ICAHN ENTERPRISES L.P. quarterly report, Q2 FY2017

Icahn Enterprises L.P. — Q2 2017 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2017. The filing is joint with Icahn Enterprises Holdings L.P.; their consolidated results are substantially the same. The diversified holding company operates across investment, automotive, energy, railcar, gaming and other businesses. Financial statements are unaudited.

Key financial results

Metric	Q2 2017	Q2 2016	Six months 2017	Six months 2016
Total revenues	$6.654 billion	$4.350 billion	$11.331 billion	$7.477 billion
Net sales	$4.282 billion	$4.094 billion	$8.601 billion	$7.642 billion
Net income (loss) attributable to Icahn Enterprises	$1.553 billion	$(69) million	$1.535 billion	$(906) million
Basic and diluted income (loss) per LP unit	$9.51	$(0.50)	$9.77	$(6.68)
Interest expense	$218 million	$202 million	$441 million	$443 million

Total revenue and earnings include substantial investment results and asset-sale gains; they are not solely measures of operating performance. Q2 2017 included a $1.525 billion net gain on asset dispositions, primarily the railcar leasing business sale, and $314 million of investment income. Net sales provide a more direct view of sales-based businesses. A single consolidated operating margin is not presented in the filing.

Cash flows, first half: Operating cash use was $1.152 billion, compared with $992 million provided in 2016. Investing activities provided $515 million versus $1.482 billion used; financing provided $1.073 billion versus $338 million. Cash and cash equivalents increased $556 million to $2.389 billion.
Balance sheet at June 30: Cash and cash equivalents were $2.389 billion; cash held at consolidated affiliated partnerships and restricted cash was another $1.019 billion. Investments were $9.302 billion, total assets $32.557 billion, debt $11.285 billion and total liabilities $22.027 billion. Debt was $11.119 billion at year-end 2016.
Liquidity and distributions: The Holding Company had $653 million cash and approximately $5.5 billion debt. Subsidiaries had $1.044 billion available under revolving facilities. The partnership declared $1.50 per unit quarterly distributions in Q1 and Q2; holders could elect cash or additional units. A further $1.50 distribution was declared in August 2017.

Material changes and business drivers

Net income attributable to Icahn Enterprises improved sharply against prior-year losses, reflecting the railcar sale gain and a reversal in investment performance. Investment Funds returned 4.3% in Q2 2017 versus negative 6.0% in Q2 2016; first-half returns were 1.4% versus negative 18.0%.
On June 1, the company completed the initial sale of American Railcar Leasing for approximately $2.8 billion stated transaction value. After repayment or assignment of related debt, it received about $1.3 billion cash and recorded an approximately $1.5 billion pretax gain. The company retained about 4,600 railcars and has a conditional option to sell them for an estimated additional $559 million.
Automotive first-half net sales rose 4% to $4.995 billion, reflecting acquisitions, including Pep Boys, and organic growth, partly offset by foreign exchange. First-half gross margin was 19%, unchanged year over year.
Energy first-half sales rose 34% to $2.942 billion, but Q2 gross margin fell to $19 million from $108 million as higher crude/feedstock costs and renewable fuel credit costs outweighed higher selling prices. Q2 gross margin as a share of sales fell to 1% from 8%.
Railcar manufacturing revenue and margins declined amid lower shipments, lower production and competitive pricing; leasing revenue also fell after the fleet sale. The lease fleet stood at 16,905 railcars versus 45,336 a year earlier, and the reported backlog was 2,808 railcars.
Metals improved with higher shipment volumes and prices. Gaming revenue declined following the 2016 closure of Trump Taj Mahal, partly offset by growth at existing properties. Home Fashion sales and gross margin declined, chiefly due to lower volume and product mix.

Outlook, risks and contingencies

The filing gives no specific consolidated earnings or revenue guidance. Management cautions that investment returns depend on market conditions, portfolio exposures and available capital, and that historical results are not indicative of future performance.
Management said the Holding Company depends on divestitures, financing, investment returns and subsidiary distributions to meet obligations and fund distributions. Subsidiary debt agreements or other restrictions may limit transfers to the Holding Company. The Holding Company was not permitted to incur additional debt under senior-note covenants at June 30, subject to permitted refinancing.
Investment activities involve market, counterparty and liquidity risks, including derivatives and short positions. At June 30, Investment Funds had 132% long and 176% short notional exposure, a net short exposure of 44%. A modeled 10% adverse fair-value move could reduce the value of securities owned by about $862 million, securities sold short by about $173 million and derivatives by about $1.6 billion; the filing notes that non-controlling interests offset a portion of investment-result impacts.
Energy faces refining-margin volatility and uncertain renewable fuel credit costs. First-half RIN expense was $99 million; the recorded biofuel blending obligation was $280 million at June 30.
The Railcar segment recorded a $14 million contingency for a federal directive concerning certain tank railcars. The company is challenging the directive; additional costs may be possible but could not be reasonably estimated.
Potential pension exposure is significant: specified ACF and Federal-Mogul plans were estimated to be underfunded by $509 million on a voluntary-termination basis at June 30. The filing describes possible controlled-group liability and a Starfire indemnity, while noting that the indemnity may not be funded and does not cover all relevant liabilities.
Environmental liabilities totaled $48 million. Federal-Mogul estimated up to $40 million of reasonably possible additional remediation losses beyond its recorded estimate. Litigation includes Federal-Mogul appraisal and shareholder cases; outcomes and potential losses are not quantified in the filing text. Management reported no material changes to risk factors from the 2016 Form 10-K.
The company early adopted certain accounting updates, including one that reduced partners’ equity by $47 million. It planned to adopt the new revenue-recognition standard in 2018 and had not identified material differences in existing revenue-recognition methods to date.

Investor verification priorities

Separate recurring operating performance from the $1.5 billion railcar-sale gain and volatile investment gains or losses; verify segment-level earnings and cash generation.
Review cash-flow quality: first-half operating cash use was $1.152 billion despite reported net income, with securities-related activity materially affecting cash flows.
Check Holding Company liquidity, debt covenants, subsidiary distribution restrictions and the cash-versus-unit mix of future distributions.
Track Energy refining margins and RIN costs, and determine whether the $280 million blending obligation or future RIN expense changes materially.
Monitor the railcar directive appeal and any costs above the $14 million accrual, as well as the retained railcar sale option and its conditions.
Assess pension and environmental exposures, including the limits and collectability of the Starfire indemnity and possible costs not currently estimable.
Verify the outcome and terms of the Tropicana tender offer, which was extended to expire August 9, 2017 unless further extended.