Icahn Enterprises L.P. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Unaudited consolidated results cover a diversified holding company with Investment, Automotive, Energy, Metals, Railcar, Gaming, Mining, Food Packaging, Real Estate and Home Fashion businesses. Icahn Enterprises Holdings owns substantially all operating assets; the two registrants’ results are substantially the same.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenues | $4.899 billion | $3.212 billion | $12.376 billion | $12.707 billion |
| Net income (loss) | $238 million | $(940) million | $(1.656) billion | $23 million |
| Net income (loss) attributable to Icahn Enterprises | $(16) million | $(440) million | $(922) million | $(67) million |
| Loss per LP unit | $(0.12) | $(3.40) | $(6.70) | $(0.53) |
| Operating cash flow | Not presented by quarter in the supplied filing text | $1.322 billion | $510 million |
Q3’s improvement in consolidated net income primarily reflected a $418 million investment-activity gain versus a $947 million loss in Q3 2015. For the first nine months, investment activities recorded an $826 million loss versus a $236 million gain in 2015. The Investment Funds returned 6.5% in Q3 but were down 12.7% for the first nine months. Consolidated net income includes non-controlling interests; the amount attributable to Icahn Enterprises remained a loss.
Net sales were $3.904 billion in Q3 and $11.546 billion for the nine months. The filing does not provide a consolidated operating margin or EBITDA figure. Automotive gross margin rose to $447 million in Q3 from $320 million, and to $1.343 billion for nine months from $881 million, helped by acquired businesses and their higher-margin mix. Energy refining margin per barrel fell to $9.66 in Q3 from $16.17 and to $9.55 for nine months from $16.38.
Balance sheet, debt and liquidity
- At September 30, 2016: total assets were $33.085 billion, total liabilities $24.287 billion and total equity $8.798 billion. Cash and cash equivalents were $2.002 billion; cash held at consolidated affiliated partnerships and restricted cash was $692 million.
- Total debt was $12.971 billion, up from $12.594 billion at December 31, 2015. Estimated fair value of long-term debt was $12.8 billion against a $13.0 billion carrying value. The company reported compliance with debt covenants, but its senior-note indentures barred additional indebtedness at the holding-company level.
- Nine-month cash flows: $1.322 billion provided by operations, $1.667 billion used in investing and $279 million provided by financing. Cash and cash equivalents decreased $76 million from year-end.
- Holding Company cash was $192 million and debt approximately $5.5 billion. Management noted that debt service and distributions depend on subsidiary distributions, financing, asset sales and Investment Funds returns; subsidiary distributions may be restricted by law or debt covenants.
- Icahn Enterprises declared distributions of $1.50 per unit each quarter during the first nine months, with cash or additional units available by election. A further $1.50 distribution was declared November 1, 2016.
Material changes and unusual items
- Acquisitions changed the reporting base: Pep Boys was acquired in February 2016, CVR Nitrogen in April, and Trump was consolidated following its emergence from bankruptcy in February. Icahn Enterprises also acquired the remaining 25% economic interest in ARL through issuance of depositary units.
- Impairment charges totaled $670 million for the first nine months, including a $574 million write-off of Energy goodwill following worsening petroleum sales trends and $92 million related to Trump Taj Mahal property and intangible assets. The Taj Mahal closed on October 10, 2016.
- The Investment segment’s holdings declined from $15.351 billion at year-end to $9.987 billion; the filing attributes substantial period-to-period earnings volatility to fair-value changes, trading and investment exposures.
- Railcar recorded a $32 million contingency for its response to an FRA directive covering certain DOT 111 tank cars. The directive could entail inspections, repairs, downtime, lost lease revenue and additional costs beyond the reserve.
- CVR Partners issued $645 million of 9.25% secured notes due 2023 and used proceeds in part to refinance debt. CVR Refining’s refining margins weakened; RIN costs were $152 million for nine months, and management estimated full-year 2016 costs of $210–$250 million.
Outlook, risks and contingencies
The filing gives no consolidated earnings or revenue guidance. Management described challenging conditions for iron ore and noted that refining results are sensitive to crude/product spreads, inventory effects and volatile RIN prices. Automotive faces foreign-exchange and geopolitical uncertainty, including Brexit and conditions in Turkey. Other risks include investment-market exposure, commodity prices, counterparty and derivative risks, and restrictions on moving cash from subsidiaries to the holding company.
Environmental liabilities include $12 million at Federal-Mogul and $5 million in Energy; Federal-Mogul estimated reasonably possible additional environmental losses of about $44 million. PSC Metals reported $28 million of remediation liabilities. The company also disclosed approximately $550 million of potential pension underfunding for ACF and Federal-Mogul plans on a voluntary termination basis; controlled-group rules could create broader liability, and the Starfire indemnity may not be fully collectible. A pipeline-safety notice to CVR included a preliminary penalty of approximately $0.5 million, part paid and the remainder contested. The filing also describes pending or unresolved litigation and regulatory matters.
Investor verification priorities
- Separate operating performance from investment fair-value gains and losses, and review the Investment Funds’ short exposure, leverage and collateral requirements.
- Assess the cash-generation and integration effects of Pep Boys, CVR Nitrogen and Trump, including the Taj Mahal closure and related impairment.
- Review debt maturities, subsidiary-level borrowing availability, covenant restrictions and the holding company’s capacity to fund debt service and distributions.
- Track the FRA railcar directive, the adequacy of the $32 million reserve and possible operating or lease-revenue effects.
- Monitor refining margins, RIN prices and compliance costs, as well as energy goodwill impairment indicators and environmental and pension exposures.
- Consider dilution and cash implications of the $1.50 quarterly distribution election; Icahn and affiliates owned approximately 89.7% of outstanding units as of November 2, 2016.