Business context and reporting period
Icahn Enterprises L.P. filed this joint annual report with Icahn Enterprises Holdings L.P. for the fiscal year ended December 31, 2016. It is a diversified holding company with Investment, Automotive, Energy, Railcar, Gaming, Metals, Mining, Food Packaging, Real Estate and Home Fashion businesses. Results include acquisitions and other changes in consolidation, so year-over-year comparisons are not fully like-for-like.
Financial performance and liquidity
| Metric | 2016 | 2015 |
|---|---|---|
| Total revenues | $16.348 billion | $15.272 billion |
| Net sales | $15.511 billion | $14.604 billion |
| Net loss | $2.220 billion | $2.127 billion |
| Net loss attributable to Icahn Enterprises | $1.128 billion | $1.194 billion |
| Basic and diluted loss per unit | $8.07 | $9.29 |
| Operating cash flow | $1.655 billion | $748 million |
| Cash and cash equivalents at year-end | $1.833 billion | $2.078 billion |
| Total debt | $11.119 billion | $12.594 billion |
| EBITDA attributable to Icahn Enterprises | $270 million | $198 million |
| Adjusted EBITDA attributable to Icahn Enterprises | $842 million | $930 million |
Total revenues rose, while consolidated net loss widened modestly; the loss attributable to Icahn Enterprises narrowed, partly reflecting non-controlling interests. Adjusted EBITDA is a company-defined non-GAAP measure and should not be treated as a substitute for GAAP results or cash flow.
Cash flow from operations was positive, but investing activities used $1.854 billion, including acquisitions and capital expenditures. Financing activities provided $87 million, and cash and cash equivalents declined by $245 million during the year. Separately, $804 million was reported as cash held at consolidated affiliated partnerships and restricted cash; this amount is not necessarily available for general corporate liquidity. Holding Company cash was $225 million, with approximately $1.7 billion invested in the Investment Funds.
Segment results and changes versus 2015
- Investment: The funds returned negative 20.3% in 2016, versus negative 18.0% in 2015. Icahn Enterprises’ share of fund losses was $604 million. The filing attributes 2016 performance mainly to losses on short positions, partly offset by gains on long positions.
- Automotive: Segment revenues were $9.928 billion and attributable income was $53 million, compared with a $299 million attributable loss in 2015. Net sales increased largely because of the Pep Boys acquisition and a full-year contribution from IEH Auto. Gross margin as a percentage of net sales rose to 19% from 16%.
- Energy: Segment revenues were $4.764 billion and attributable loss was $327 million, compared with attributable income of $25 million in 2015. Net sales fell 12%; gross margin declined to $164 million from $484 million, and gross margin as a percentage of net sales fell to 3% from 9%. Refining margins weakened, and RIN costs were $206 million, up from $124 million.
- Railcar: Attributable income rose to $150 million from $137 million. Manufacturing gross margin fell to $64 million from $102 million, while leasing gross margin was $276 million in both years. The segment had a 3,813-car backlog at year-end. ARL was classified as held for sale, but remained in continuing operations.
- Gaming: Attributable loss was $109 million, compared with income of $26 million in 2015. Results included TER after its February 2016 emergence from bankruptcy; the Trump Taj Mahal closed in October, prompting a $106 million impairment charge.
- Metals: Net sales declined to $267 million from $361 million and attributable loss narrowed to $20 million from $51 million. Lower shipment volumes and prices, including facilities idled during environmental remediation, affected results.
- Mining: Net sales rose to $71 million from $30 million, while attributable loss narrowed to $19 million from $150 million. Ferrous Resources remained unprofitable; its year-end cash was $14 million, and its Viga development plan could require about $1.0 billion of capital not yet secured.
- Food Packaging: Net sales were $329 million, down from $344 million; attributable income was $6 million, versus a $3 million loss.
- Real Estate: Revenues were $88 million, down from $131 million; attributable income was $12 million, versus $61 million.
- Home Fashion: Net sales were $196 million, slightly above $193 million; attributable loss widened to $12 million from $4 million, and gross margin as a percentage of net sales declined to 14% from 16%.
Outlook, management commentary, risks and unusual items
- Management estimated 2017 capital expenditures of approximately $1.0 billion for continuing operating businesses. The filing provides no consolidated earnings or revenue guidance.
- Icahn Enterprises agreed to sell ARL for cash based on an approximately $2.8 billion value and a fleet of about 29,000 railcars; closing was expected in the second quarter of 2017, subject to conditions. An option could cover another approximately 4,800 railcars for an estimated $586 million. The sale had not closed at year-end, and ARL’s approximately $1.746 billion debt was classified in liabilities held for sale.
- After year-end, the partnership completed a $600 million rights offering. It also refinanced the $1.174 billion of 3.50% notes due 2017 with $695 million of 6.250% notes due 2022 and $500 million of 6.750% notes due 2024. This extended maturities but increased the stated interest rates.
- 2016 impairment charges totaled $709 million, including $574 million of Energy goodwill impairment and $106 million related to the Trump Taj Mahal closure. Investment losses and derivative valuation changes also materially affected results.
- Key risks include volatile investment returns and substantial short exposure; commodity and refining-margin volatility; RIN availability and cost; high leverage and refinancing needs; environmental, safety and regulatory obligations; and acquisition, integration and asset-sale execution. The partnership reported approximately $3.2 billion of required payments over the three years ending December 31, 2019, including interest; it subsequently refinanced the 2017 notes.
- Railcar’s FRA directive concerning certain tank cars resulted in a $16 million loss contingency. The filing says additional losses are reasonably possible but cannot be reasonably estimated. Other notable exposures include environmental liabilities, a $613 million estimated underfunding of certain affiliated pension plans if voluntarily terminated, and litigation and regulatory matters. The Starfire indemnity does not cover all potential pension liabilities and may not be sufficient to fund its obligations.
- Icahn and affiliates owned approximately 90.1% of outstanding depositary units as of March 1, 2017. The filing describes limited unitholder voting rights, affiliate transactions and controlled-company governance exemptions. The board declared $6.00 per unit in 2016 distributions; future distributions are discretionary and subject to liquidity, covenants and other factors.
Important facts for investors to verify
- Review the full audited statements and segment disclosures, especially the investment portfolio’s positions, leverage, short exposure and liquidity arrangements.
- Check the status and final proceeds of the ARL sale, including debt transferred, closing adjustments and the additional-railcar option.
- Assess the sustainability of operating cash flow and distributions against debt maturities, subsidiary distribution restrictions and planned capital expenditures.
- Track Energy segment refining margins, RIN costs, environmental compliance and the refinancing or renewal of key credit and crude-supply arrangements.
- Monitor the FRA directive, the adequacy of the $16 million Railcar reserve, and material litigation, environmental and controlled-group pension exposures.
- Consider acquisition comparability and accounting scope: Pep Boys was excluded from management’s 2016 internal-control assessment, though the auditor reported an unqualified opinion on the consolidated financial statements and an effective-control opinion for the scope audited.