertilizer results are cyclical and seasonal.
- Automotive and subsequent events: Federal-Mogul’s planned Powertrain/Motorparts separation was deferred in February 2015. Federal-Mogul announced a $250 million rights offering to strengthen its balance sheet. Federal-Mogul completed a $313 million TRW engine-components acquisition in February 2015; Icahn Enterprises also agreed to acquire Uni-Select USA assets for approximately $340 million, subject to closing conditions.
- Unusual items: The year included $135 million of impairment charges, including a preliminary $103 million Energy fertilizer goodwill impairment; the impairment assessment was to be finalized in early 2015. A $53 million Gaming predecessor-claims settlement gain and a $103 million consolidated income-tax benefit, including a $196 million Gaming valuation-allowance release, also affected results. Debt-extinguishment losses totaled $162 million.
- Debt and liquidity risks: Approximately $2.0 billion of required payments were due in the three years ending December 31, 2017, including interest and mortgage principal. Subsidiaries may be restricted from transferring cash to the holding company. The filing states the group was in compliance with debt covenants at year-end, but refinancing, variable-rate debt and broker financing remain relevant risks.
- Contingencies and operational risks: Controlled-group pension plans were estimated to be underfunded by $474 million on a voluntary termination basis; the filing warns Icahn Enterprises could face certain affiliate pension liabilities. The Wynnewood refinery fatal boiler explosion remains subject to contested OSHA citations and civil litigation. Environmental, safety, permitting, labor, customer-concentration and severe-weather risks affect multiple segments. Atlantic City casino competition and fiscal pressures, and Federal-Mogul’s restructuring and separation execution, are also material concerns.
Most important facts for investors to verify
- Review the investment portfolio’s 2014 loss, short exposure, derivatives, collateral requirements and liquidity available after broker obligations.
- Assess the sustainability of the $6.00 annual distribution against operating cash flow, debt service, subsidiary distribution restrictions and the use of units rather than cash.
- Reconcile the $11.588 billion of consolidated debt by issuer, maturity, interest rate and covenant, including the increase in railcar and automotive borrowings.
- Track Energy refining margins, RIN expense and compliance, refinery turnaround costs, the fertilizer impairment finalization and the status of the Wynnewood matters.
- Evaluate the cost, financing and integration of the 2015 automotive acquisitions, the Federal-Mogul rights offering and the revised separation timetable.
- Review the assumptions behind pension obligations, environmental reserves and the $474 million controlled-group pension underfunding estimate, including the limits of the Starfire indemnity.
- Consider governance and related-party exposure: Mr. Icahn and affiliates owned approximately 88.4% of outstanding units as of February 26, 2015.