Icahn Enterprises L.P. — Q3 2012 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2012. Icahn Enterprises is a diversified holding partnership with investment, automotive, energy, gaming, railcar, food packaging, metals, real estate and home-fashion businesses. The main comparability change is the May 4, 2012 consolidation of CVR Energy; its results are included from May 5, so 2012 and 2011 segment results are not directly comparable.
Key financial results
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total revenues | $4.503 billion | $2.443 billion | $11.392 billion | $8.663 billion |
| Net income (loss) | $100 million | $(52) million | $651 million | $1.128 billion |
| Net income (loss) attributable to Icahn Enterprises | $85 million | $(39) million | $378 million | $490 million |
| Basic earnings (loss) per LP unit | $0.76 | $(0.44) | $3.61 | $5.52 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $1.368 billion | $1.860 billion |
| Capital expenditures | Not stated for quarter | Not stated for quarter | $617 million | $359 million |
Q3 net income included significant cross-currents: investment activities recorded an $81 million loss, while Energy reported $213 million of net income, including the acquired CVR business. Automotive reported a $10 million loss, including impairment charges. Nine-month investment gains were $255 million, sharply below $1.158 billion in 2011. Consolidated gross margin is not a clear measure of underlying performance given the diverse segments and investment-related revenue items.
Balance sheet and liquidity. At September 30, 2012, total assets were $24.332 billion, total liabilities $14.534 billion and total equity $9.798 billion. Cash and cash equivalents were $3.140 billion, with an additional $1.886 billion of cash held at consolidated affiliated partnerships and restricted cash. Investments were $4.912 billion. Total debt was $8.422 billion, up from $6.473 billion at year-end 2011; estimated fair value of long-term debt was $8.7 billion versus $8.4 billion carrying value. The company reported compliance with debt covenants and approximately $1.5 billion of capacity for additional indebtedness under its senior-note covenants. Subsidiary cash and distributions may be restricted by debt agreements and other terms.
Margins and cash flows. Automotive net sales fell 8% in Q3 and 4% for nine months year over year; gross margin rates declined to 13.2% and 14.7%, respectively, from 15.2% and 16.0%. Energy, consolidated from May, generated $2.410 billion of Q3 sales and $213 million of segment net income; petroleum refining margin adjusted for FIFO impact was $33.44 per throughput barrel in Q3. Railcar sales and margins improved with higher shipments, pricing and mix. Metals moved to a Q3 operating loss amid lower scrap prices and constrained supply. Home Fashion sales declined 33% in both the quarter and nine-month period, though its Q3 gross margin rate improved to 11% from 4%.
Nine-month operating cash flow declined year over year, but was materially affected by investment-segment trading and changes in cash held at affiliated partnerships and restricted cash. Investing cash use of $1.976 billion principally reflected the CVR acquisition and capital spending. Financing cash provided was $1.454 billion, including $1.0 billion of additional Icahn Enterprises notes and $500 million from the rights offering. Cash interest paid was $387 million for the nine months.
Material changes, outlook and unusual items
- CVR acquisition and financing: Icahn Enterprises acquired control of CVR for a total purchase price of approximately $2.1 billion and held about 82% at September 30. Preliminary purchase accounting recorded $894 million of goodwill, which remains subject to adjustment. In October, CVR Refining issued $500 million of 6.50% second-lien notes due 2022 and used proceeds to tender for approximately $323 million of 9.0% first-lien notes, incurring a reported premium of about $23 million.
- Near-term operating outlook: Management expected the Wynnewood refinery turnaround to cost approximately $100 million in 2012 and require 40–45 days of downtime, significantly affecting Q4 revenue. The nitrogen fertilizer plant turnaround was completed in October; approximately $5 million of turnaround expenses were estimated for that month. Management said CVR expected operating cash, existing cash and available facilities to cover anticipated needs for at least 12 months, subject to operating and market conditions.
- Energy investment and market risk: CVR’s open crack-spread hedges covered about 26 million barrels and had a $116 million net liability at quarter-end; a $1-per-barrel change in crack-spread value was estimated to change fair value by about $26 million. The Seaway pipeline reversal and planned capacity expansion could reduce the favorable crude-oil differential benefiting Midwestern refiners. Refining margins, crude prices, fertilizer prices and RIN costs remain volatile.
- Automotive: Federal-Mogul reorganized into Powertrain and Vehicle Components Solutions. Its VCS reporting unit’s estimated fair value exceeded carrying value by less than 1%; a goodwill impairment analysis was not finalized, and any required adjustment was expected in Q4. Nine-month restructuring charges were $19 million, with approximately $37 million of total charges anticipated for the restructuring plan.
- Other unusual items: A $51 million pension curtailment gain benefited Q3 results. The company recorded $87 million of impairment charges for the nine months, principally in Automotive. A $159 million deferred-tax valuation allowance release contributed to tax results. Two employees died in a September 28 explosion at the Wynnewood refinery; the boiler was damaged, with no reported impact to process areas or evidence of environmental impact, and investigations continued.
- Other developments: A proposed CVR Refining IPO was under SEC review and remained conditional; no offering size was determined. Hurricane Sandy caused a mandated five-day closure of Atlantic City casinos; Tropicana AC reopened November 2, and management had not estimated the resulting loss. A quarterly $0.35-per-unit distribution was declared, comprising $0.10 cash and $0.25 in units. Icahn affiliates owned approximately 93.3% of outstanding depositary units.
- Contingencies and governance: CVR accrued $18.5 million for each of separate Goldman Sachs and Deutsche Bank fee claims while disputing liability. Other exposures include environmental and regulatory obligations, contested fertilizer-plant property-tax assessments, and pension liabilities arising from the Icahn controlled group; Starfire indemnity support may not be sufficient. Related-party arrangements and concentrated control merit attention.
Most important facts for investors to verify
- Separate acquired CVR’s contribution from legacy operations when assessing growth, earnings and cash generation.
- Track the Wynnewood turnaround’s actual downtime and costs, post-turnaround refinery performance, and the impact of the fatal incident investigations.
- Review the final CVR purchase-price allocation and Federal-Mogul VCS goodwill impairment conclusion, including any subsequent charges.
- Assess debt maturities, interest burden, refinancing and covenant headroom, including the post-quarter CVR refinancing and remaining first-lien debt disposition.
- Monitor CVR refining spreads, crude sourcing and transportation changes, hedge mark-to-market exposure, RIN obligations, and fertilizer prices and seasonal working capital.
- Confirm the status and terms of the proposed CVR Refining IPO, environmental and tax contingencies, and the effect of the Atlantic City closure.
- Review related-party transactions, unit distributions and dilution, and the implications of Mr. Icahn’s approximately 93.3% unit ownership.
The independent accountants performed an interim review, not an audit, and expressed no audit opinion on these quarterly financial statements.