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

Metric	Q3 2015	Q3 2014	Nine months 2015	Nine 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 flow	Not 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.