Icahn Enterprises L.P. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparative period is Q1 2014. Unaudited consolidated results cover a diversified holding company with Investment, Automotive, Energy, Metals, Railcar, Gaming, Food Packaging, Real Estate and Home Fashion operations. Icahn Enterprises Holdings reports substantially the same operating results.
Key financial metrics
| Metric | Q1 2015 | Q1 2014 / prior date |
|---|---|---|
| Total reported revenues | $4.511 billion | $4.990 billion |
| Net sales | $3.565 billion | $4.666 billion |
| Net gain (loss) from investment activities | $591 million | $(31) million |
| Income before income taxes | $471 million | $180 million |
| Net income | $422 million | $77 million |
| Net income (loss) attributable to Icahn Enterprises | $161 million | $(29) million |
| Basic / diluted income (loss) per LP unit | $1.28 / $1.27 | $(0.24) / $(0.24) |
| Cash distributions declared per LP unit | $1.50 | $1.50 |
| Net cash used in operating activities | $(186) million | $(802) million |
| Net cash used in investing activities | $(573) million | $(296) million |
| Net cash provided by financing activities | $702 million | $1.180 billion |
| Cash and cash equivalents | $2.868 billion | $2.912 billion at Dec. 31, 2014 |
| Cash held at affiliated partnerships and restricted cash | $2.005 billion | $1.435 billion at Dec. 31, 2014 |
| Total debt | $12.088 billion | $11.588 billion at Dec. 31, 2014 |
| Total assets / total equity | $37.241 billion / $12.735 billion | $35.780 billion / $12.390 billion at Dec. 31, 2014 |
The effective income tax rate was 10.4%, versus 57.2% in Q1 2014; management attributed the lower current-period rate mainly to partnership income not subject to entity-level tax. Consolidated interest expense increased to $270 million from $170 million.
Material changes and operating drivers
- Reported revenue declined about 10%, while net sales fell about 24%. The investment-activity result shifted to a $591 million gain from a $31 million loss, materially supporting the improvement in earnings. The Investment Funds returned 4.3%, versus negative 0.4% a year earlier; their gains were primarily from long equity positions and partly offset by short-position losses.
- Energy segment revenue declined to $1.374 billion from $2.556 billion, mainly because of lower petroleum product selling prices. Petroleum gross margin was $119 million versus $175 million; refining margin adjusted for FIFO effects was $273 million versus $290 million. Fertilizer sales and gross margin improved.
- Automotive net sales rose 3% to $1.835 billion, but gross margin declined to $251 million from $273 million and gross margin rate fell to 14% from 15%. Foreign currency reduced sales by $160 million; acquisitions and higher volumes more than offset that impact. The segment recorded a Q1 loss attributable to Icahn Enterprises of $18 million, versus income of $31 million.
- Metals sales fell 44% to $106 million, and the segment reported a $10 million gross loss, versus a $3 million gross loss. Lower ferrous shipments and prices, weak demand and inventory-cost timing contributed.
- Railcar segment revenue was $221 million versus $207 million, and attributable income increased to $27 million from $21 million. Shipments rose to 2,668 railcars from 1,610; backlog was 10,471 railcars at quarter-end. Leasing revenue benefited from a larger fleet and higher average lease rates.
- Gaming and Real Estate attributable income were $5 million and $23 million, respectively, compared with $23 million and $7 million. Food Packaging was approximately break-even; Home Fashion reported a $1 million loss.
Liquidity, debt and financing
- Quarter-end cash and cash equivalents were $2.868 billion, but an additional $2.005 billion was held in affiliated partnerships or restricted. Investment Funds had about $1.8 billion posted as collateral for derivatives, included in the latter balance.
- Debt increased $500 million from year-end. The filing reports approximately $5.5 billion of Holding Company debt and $826 million of Holding Company cash; the company notes its ability to service debt and fund distributions depends in part on investment returns, financing and subsidiary distributions, which are not assured.
- Financing cash flow included $245 million of Investment segment contributions from Mr. Icahn’s affiliates, $1.070 billion of proceeds from other borrowings and $572 million of repayments of other borrowings. Automotive also received $250 million in Federal-Mogul rights-offering proceeds, of which Icahn Enterprises invested $230 million.
- Capital expenditures were $363 million, and the TRW engine-components acquisition used $305 million net of cash acquired. Management reported compliance with debt covenants and approximately $792 million of additional borrowing capacity under the senior-note indenture covenants.
Outlook, commentary, risks and contingencies
- No consolidated earnings or revenue guidance is provided. Energy management estimated 2015 petroleum-business RIN costs of approximately $125 million to $175 million, subject to regulatory requirements and market prices.
- Federal-Mogul deferred the planned Motorparts spin-off to integrate acquisitions and pursue strategic initiatives; its board intended to revisit timing before year-end 2015. Completion and timing remain uncertain. Icahn Enterprises expected the $340 million Uni-Select USA acquisition to close in Q2 2015, subject to conditions.
- Railcar management described demand as uncertain in energy-related markets amid oil-price volatility and pending regulatory changes. U.S. and Canadian final tank-car rules were released May 1, 2015; the segment was assessing their effects, including possible retrofit costs, changes in demand and capital spending.
- Key exposures include investment-market volatility, derivatives and short positions, commodity and refining margins, foreign exchange, interest rates, and cyclical metals and railcar markets. Maximum payout on certain written Investment Funds put options was approximately $6.5 billion; this is a contractual maximum, not a stated expected loss.
- Environmental liabilities included $15 million for Federal-Mogul and $27 million for PSC Metals. Federal-Mogul estimated reasonably possible additional environmental losses of about $35 million beyond its recorded estimate. Litigation and remediation outcomes remain uncertain; the filing does not quantify all potential exposures.
- Under controlled-group pension rules, Icahn Enterprises could be liable for certain pension obligations of affiliated entities. Federal-Mogul and ACF plans were estimated to be underfunded by $493 million if voluntarily terminated; an affiliate indemnity does not cover all such exposure and may not be collectible.
- A $30 million judgment in CVR’s insurance dispute was on appeal; only a $4 million receivable had been recorded. A separate Metals acquisition proposal for up to $230 million plus a rights-offering backstop was subject to approvals and was not assured to close.
Important facts for investors to verify
- How much of the $422 million net income and $161 million attributable income reflects investment gains, and how sustainable those gains are.
- Availability and restrictions on cash, collateral needs, derivative exposures, and the ability of subsidiaries to distribute cash to the Holding Company.
- Debt maturities, borrowing-base availability and covenant headroom, particularly as total debt rose during the quarter.
- Progress and economics of the Federal-Mogul spin-off, Uni-Select acquisition and railcar regulatory response.
- Updates on RIN expense, pension obligations, environmental matters, litigation and the appealed CVR insurance judgment.