ICAHN ENTERPRISES L.P. quarterly report, Q1 FY2012

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Business context and reporting period

Icahn Enterprises L.P. is a diversified holding company with Investment, Automotive, Gaming, Railcar, Food Packaging, Metals, Real Estate and Home Fashion businesses. This unaudited Form 10-Q covers the three months ended March 31, 2012; comparisons are with the three months ended March 31, 2011 unless otherwise stated. The interim financial statements received review reports, not audit opinions.

Financial performance and position

  • Revenue: Total revenue was $2.684 billion, down 12.8% from $3.078 billion. Net sales rose 6.6% to $2.399 billion, while net gains from investment activities fell to $58 million from $617 million.
  • Profit: Net income was $101 million versus $596 million; net income attributable to Icahn Enterprises was $49 million versus $240 million. Basic and diluted income per LP unit was $0.49 versus $2.73 and $2.65, respectively. The prior-period comparison also reflects changes in weighted-average units from unit distributions.
  • Cash flow: Operating activities provided $85 million, compared with $447 million used in Q1 2011. Investing activities used $240 million, including $197 million of capital expenditures. Financing activities provided $1.326 billion, including $510 million from the rights offering and $716 million of proceeds from additional notes.
  • Liquidity and balance sheet: Cash and cash equivalents were $3.467 billion, up from $2.278 billion at year-end; cash held at consolidated affiliated partnerships and restricted cash was $2.249 billion, down from $4.979 billion. Investments were $5.876 billion versus $8.938 billion. Total assets were $21.065 billion versus $25.136 billion, and total equity was $8.525 billion versus $7.833 billion.
  • Debt: Total debt increased to $7.313 billion from $6.473 billion, principally reflecting $700 million of additional 8% notes due 2018. Long-term debt fair value was estimated at $7.5 billion versus its $7.3 billion carrying value. The company reported compliance with its debt covenants and approximately $1.4 billion of capacity for additional indebtedness under its senior-note covenants.
  • Margins and segment results: Federal-Mogul’s gross margin was 15.7% of sales versus 16.2%. Railcar manufacturing gross margin improved to 16% from 3%; Metals’ gross margin fell below 1% from 6%; Home Fashion’s gross margin declined to 4% from 8%; Food Packaging remained at 24%.

Material changes versus the prior comparable period

  • Investment performance was materially lower: Investment Funds reported a 1.0% gross return for Q1 2012 versus 9.6% in Q1 2011. Management attributed current-period gains primarily to long equity exposure, partly offset by short positions.
  • Railcar net sales rose to $164 million from $69 million; shipments increased to 2,200 from 670 railcars. Backlog was approximately 6,190 railcars at quarter-end, compared with 6,530 at year-end 2011.
  • Metals sales increased 19%, but higher costs and weak selling prices compressed margins; the segment reported a $2 million net loss attributable to Icahn Enterprises versus $8 million of income.
  • Home Fashion sales declined 43%, which management attributed mainly to exiting unprofitable programs and customers. The segment remained loss-making.
  • Gaming refinanced Tropicana’s prior Exit Facility with a $175 million term loan facility and repaid the Exit Facility; the refinancing generated a $2 million extinguishment loss. Gaming net revenues were $155 million versus $157 million, with management citing lower table-game hold and weaker room revenue.
  • The company completed a $500 million rights offering and distributed 619,585 units in connection with its Q1 distribution. The quarterly distribution declared was $0.35 per unit, comprising $0.10 cash and $0.25 in units.

Outlook, management commentary, risks and unusual items

  • No consolidated earnings or revenue guidance is provided. Management said the railcar market had improved but was cyclical and future orders and shipments were uncertain. It also said Home Fashion’s future improvement could not be predicted amid macroeconomic uncertainty.
  • WPH expected about $1 million of additional restructuring costs for the remainder of fiscal 2012; actual costs could vary, and further impairment charges were possible. Tropicana expected $20–$30 million of maintenance capital expenditures for the remainder of 2012, in addition to debt service and potential growth or Aruba development spending.
  • After quarter-end, Icahn affiliates amended a tender offer for CVR Energy at $30 per share plus a contingent payment right. The potential purchase consideration for remaining shares was approximately $2.23 billion; funding was expected from cash and a partial redemption of Investment Funds interests. Completion and any later sale proposal were not assured.
  • Investment-related market and counterparty risks are significant. At March 31, 2012, written put options had maximum payout amounts of approximately $3.8 billion; derivative liabilities were $383 million and collateral posted was $709 million. The Investment Funds had returned all fee-paying capital in 2011, and no further incentive or special profits-interest allocations would accrue after March 31, 2011.
  • Federal-Mogul’s Thailand facility remained suspended after 2011 flooding; it received $25 million and $5 million insurance advances in February and April 2012, respectively. Federal-Mogul also estimated up to $42 million of reasonably possible additional environmental losses above recorded remediation liabilities.
  • Other contingencies include an estimated $114 million underfunding of ACF pension plans upon voluntary termination, for which Icahn Enterprises could have controlled-group exposure; Starfire indemnified the partnership, but its ability to fund the indemnity was not assured. PSC Metals reported that potential Festus, Missouri remediation exposure could not yet be assessed. Aztar’s claim against Marsh was dismissed with prejudice in April 2012, but reconsideration was pending.
  • A $30 million income tax benefit included a release of approximately $48 million of WPH valuation allowance. Federal-Mogul also said unrecognized tax benefits could decrease by approximately $328 million within 12 months, of which $43 million, if recognized, could affect the effective tax rate.
  • Mr. Icahn’s affiliates owned approximately 93% of outstanding depositary units, creating significant control and related-party considerations.

Important facts for investors to verify

  1. Whether the decline in reported earnings reflects mainly the lower investment gains and how segment operating performance develops.
  2. Availability and restrictions on cash, including cash held by affiliated partnerships, and the liquidity impact of the CVR tender offer and any Investment Funds redemption.
  3. Debt balances, interest costs, covenant headroom and subsidiary restrictions on transferring cash to the holding company.
  4. Railcar backlog conversion, Metals margins, and progress and costs of Home Fashion restructuring.
  5. Developments in the CVR offer, environmental matters, pension exposure, litigation and other contingencies.