ICAHN ENTERPRISES L.P. quarterly report, Q3 FY2015

Icahn Enterprises L.P. — Q3 2015 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2015. The filing is jointly submitted with Icahn Enterprises Holdings L.P.; their results are substantially similar. Icahn Enterprises is a diversified holding company with investment, automotive, energy, metals, railcar, gaming, mining, food packaging, real estate and home-fashion businesses. Figures below are in U.S. dollars; financial-statement amounts are in millions unless stated otherwise.

Financial results and liquidity

MetricQ3 2015Q3 2014Nine months 2015Nine months 2014
Reported total revenues$3,212$4,422$12,707$15,791
Net income (loss)$(940)$(627)$23$573
Net income (loss) attributable to Icahn Enterprises$(440)$(355)$(67)$105
Basic and diluted income (loss) per LP unit$(3.40)$(2.90)$(0.53)$0.87
Operating cash flowNot presented quarterly$510$(619)
  • Q3 reported total revenues include a $947 million net loss from investment activities; the comparable 2014 quarter included a $592 million net loss. Nine-month investment activities produced a $236 million gain, versus $509 million in 2014.
  • For the nine months, cash used in investing activities was $1.859 billion, including $1.067 billion of capital expenditures and $855 million for business acquisitions. Financing activities provided $478 million. Cash and cash equivalents declined by $871 million to $2.041 billion.
  • At September 30, cash and cash equivalents were $2.041 billion, with another $1.441 billion in cash held at consolidated affiliated partnerships and restricted cash. Total debt was $12.182 billion, up from $11.588 billion at year-end 2014. Total liabilities were $24.166 billion and total equity was $12.286 billion.
  • Interest expense was $296 million in Q3 versus $226 million, and $853 million for nine months versus $593 million. Management attributed the increase primarily to higher Investment-segment broker balances, increased Automotive borrowings and rates, and higher Railcar debt.
  • Quarterly distributions declared were $1.50 per depositary unit; holders could elect cash or additional units. The filing reports $4.50 per unit declared for the first nine months.

Material changes and operating performance

  • Investment performance weakened: the Investment Funds returned negative 10.3% in Q3 and negative 2.8% for nine months, compared with negative 5.3% and positive 4.4% in the respective 2014 periods. Management cited losses in several large long equity holdings, partly offset by short positions and hedges.
  • Energy net sales fell to $1.409 billion in Q3 from $2.280 billion, largely reflecting lower petroleum product prices. Petroleum refining margins improved: adjusted for FIFO inventory effects, margin was $18.65 per barrel versus $13.16. Fertilizer results were affected by turnaround work and air-separation-unit downtime.
  • Metals sales declined 51% in Q3 and 47% for nine months, reflecting lower volumes and prices for ferrous and non-ferrous scrap; the segment reported gross losses in both comparison periods.
  • Automotive sales rose 6% in both Q3 and nine months, aided by the Uni-Select auto-parts acquisition and other acquisitions, but Federal-Mogul faced substantial unfavorable currency effects. Automotive gross margin was 16% of sales in Q3 versus 14%; nine-month gross margin remained 15%.
  • Railcar leasing revenue and fleet size increased, but Q3 manufacturing revenue and gross margin declined amid a less favorable product mix. The segment reported a backlog of 7,936 railcars at quarter-end.
  • Icahn Enterprises obtained control of Ferrous Resources in Q2 2015 and began consolidating its results. The Mining segment was loss-making; iron ore prices were depressed, two mines had been suspended, and most reported-period sales went to one Brazilian customer.
  • Real Estate sold 14 commercial rental properties and the Oak Harbor development during the first nine months, recording a $39 million aggregate gain on asset dispositions.

Outlook, risks and unusual items

  • The filing provides no consolidated earnings or revenue guidance. Management described the iron ore and steel environment as challenging and said Ferrous Resources was evaluating sales alternatives and profitability measures.
  • Ferrous Resources had approximately $28 million of cash at September 30 and was not profitable. Its Viga mine was operating at marginal profitability; expansion projects require substantial financing, and the company had not secured the financing needed by quarter-end. The filing identifies iron ore prices, funding, Brazilian currency and country risks, permits, transport access and operating conditions as material uncertainties.
  • CVR’s petroleum business estimated 2015 renewable identification number (RIN) costs of approximately $100 million to $125 million; final regulatory volume requirements were pending. Its fertilizer reporting unit’s fair value was only approximately 1% above carrying value, making $253 million of goodwill potentially vulnerable if forecast sales growth is not achieved.
  • New U.S. and Canadian tank-railcar rules could affect railcar demand, retrofit costs and capital plans. The filing also cites potential product-liability exposure from rail accidents.
  • Investment Funds’ net notional exposure was negative 26% of net asset value, with 160% long and 186% short exposure. Written puts had maximum payout amounts of approximately $5.7 billion; the filing describes collateral, counterparty and market risks. A 10% adverse move in specified Investment-segment holdings was estimated to reduce fair values by approximately $1.3 billion for securities owned, $124 million for securities sold short and $2.6 billion for derivatives.
  • Potential contingencies include environmental liabilities, litigation and pension obligations. ACF and Federal-Mogul pension plans would have been underfunded by approximately $623 million if voluntarily terminated; Icahn Enterprises may face controlled-group liability. Federal-Mogul estimated up to $44 million of reasonably possible additional environmental losses beyond its recorded estimate.
  • Federal-Mogul deferred its planned Motorparts spin-off; timing and completion remain uncertain. Subsequent to quarter-end, it agreed to sell a French Powertrain location, with a potential cash contribution not expected to exceed $15 million. CVR Partners’ proposed Rentech Nitrogen merger faced litigation that could delay or prevent completion.
  • Management reported compliance with debt covenants at September 30. The parent-level senior-note covenants permitted approximately $584 million of additional indebtedness. Federal-Mogul’s revolver availability had fallen to $175 million from $516 million at year-end 2014.

Most important facts for investors to verify

  • How much of reported earnings and quarter-to-quarter volatility reflects Investment-segment trading results, and what are the current exposures, collateral requirements and liquidity available through brokers?
  • Whether Ferrous Resources can fund operations and planned projects, and how iron ore prices, Brazil-related risks and the concentration of sales with one customer affect its cash needs.
  • Whether debt growth, higher interest costs and reduced Federal-Mogul revolver availability constrain liquidity, investment or distributions.
  • Whether Energy refining margins and RIN costs, fertilizer operating reliability and the fertilizer goodwill valuation develop in line with management assumptions.
  • The status and financial effects of the Rentech Nitrogen merger, the Motorparts separation, railcar regulatory changes, environmental matters and pension obligations.
  • Whether the $1.50 quarterly distribution remains sustainable given operating cash flows, capital spending, debt service and the option for holders to receive units rather than cash.