Business Context and Reporting Period
Company: ICAHN ENTERPRISES L.P.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2010
Business Overview: A diversified holding company operating through seven reportable segments: Investment Management, Automotive (Federal-Mogul), Railcar (ARI), Food Packaging (Viskase), Metals (PSC Metals), Real Estate, and Home Fashion (WPI). The company also reports a Holding Company segment.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2010 | Nine Months Ended Sep 30, 2010 | Balance Sheet (Sep 30, 2010) |
|---|---|---|---|
| Total Revenues | $2,825 million | $6,631 million | Total Assets: $19,323 million |
| Net Income (Consolidated) | $765 million | $493 million | Total Liabilities: $11,570 million |
| Net Income Attributable to Icahn Enterprises | $298 million | $117 million | Total Equity: $7,753 million |
| Diluted EPS (LP Unit) | $3.35 | $1.39 | Cash & Equivalents: $2,261 million |
| Net Gain from Investment Activities | $793 million | $540 million | Total Debt: $5,966 million |
| Operating Cash Flow (9M) | $(160) million | Restricted Cash: $1,943 million |
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenues increased 21% for the three months ended September 30, 2010 ($2,825 million) compared to the prior year ($2,343 million), driven primarily by the Investment Management segment and the inclusion of ARI and Viskase.
- Profitability: Net income attributable to Icahn Enterprises rose significantly to $298 million for the quarter, compared to $116 million in the prior year period. This was largely due to strong performance in the Investment Management segment ($332 million income) and improved results in the Automotive segment ($38 million income vs. $8 million loss).
- Debt Restructuring: In January 2010, the company issued $2.0 billion in new senior notes (7.75% due 2016 and 8% due 2018) to refinance and extinguish approximately $1.28 billion of older debt (2012 and 2013 notes). This resulted in a $40 million loss on extinguishment of debt recorded in the nine-month period.
- Acquisitions: The company consolidated results for American Railcar Industries (ARI) and Viskase Companies effective January 15, 2010, following the acquisition of controlling interests from affiliates of Carl Icahn. These are now reported as the Railcar and Food Packaging segments.
- Preferred Units: All outstanding preferred limited partner units were redeemed on March 31, 2010, for a total liability of $138 million, settled via the issuance of depositary units.
Guidance, Outlook, and Risks
- Investment Management: Assets Under Management (AUM) increased to $6.6 billion as of September 30, 2010. The Private Funds reported a gross return of 13.9% for the quarter. Management notes that the Dodd-Frank Act will require registration as an investment adviser by July 2011, though the specific impact of rulemaking is currently unpredictable.
- Automotive (Federal-Mogul): Sales increased 12% quarter-over-year due to higher OEM production volumes. However, the segment faces currency headwinds (stronger U.S. dollar) and reduced sales in Venezuela due to currency restrictions. Management expects to incur up to $2 million in additional restructuring charges through 2011.
- Railcar (ARI): The segment reported a net loss of $3 million for the quarter due to reduced railcar shipments and pricing pressures, though management notes modest market improvement with increased requests for quotations.
- Home Fashion (WPI): The segment continues to incur operating losses and restructuring charges. Management anticipates these will continue for the remainder of fiscal 2010 as it realigns manufacturing operations.
- Liquidity: The Holding Company has approximately $1.1 billion of additional indebtedness capacity under current covenants. The company declared a quarterly cash distribution of $0.25 per unit payable in December 2010.
- Legal Proceedings: A favorable ruling was obtained in March 2010 regarding control of WPI. A new lawsuit was filed in October 2010 by Lions Gate Entertainment Corp. alleging securities violations; management intends to vigorously defend against these claims.
Investor Verification Checklist
- Investment Fund Performance: Verify the sustainability of the 13.9% quarterly return in the Investment Management segment and the impact of potential redemptions (4.7% of AUM notified for redemption as of Dec 31, 2010).
- Debt Covenants: Confirm continued compliance with financial ratios in the indentures for the new 2016 and 2018 notes, particularly given the Holding Company's reliance on subsidiary distributions.
- Automotive Currency Exposure: Assess the impact of the strong U.S. dollar on Federal-Mogul's international sales (60% of sales are international, 59% denominated in Euro).
- Restructuring Costs: Monitor the execution of restructuring plans at Federal-Mogul and WPI, specifically the realization of anticipated cost savings versus ongoing charges.
- Related Party Transactions: Review the terms of transactions with affiliates of Carl Icahn, including the ARI and Viskase acquisitions and ongoing supply/service agreements.