Icahn Enterprises L.P. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; unaudited. Icahn Enterprises is a diversified holding company spanning investment, automotive, energy, metals, railcar, gaming, food packaging, real estate and home fashion. Its results are substantially the same as those of Icahn Enterprises Holdings. Carl Icahn and affiliates owned approximately 88% of Icahn Enterprises’ depositary units at quarter-end.
Financial performance and position
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Total reported revenues | $4.990 billion | $5.369 billion, down 7% |
| Net sales | $4.666 billion | $4.574 billion, up 2% |
| Net income | $77 million | $710 million |
| Net income attributable to Icahn Enterprises | Loss of $29 million; loss of $0.24 per LP unit | Income of $277 million; income of $2.56 per LP unit |
| Cash from operating activities | Used $802 million | Provided $71 million |
| Cash from investing activities | Used $296 million | Used $355 million |
| Cash from financing activities | Provided $1.180 billion | Used $323 million |
| Cash and cash equivalents at quarter-end | $3.342 billion | $3.262 billion at December 31, 2013 |
| Total assets / total liabilities | $35.186 billion / $22.295 billion | $31.745 billion / $18.436 billion at year-end |
| Debt | $11.067 billion | $9.295 billion at year-end |
Reported revenue includes investment activity: investment results shifted from a $578 million gain in Q1 2013 to a $31 million loss in Q1 2014. Cost of goods sold was $4.142 billion versus $3.893 billion, and interest expense rose to $170 million from $145 million. The effective tax rate was 57.2%, versus 14.5%; management attributed the 2014 rate primarily to partnership losses not subject to entity-level taxation.
Cash held at consolidated affiliated partnerships and restricted cash was $729 million, including $708 million of restricted cash. Operating cash use was primarily driven by investment transactions, including security purchases; financing inflows largely reflected debt issuance and refinancing. The filing does not provide a single unrestricted, readily available liquidity measure for the entire group.
Material changes and segment developments
- Investment: Funds returned -0.4% in Q1 2014 versus +9.7% in Q1 2013. Management attributed the current-quarter result mainly to losses on short equity exposure as markets rose, partly offset by long positions. Icahn Enterprises’ share of fund net income fell to $5 million from $233 million.
- Automotive: Segment net sales increased 4% to $1.779 billion; gross margin rose to $273 million from $248 million, and gross margin percentage increased to 15% from 14%. Organic sales growth was supported by higher volumes across regions, partly offset by customer pricing and dispositions.
- Energy: Segment revenue increased, but petroleum gross margin fell to $175 million from $346 million. Refining margin adjusted for FIFO impacts declined to $15.98 per barrel from $26.44. Higher crude costs and lower refined-product prices pressured margins. Derivative gains and other items contributed to reported results.
- Metals: Net sales fell 28% to $189 million, primarily on lower shipment volumes, weather-related supply and transport problems, and weaker non-ferrous markets. The segment recorded a $3 million gross loss.
- Railcar: Railcar segment gross margin rose to $75 million from $58 million, aided by mix and leasing growth. Shipments fell to about 1,610 from 1,900; backlog was approximately 8,600 railcars at quarter-end.
- Gaming: Segment revenue increased to $187 million from $143 million and attributable income rose to $23 million from $3 million. The filing cites increased gaming hold and internet gaming at Tropicana Atlantic City. The Lumière acquisition closed April 1, 2014 for $260 million, subject to adjustments.
- Other segments: Food Packaging sales were flat at $88 million; Home Fashion sales declined 9% to $43 million. Real Estate revenue was $24 million.
Debt, distributions and unusual items
- Icahn Enterprises issued notes due 2017, 2019, 2020 and 2022 in January and used proceeds principally to refinance older notes. The refinancing generated a $108 million loss on extinguishment; additional debt extinguishment losses across the group brought the quarter’s total to $126 million.
- Debt increased by approximately $1.8 billion from year-end. Management reported compliance with debt covenants and approximately $1.6 billion of additional debt-incurrence capacity under the parent senior-note indentures.
- Other income included $109 million of derivative gains and a $32 million cash payment related to a negotiated gaming tax settlement. These were partly offset by debt-extinguishment losses.
- A $1.50-per-unit quarterly distribution was declared for Q1, payable in cash or units at holders’ election; $175 million was recorded as a distribution payable at March 31. The board also declared a further $1.50-per-unit distribution in May 2014.
Outlook, risks and contingencies
- No consolidated earnings guidance is provided. Segment estimates include 2014 Energy capital spending of approximately $360–$375 million, Automotive capital expenditures of $370–$420 million, and Energy RIN compliance costs of approximately $75–$150 million. These are estimates, not guarantees.
- Energy results are exposed to crude oil and refined-product spreads, commodity prices, inventory accounting and volatile Renewable Fuel Standard credit costs. Regulatory proceedings at the Wynnewood refinery could lead to penalties, controls or operational changes; amounts were not estimable, though management did not expect material costs based on its experience.
- Automotive had approximately $2.6 billion of debt at March 31. A refinancing completed in April 2014 extended term-loan maturities but increased applicable interest rates; the segment anticipated a further non-cash debt-extinguishment loss of about $35 million in Q2.
- Federal-Mogul environmental liabilities were accrued at $14 million, with reasonably possible additional losses estimated at about $45 million. PSC Metals recorded remediation liabilities of $28 million. The filing also identifies an approximately $483 million underfunding of Federal-Mogul and ACF pension plans on a hypothetical termination basis; an affiliate indemnity does not cover the Federal-Mogul unfunded termination liability.
- Investment activities include short positions, derivatives and counterparty exposure. At quarter-end, the Investment Funds’ disclosed maximum payout on certain written put options was $302 million; derivative liabilities and collateral requirements can create liquidity demands.
- Disclosure controls were assessed as effective, with no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- How much of the year-over-year earnings decline reflects investment performance and nonrecurring refinancing costs, and how sustainable are operating-segment results?
- Debt maturity, interest-rate and covenant exposure—especially after the April Federal-Mogul refinancing—and actual unrestricted liquidity at the parent level.
- Whether Energy refining spreads and RIN costs track management’s estimates, and the outcome and cost of Wynnewood regulatory matters.
- Railcar backlog conversion, fleet leasing economics, and the capital and debt commitments associated with railcar expansion.
- Potential pension, environmental and litigation exposures, including the limits and financial capacity of the Starfire indemnity.
- Cash-versus-unit distribution elections, resulting unit dilution, and the effect of the distribution policy on liquidity.