Business Context and Reporting Period
This Form 10-K covers the fiscal year ended December 31, 2007, for Icahn Enterprises L.P. (formerly American Real Estate Partners, L.P.). The company is a diversified holding company operating through four primary segments: Investment Management, Metals, Real Estate, and Home Fashion. The Gaming segment was classified as discontinued operations as it was in the process of being sold during the reporting period.
Key structural changes in 2007 included the acquisition of the Investment Management business (Partnership Interests) on August 8, 2007, and the acquisition of PSC Metals on November 5, 2007. Both were treated as common control transactions.
Key Financial Metrics
| Metric | 2007 | 2006 |
|---|---|---|
| Total Revenues | $2,487.6 million | $3,004.0 million |
| Income from Continuing Operations | $217.3 million | $309.2 million |
| Income from Discontinued Operations | $91.0 million | $798.5 million |
| Net Earnings | $308.3 million | $1,107.7 million |
| Net Earnings per LP Unit (Basic/Diluted) | $1.58 | $8.22 |
| EBITDA | $544.9 million | $1,463.4 million |
| Cash and Cash Equivalents | $2,112.8 million | $1,884.5 million |
| Total Long-Term Debt | $2,028.6 million | $939.8 million |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased by 17.2% ($516.4 million) primarily due to a $516.0 million decrease in Investment Management segment revenues driven by reduced investment profits in the Private Funds. Home Fashion revenues also dropped $207.2 million due to a weaker retail environment and strategic reductions in less profitable programs.
- Profitability: Income from continuing operations fell 29.7% ($91.9 million). This was largely driven by an $89.5 million decrease in Investment Management earnings. Conversely, the Metals segment saw a revenue increase of $124.1 million due to higher ferrous scrap prices and volume.
- Discontinued Operations: Income from discontinued operations dropped significantly from $798.5 million in 2006 to $91.0 million in 2007. The 2006 figure included a massive $676.4 million gain on the sale of Oil and Gas and Atlantic City gaming operations, which did not recur in 2007.
- Debt Increase: Long-term debt more than doubled to $2.03 billion from $940 million, reflecting the issuance of $500 million in 7.125% senior notes and $600 million in variable rate convertible notes in 2007.
Guidance, Outlook, and Risks
- Management Fee Restructuring: Effective January 1, 2008, management agreements with the Private Funds were terminated. The General Partners will now receive "special profits interest allocations" instead of traditional management fees, contingent on net profits allocated to investors.
- Dividend Increase: On February 29, 2008, the board increased the quarterly cash distribution on depositary units from $0.15 to $0.25 per unit.
- Home Fashion (WPI) Outlook: WPI is expected to continue operating at a loss in 2008 as it continues restructuring efforts, including closing U.S. plants and shifting to offshore manufacturing. The company faces significant litigation regarding its ownership structure which could impact consolidation.
- Real Estate Outlook: Management expects property development sales and profits to decline in 2008 due to the residential slowdown and depressed Florida real estate market. Additional asset impairment charges are possible.
- Key Risks:
- Concentration of Ownership: Carl C. Icahn and affiliates own approximately 91.2% of depositary units, giving them effective control.
- Investment Management Performance: Revenue is highly dependent on the performance of the Private Funds and Assets Under Management (AUM).
- Legal Proceedings: Ongoing litigation regarding the WPI acquisition and a derivative suit against NEGI (National Energy Group, Inc.) pose risks to ownership percentages and potential liabilities.
- Environmental Liabilities: The Metals segment faces potential remediation costs, with an estimated liability of $24.3 million as of year-end.
Investor Verification Checklist
- WPI Litigation Status: Verify the outcome of the Delaware and Federal proceedings challenging Icahn Enterprises' ownership of WestPoint International (WPI), as a loss of control could alter financial consolidation.
- Private Fund Performance: Monitor the 2008 performance of the Private Funds, as the new "special profits interest" fee structure ties revenue directly to net investor profits.
- ACEP Sale Closing: Confirm the final post-closing adjustments on the sale of American Casino & Entertainment Properties (ACEP), which closed in February 2008 with an anticipated pre-tax gain of ~$700 million.
- Debt Covenants: Review compliance with debt covenants, particularly the cash flow to fixed charges ratio, given the significant increase in leverage in 2007.
- NEGI Dissolution: Track the dissolution of National Energy Group, Inc. (NEGI) and the resolution of the related derivative lawsuit to assess potential liability impacts.