Icahn Enterprises L.P. — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. This is an annual report, not a standalone fourth-quarter filing. Icahn Enterprises is a diversified holding partnership; Icahn Enterprises Holdings and its subsidiaries conduct substantially all operations, so the two registrants’ consolidated results are substantially alike.
Financial performance and liquidity
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Net sales | $14.619 billion | $9.127 billion |
| Total revenues, including investment gains and other items | $15.654 billion | $11.842 billion |
| Net income attributable to Icahn Enterprises | $396 million | $750 million |
| Basic income per depositary unit | $3.75 | $8.35 |
| Operating cash flow | $1.514 billion | $1.995 billion |
| Capital expenditures | $890 million | $481 million |
| Cash and cash equivalents at year-end | $3.071 billion | $2.278 billion |
| Total debt at year-end | $8.548 billion | $6.473 billion |
| Adjusted EBITDA attributable to Icahn Enterprises | $1.542 billion | $1.547 billion |
FY 2012 total revenues rose substantially, primarily reflecting the consolidation of CVR Energy from May 4, 2012. Net income attributable to Icahn Enterprises fell as Investment segment gains were much lower than in 2011, while interest expense and impairment charges increased. Reported operating cash flow includes substantial investment-segment trading and cash movements; it should not be read as a simple measure of cash generated by operating subsidiaries. The filing does not provide a meaningful consolidated operating margin for this diversified portfolio.
Year-end balance-sheet context: total assets were $24.556 billion and total liabilities were $14.783 billion. In addition to $3.071 billion of cash and cash equivalents, the company reported $1.419 billion of cash held at consolidated affiliated partnerships and restricted cash; that amount is not all freely available for general corporate liquidity. The Holding Company separately reported approximately $1.0 billion of cash and $4.1 billion of debt. Interest expense was $522 million, versus $436 million in 2011. Management reported compliance with debt covenants at year-end.
Business and material changes
- The company operates Investment, Automotive, Energy, Gaming, Railcar, Food Packaging, Metals, Real Estate and Home Fashion businesses, alongside its holding company activities.
- Icahn Enterprises acquired control of CVR Energy in May 2012 and owned approximately 82% at year-end. CVR contributed $5.519 billion of segment revenue and $263 million of net income attributable to Icahn Enterprises for the consolidation period. The acquisition’s stated purchase price was approximately $2.1 billion, including a preliminary $930 million goodwill allocation.
- The Investment segment’s share of Investment Funds’ net profit was $157 million, compared with $871 million in 2011; reported fund return was 6.6%, versus 34.5%. The company’s Investment Funds interest was valued at approximately $2.4 billion at year-end, compared with $3.1 billion in 2011.
- Railcar segment income before interest and taxes increased to $115 million from $33 million, reflecting higher shipments, improved pricing and stronger leasing activity. Metals reported a $42 million loss before interest and taxes, compared with $2 million income, as weak scrap pricing and squeezed margins offset higher volumes.
- Automotive reported a $22 million segment loss before interest and taxes, versus $168 million income. Sales declined 4%; foreign exchange, lower European volumes, product mix and weaker productivity weighed on results. The segment recorded $98 million of impairment charges.
- Home Fashion sales declined 29% to $228 million; its segment loss before interest and taxes narrowed to $30 million from $68 million, aided by exiting unprofitable programs and cost reductions.
Cash, debt, outlook and notable items
- Cash provided by operating activities was $1.514 billion; investing activities used $2.279 billion, including approximately $1.361 billion for acquisitions net of cash acquired. Financing activities provided $1.543 billion, including $1.030 billion of senior-note proceeds and $513 million of partnership contributions.
- Debt rose by approximately $2.1 billion year over year, reflecting CVR consolidation and additional holding-company borrowing. The filing identified approximately $1.4 billion of debt and related interest due in the three years through 2015; it also disclosed $12.943 billion of total contractual cash obligations, including debt, interest, pensions, leases and purchase obligations.
- Management stated that it expected available cash, operating cash flow and borrowing capacity to meet near-term needs. Federal-Mogul forecast 2013 capital expenditures of $385–$435 million; CVR estimated 2013 capital spending of approximately $283 million, excluding certain turnaround expenditures; Railcar expected $375–$400 million for lease-fleet investment. These are subsidiary estimates, not consolidated guidance.
- In February 2013, the general partner approved increasing the annual distribution policy from $1.40 to $4.00 per unit, payable in cash or additional units at each holder’s election. The first $1.00 quarterly distribution was declared for payment in April 2013. Icahn and affiliates indicated an intention to elect units for the foreseeable future. Distributions remain subject to board decisions, cash availability, subsidiary restrictions and financing covenants.
- After year-end, CVR Refining completed an IPO that generated $690 million gross proceeds, including the underwriters’ option; a wholly owned Icahn Enterprises subsidiary bought 4 million units. CVR also announced an expected $3.00-per-share annual dividend and paid a $5.50-per-share special dividend in February 2013.
- Unusual items included $1.339 billion of reported derivative losses across segments, a $71 million unfavorable FIFO inventory impact in CVR’s petroleum business for its consolidation period, and $88 million of major scheduled turnaround expense excluded from Adjusted EBITDA. Adjusted EBITDA is a non-GAAP measure and does not capture interest, working-capital needs or capital expenditures.
- At Wynnewood, a September 2012 boiler explosion fatally injured two employees; OSHA and Oklahoma authorities were investigating. Federal-Mogul’s VCS goodwill impairment analysis was not finalized at year-end; a further adjustment, if required, was expected to be recorded in the first quarter of 2013.
- Management described significant exposures to investment-market volatility, refinery margins and outages, environmental and regulatory requirements, customer concentration, pension liabilities and subsidiary debt. Other notable contingencies include two $18.5 million investment-banking fee lawsuits against CVR, both fully accrued, and environmental remediation matters. The filing also disclosed approximately $130 million of potential controlled-group pension underfunding if related plans were voluntarily terminated; an Icahn affiliate indemnity is subject to its ability to pay.
Most important facts for investors to verify
- Whether recurring cash generation and subsidiary distributions can support the increased $4.00 annual unit distribution, debt service and planned capital spending—particularly given the distinction between unrestricted cash and affiliated or restricted cash.
- CVR’s post-IPO debt, dividend capacity and refining margins, including exposure to narrower crude differentials, volatile crack spreads and renewable-fuel credit costs.
- Final purchase accounting for CVR and the outstanding Federal-Mogul VCS goodwill assessment, including any 2013 impairment adjustment.
- Progress and potential costs of the Wynnewood fatal-accident investigation, environmental obligations, and the accrued CVR fee disputes.
- The effects of lower Investment Funds returns, concentrated or short positions, derivatives and leverage on earnings and liquidity; verify the non-GAAP Adjusted EBITDA reconciliation against GAAP results and cash flows.
- Control and related-party risks: Icahn and affiliates held approximately 90.5% of units after the 2013 offering, and the filing describes multiple affiliate transactions. The consolidated audit opinion was unqualified; the auditor relied on other auditors for CVR and Federal-Mogul, and Icahn Enterprises’ internal control was reported effective.