Icahn Enterprises L.P. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018; filed November 8, 2018. The joint report covers Icahn Enterprises L.P. and Icahn Enterprises Holdings L.P., whose consolidated results are substantially the same. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context and financial results
Icahn Enterprises is a diversified holding company with continuing Investment, Automotive, Energy, Railcar, Metals, Mining, Food Packaging, Real Estate and Home Fashion businesses. Federal-Mogul and Tropicana were classified as discontinued operations in 2018.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $2,864 | $2,404 | $8,220 | $7,107 |
| Total reported revenues | $2,685 | $3,504 | $9,427 | $10,468 |
| Income (loss) from continuing operations | $(310) | $800 | $511 | $2,263 |
| Continuing income (loss) attributable to Icahn Enterprises | $(29) | $577 | $243 | $2,027 |
| Net income attributable to Icahn Enterprises, including discontinued operations | $126 | $597 | $572 | $2,132 |
| Basic and diluted income per LP unit | $0.68 | $3.53 | $3.15 | $13.23 |
| Net cash provided by (used in) operating activities | Not presented quarterly | $326 | $(914) |
Total reported revenues include investment results and asset disposition gains, not just sales. Q3 2018 included a $514 investment-activity loss, versus a $420 gain in Q3 2017; Q3 2017 also included substantial disposition gains. Nine-month 2017 results included a $1.5 billion Railcar gain and a $456 million Real Estate gain.
Financial position, liquidity and distributions
- At September 30, 2018, total assets were $30.975 billion, total liabilities $18.639 billion and total equity $12.336 billion. At December 31, 2017, these were $31.801 billion, $20.433 billion and $11.368 billion, respectively.
- Cash and cash equivalents were $1.053 billion; cash held at consolidated affiliated partnerships and restricted cash totaled $801 million. Some affiliated-fund cash was not available for general liquidity, and restricted cash primarily supported derivative margin requirements.
- Total debt was $7.907 billion, including $5.505 billion of Holding Company senior unsecured notes and $2.402 billion at operating segments. Holding Company notes carry fixed rates of 5.875%–6.750%, with maturities from 2020 to 2025. Long-term debt fair value was estimated at $8.1 billion versus $7.9 billion carrying value.
- Continuing-operations operating cash flow was negative $19 million for the first nine months; discontinued operations provided $345 million, resulting in consolidated operating cash flow of $326 million. Investing activities used $467 million and financing activities used $78 million. Cash, cash equivalents and restricted cash ended at $1.854 billion, down $176 million from the start of the period.
- Quarterly distributions declared in the first nine months totaled $5.25 per depositary unit; holders could elect cash or additional units. A further $1.75 distribution was declared October 31, payable on or about December 18, 2018. The board reviews future distributions quarterly; future amounts are not assured.
Material changes and operating performance
- Energy net sales increased 33% in Q3 and 23% for the nine-month period. Gross margin rose to $193 million from $97 million in Q3 and to $438 million from $204 million year to date, helped by higher volumes and lower RIN costs, though crude costs and refined-product crack spreads affected results.
- Automotive sales and service-labor revenue grew 5% in Q3 and 6% year to date. Gross margin improved to 33% from 28% in Q3 and to 32% from 29% year to date. Management cited franchisor mix, service cost improvements and selective price increases; a multi-year integration and transformation plan is underway.
- Railcar gross margin fell to $22 million from $44 million in Q3 and to $82 million from $227 million year to date. Q3 manufacturing gross margin was negative; the filing cites lower production, competition and facility inefficiencies. Leasing revenue also fell as the fleet contracted following the ARL sale.
- Food Packaging gross margin percentage declined to 21% from 24% in Q3 and 22% from 24% year to date, reflecting input-cost increases and lower fixed-cost absorption. Home Fashion sales declined 17% in Q3 and 9% year to date, mainly due to lower volume.
- The Investment Funds returned negative 6.3% in Q3 2018 versus positive 5.1% in Q3 2017; nine-month returns were positive 3.5% versus 6.6%. Q3 weakness was driven largely by short positions, including broad-market hedges.
- Consolidated interest expense fell $34 million in Q3 and $118 million year to date, mainly because Investment segment broker balances were lower and, year to date, because ARL had been sold; higher Holding Company borrowing costs partly offset the decreases.
Outlook, transactions, risks and contingencies
- No specific consolidated earnings or revenue guidance is provided. Management emphasizes that investment results depend on market conditions and portfolio exposures and that past returns are not indicative of future results.
- On October 1, 2018, Federal-Mogul and Tropicana sales closed. The Holding Company received approximately $2.3 billion in aggregate cash proceeds, and the company expected to recognize approximately $1.0 billion in aggregate pretax gains in Q4 2018. Federal-Mogul consideration included $800 million cash and approximately 29.5 million Tenneco shares, valued at about $1.2 billion at closing; Federal-Mogul debt was assumed by Tenneco. Icahn Enterprises’ proportionate Tropicana cash proceeds were approximately $1.5 billion.
- On October 22, 2018, Icahn Enterprises announced an agreement to sell ARI for $70 per share, with expected proceeds of approximately $831 million. Closing was expected in Q4, subject to customary conditions; termination fees may apply. At September 30, Railcar reported an 11,215-car backlog.
- Management reported $97 million of Holding Company cash and approximately $5.5 billion of Holding Company debt at quarter end. Pro forma for the Federal-Mogul and Tropicana closings and pending ARI sale, Holding Company cash would have been approximately $3.3 billion. The filing cautions that subsidiary cash transfers can be limited by covenants, law and business needs.
- Investment activity involves significant market, counterparty, leverage and collateral risks. Funds had 115% long and 141% short notional exposure at quarter end. A 10% adverse move was estimated to affect the fair values of securities owned by $871 million, securities sold short by $63 million and derivatives by $1.1 billion; the effect on Icahn Enterprises’ share of investment results would be partly offset by non-controlling interests.
- CVR Refining received a DOJ letter alleging Clean Air Act and consent-decree violations at its Coffeyville refinery. A tolling agreement extended negotiations through March 31, 2019; potential penalties or costs could not be reasonably estimated. RIN costs were $47 million for the first nine months of 2018, down from $164 million a year earlier.
- The filing reports $38 million of consolidated environmental liabilities, plus $16 million for Federal-Mogul classified as held for sale; a $9 million Railcar reserve related to an FRA directive; and a $56 million Federal-Mogul appraisal-litigation reserve funded before its sale. Potential controlled-group pension exposure included an estimated $371 million underfunding if specified ACF and Federal-Mogul plans were terminated; the filing describes an affiliate indemnity but says it may not be able to fund its obligations.
- A U.S. Attorney’s Office inquiry concerning Renewable Fuel Standard matters remained ongoing; the company said no claims or allegations had been made against it or Mr. Icahn. The filing also identifies the risk that asset sales or market-value changes could cause the partnership to be deemed an investment company under the Investment Company Act.
Important facts for investors to verify
- Whether the ARI sale closed on the expected terms and how its proceeds and any sale gain were reported.
- Actual Q4 proceeds, gains and balance-sheet effects from the Federal-Mogul and Tropicana disposals, including Tenneco share restrictions and valuation.
- Investment Funds’ subsequent performance, short exposure, collateral needs and potential effects on Holding Company liquidity.
- Energy segment exposure to refining margins, crude prices, RIN costs and the unresolved Coffeyville regulatory matter.
- Railcar backlog conversion, margins and sale completion; Automotive transformation progress and cash requirements.
- Future distributions, debt covenant compliance, subsidiary cash-transfer restrictions and potential pension or litigation liabilities.