Icahn Enterprises L.P. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; unaudited. The joint filing covers Icahn Enterprises L.P. and Icahn Enterprises Holdings L.P., whose results are substantially the same. Icahn Enterprises is a diversified holding company with investment, automotive, energy, railcar, metals, mining, food packaging, real estate and home-fashion businesses. Federal-Mogul and Tropicana are reported as discontinued operations and held for sale.
Financial performance and position
- Q2 revenue: $3.578 billion, versus $4.465 billion in Q2 2017. This total includes investment gains and other items; net sales were $2.919 billion, up from $2.332 billion.
- Q2 earnings: Income from continuing operations was $433 million, versus $1.667 billion. Net income attributable to Icahn Enterprises was $309 million, versus $1.553 billion; basic and diluted income per unit was $1.70, versus $9.51. The prior-year comparison included a $1.523 billion gain on the 2017 sale of American Railcar Leasing.
- First-half results: Revenue was $6.733 billion, versus $6.964 billion; net sales were $5.356 billion, versus $4.704 billion. Income from continuing operations was $821 million, versus $1.463 billion, and net income attributable to Icahn Enterprises was $446 million, versus $1.535 billion. First-half income per unit was $2.48, versus $9.77.
- Discontinued operations: Generated $155 million of Q2 income and $190 million for the first half; $145 million and $174 million, respectively, were attributable to Icahn Enterprises.
- Segment indicators: Automotive gross margin rose to 32% from 29% in Q2 and to 31% from 29% for the first half. Energy gross margin was 7% in both Q2 and the first half, compared with 1% and 4%, respectively, in 2017. Railcar gross margin declined as leasing revenue fell following the 2017 sale of ARL. These are segment gross margins, not consolidated operating margins.
- Cash flow and liquidity: First-half operating cash flow was negative $486 million, compared with negative $937 million; investing cash flow was negative $395 million, versus positive $515 million; financing cash flow was positive $56 million, versus positive $1.073 billion. Cash, cash equivalents and restricted cash ended at $1.225 billion, down from $2.030 billion at year-end 2017. Balance-sheet cash and cash equivalents were $875 million; additional cash held at affiliated partnerships and restricted cash was $350 million.
- Debt and equity: Consolidated debt was $7.880 billion at June 30, 2018, versus $7.918 billion at year-end 2017; total equity was $12.448 billion, versus $11.368 billion. Holding Company debt was $5.505 billion and Holding Company cash was $79 million. The company reported compliance with debt covenants and approximately $705 million of additional permitted Holding Company indebtedness.
- Distributions: Two quarterly distributions of $1.75 per depositary unit were declared in the first half; holders could elect cash or additional units. A further $1.75 distribution was declared July 31, 2018. Mr. Icahn and affiliates owned approximately 91.3% of outstanding units at June 30.
Material changes versus prior period
- Reported earnings were substantially lower than in 2017, principally because the prior-year period included the $1.523 billion ARL disposal gain. Investment results improved: Investment segment income from continuing operations was $397 million in Q2 versus $273 million, and $798 million for the first half versus $81 million.
- Energy revenue and gross margin increased, mainly on higher petroleum product prices and wider refining spreads; higher crude costs partly offset the benefit.
- Automotive sales and service labor revenue increased, supported by acquisitions and organic growth, while the business continued a multi-year integration and transformation plan.
- Federal-Mogul and Tropicana were reclassified as discontinued operations and held for sale in Q2. Total assets held for sale were $8.869 billion and related liabilities were $6.145 billion at June 30.
- Adoption of the new revenue standard resulted in a $29 million reduction to opening equity, primarily related to deferring Automotive extended-warranty revenue. Management said the standard did not materially affect current-period revenue.
Outlook, risks and unusual items
- Proposed sales: Federal-Mogul was agreed to be sold to Tenneco for approximately $5.4 billion in cash and Tenneco shares, with Federal-Mogul debt assumed at closing. Tropicana was agreed to be sold in a transaction with stated aggregate consideration of approximately $1.85 billion, subject to adjustments and the Aruba asset disposition. Both deals were expected to close in the second half of 2018, subject to approvals and other conditions; neither was completed as of the filing. The Federal-Mogul agreement includes a $200 million termination provision.
- Investment-company status: Management said the Federal-Mogul sale could make Icahn Enterprises likely to be considered an investment company absent an Investment Company Act exemption. The partnership expects to take steps during the exemption period to avoid registration, but gave no assurance it will succeed. Registration could materially restrict its operations and affect tax treatment.
- Market and operating risks: Investment results are sensitive to securities prices, short positions, derivatives and market exposures. Refining margins, crude prices and volatile Renewable Fuel Standard credit costs affect Energy; scrap pricing, iron ore demand, railcar demand and consumer conditions affect operating segments. First-half RIN costs are not presented consistently in the filing text, so the six-month amount is unclear.
- Contingencies: The filing reports a $9 million reserve for the FRA railcar directive, environmental liabilities of $38 million in continuing operations and $15 million within Federal-Mogul held-for-sale liabilities, and approximately $435 million of potential underfunded pension-plan liability if specified plans were terminated. Icahn Enterprises may be within a controlled group for certain pension obligations; the Starfire indemnity has stated limitations and may not be funded. A Federal-Mogul settlement of approximately $3 million received court approval in July.
- Regulatory inquiry: The U.S. Attorney’s Office for the Southern District of New York requested information concerning Renewable Fuel Standard activities and Mr. Icahn’s advisory role. The company said it was cooperating and that no claims or allegations had been made against it or Mr. Icahn.
- Management outlook: No quantified consolidated earnings or revenue guidance is provided in the filing. Management noted that future distributions are reviewed quarterly and are not assured. It also expects adoption of the lease-accounting standard in 2019 to add right-of-use assets and lease liabilities, particularly for Automotive operating leases.
Investor facts to verify
- Closing status, final consideration, proceeds and debt treatment for the Federal-Mogul and Tropicana transactions, including approval conditions and sale adjustments.
- Plans and execution timeline for avoiding Investment Company Act registration after the Federal-Mogul sale.
- Cash available to the Holding Company versus cash and collateral held in subsidiaries, affiliated funds or restricted accounts, and subsidiary distribution restrictions.
- Investment Funds’ concentration, short and derivative exposures, valuation sensitivity and the effect of non-controlling interests on reported returns.
- Actual refining margins and RIN expense, railcar backlog and lease-fleet trends, and progress and costs of the Automotive transformation.
- Potential outcomes and funding of pension, environmental, railcar-directive and legal matters, as well as the status of the federal inquiry.
- Distribution funding and dilution: the filing reports substantial unit distributions in kind to Mr. Icahn and affiliates, who controlled approximately 91.3% of units.