ICAHN ENTERPRISES L.P. quarterly report, Q1 FY2017

Icahn Enterprises L.P. — Q1 2017 Form 10-Q

Reporting period: Three months ended March 31, 2017; unaudited. Icahn Enterprises is a diversified holding company with businesses spanning investment, automotive, energy, railcar, gaming, metals, mining, food packaging, real estate and home fashion. Icahn Enterprises Holdings conducts substantially all operations; the registrants’ results are substantially the same.

Financial results and liquidity

Metric	Q1 2017	Q1 2016
Total revenues	$4.677 billion	$3.127 billion
Net sales	$4.319 billion	$3.548 billion
Net loss	$160 million	$1.609 billion
Net loss attributable to Icahn Enterprises	$18 million	$837 million
Loss per LP unit	$0.12	$6.21
Operating cash flow	$(614) million	$610 million
Investing cash flow	$(473) million	$(1.178) billion
Financing cash flow	$1.243 billion	$364 million

Total assets were $34.189 billion and total liabilities $25.622 billion at March 31, 2017. Consolidated debt was $11.212 billion, versus $11.119 billion at year-end 2016; estimated fair value of long-term debt was $11.4 billion.
Cash and cash equivalents were $2.018 billion, with a further $1.007 billion in cash held at consolidated affiliated partnerships and restricted cash. The filing reports $925 million of restricted cash.
Subsidiaries had $1.095 billion of additional borrowing availability under specified revolving facilities. The Holding Company had $337 million in cash and approximately $5.5 billion in debt; its senior-note covenants did not permit additional indebtedness as of quarter-end, other than specified refinancing.
Capital expenditures were $231 million. The partnership declared a $1.50-per-unit quarterly distribution, payable in cash or additional units at each holder’s election; the board reviews distributions quarterly and gives no assurance about future payments.

Material changes versus Q1 2016

Revenue increased, with net sales up about 22%. Total revenue also benefited from a smaller net investment loss: $130 million in Q1 2017 versus $936 million in Q1 2016.
The net loss narrowed substantially. The prior-year quarter included a $574 million Energy-segment goodwill impairment and substantially larger Investment-segment losses. Q1 2017 still included a $192 million Investment-segment net loss; Energy reported $28 million net income compared with a $614 million net loss in Q1 2016.
Operating cash flow shifted from $610 million provided to $614 million used, driven principally by Investment-segment activity and changes in securities-related receivables and payables. Financing cash flow included the $600 million unit rights offering and $600 million invested in the Investment Funds by Mr. Icahn’s affiliates.
Debt rose modestly overall. The partnership refinanced its 3.50% notes due 2017 with $695 million of 6.25% notes due 2022 and $500 million of 6.75% notes due 2024. Federal-Mogul also issued secured euro-denominated notes and used proceeds primarily to repay existing debt.
In January 2017, Icahn Enterprises acquired the remaining Federal-Mogul shares for $305 million, increasing its ownership to 100%. A $600 million rights offering issued 11,171,104 depositary units on March 1.

Segment performance, outlook and commentary

Automotive: Net sales rose 7% to $2.477 billion; gross margin was $436 million, or 18% of sales, flat as a percentage year over year. Higher volumes and Pep Boys’ inclusion for the full quarter contributed; foreign exchange was unfavorable.
Energy: Net sales rose 66% to $1.507 billion. Gross margin improved to $88 million from a $21 million loss, reflecting higher refining margins and lower net RIN costs. Management estimated an additional 2017 Renewable Fuel Standard obligation of approximately $170 million based on then-current production, requirements and RIN prices.
Railcar: Manufacturing revenue fell 51% to $61 million, and manufacturing gross margin declined to $6 million from $22 million. The segment cited fewer non-leasing customer shipments, market competition and a greater hopper-car mix. Backlog was 3,286 railcars at quarter-end. Management expected the sale of American Railcar Leasing (ARL) to close in Q2 2017 and said it would continue leasing with the remaining fleet.
Investment: Investment Funds returned negative 2.7% in Q1 2017 versus negative 12.8% in Q1 2016. Management attributed the 2017 loss mainly to short exposure, including broad-market hedges, partly offset by gains in long positions. Funds’ net notional exposure was negative 110% at quarter-end.
Other segments: Metals sales increased with higher volumes and prices; Mining sales rose with iron-ore prices and volume. Food Packaging’s sales and gross margin percentage improved. Gaming revenue was slightly lower, partly reflecting the Trump Taj Mahal closure; that property was sold on March 31, 2017. Home Fashion sales declined 6%.
ARL’s proposed sale to SMBC Rail was based on a value of approximately $2.8 billion, subject to adjustments, and included approximately 29,000 railcars. A possible later sale of approximately 4,800 additional railcars is subject to conditions and options. The initial sale had not closed as of the filing; proceeds were expected to provide Holding Company liquidity.

Risks, contingencies and unusual items

Market and investment risk: Investment Funds use securities, derivatives and short positions, with counterparty, liquidity and market risks. Management estimated that a 10% adverse fair-value change would reduce the value of securities owned by about $943 million, securities sold short by $219 million, and derivatives by $1.7 billion; the effect on Icahn Enterprises’ share of investment results would be partly offset by non-controlling interests.
Railcar directive: The company accrued $16 million for probable and estimable costs related to an FRA tank-car directive and stated that additional losses were reasonably possible but could not be estimated. The company challenged the directive in court.
Pension exposure: ACF and Federal-Mogul pension plans would have been underfunded by approximately $574 million if voluntarily terminated at March 31, 2017. Icahn Enterprises said controlled-group rules could expose it and subsidiaries to specified pension obligations. A Starfire indemnity has limitations and may not be able to fund its obligations.
Environmental matters: Consolidated environmental liabilities were $48 million. Federal-Mogul estimated reasonably possible additional remediation losses of about $41 million above its recorded amount. Environmental estimates and outcomes remain uncertain.
Energy and regulatory risk: RIN prices and refining margins are volatile and depend on market and regulatory factors. The petroleum business had a $180 million biofuel-blending obligation at quarter-end.
Other exposures: The filing describes litigation concerning the Federal-Mogul acquisition, affiliate transactions and an earlier government inquiry into trading activity. Management said it did not believe the inquiry would materially affect the business; no claims or allegations had been made against the company or Mr. Icahn, according to the filing.
Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter. It gave no general earnings guidance in the provided filing text.

Investor verification priorities

Confirm the closing date, final proceeds and debt treatment of the ARL sale, and whether the optional additional railcar transaction proceeds.
Track the $170 million estimated 2017 RFS obligation against actual RIN costs and refining margins.
Review Investment Funds’ leveraged long/short exposure, derivative obligations, collateral needs and quarter-to-quarter performance.
Assess Holding Company debt-service capacity, covenant limits, subsidiary cash-transfer restrictions and the sustainability and form of $1.50-per-unit distributions.
Monitor the FRA directive challenge and potential costs above the $16 million accrual, as well as the controlled-group pension exposure and indemnity limits.
Evaluate whether improved consolidated results reflect durable operating performance, given the prior-year impairment and investment losses and the current quarter’s investment-related cash outflows.