ICAHN ENTERPRISES L.P. quarterly report, Q2 FY2014

Icahn Enterprises L.P. — Q2 2014 Form 10-Q

Reporting period: Three and six months ended June 30, 2014; unaudited. Amounts are in millions of dollars except per-unit data. Icahn Enterprises is a diversified holding company with investment, automotive, energy, metals, railcar, gaming, food packaging, real estate and home-fashion businesses. Its results are substantially the same as those of Icahn Enterprises Holdings. Carl Icahn and affiliates held approximately 88.2% of Icahn Enterprises’ outstanding units at June 30.

Financial performance

Metric	Q2 2014	Q2 2013	Six months 2014	Six months 2013
Net sales	$4,867	$4,497	$9,533	$9,071
Total revenues, including investment gains/losses	$6,379	$4,670	$11,369	$10,039
Net gain (loss) from investment activities	$1,132	$(228)	$1,101	$350
Net income	$1,123	$93	$1,200	$803
Net income attributable to Icahn Enterprises	$489	$54	$460	$331
Basic income per LP unit	$4.06	$0.48	$3.85	$3.00
Interest expense	$197	$136	$367	$281

Q2 improvement in reported profit was heavily influenced by investment activity: the Investment segment reported $501 million of income attributable to Icahn Enterprises, compared with a $72 million loss a year earlier. The filing reports no consolidated operating-margin measure; performance varied substantially by segment. Energy refining margins weakened, while railcar and automotive sales increased.

Cash, debt and liquidity

At June 30, cash and cash equivalents were $3,333, plus $1,285 of cash held at consolidated affiliated partnerships and restricted cash. Restricted cash alone was $1,250.
Investments totaled $17,227, up from $12,261 at year-end 2013. Total assets were $38,559; total liabilities were $23,832; and total equity was $14,727.
Debt was $11,343, up from $9,295 at December 31, 2013. The filing estimates long-term debt fair value at $11.6 billion versus a carrying value of approximately $11.3 billion.
For the first six months, operating cash flow was a use of $838, investing cash flow a use of $1,048, and financing cash flow a source of $1,953. Cash and cash equivalents increased by $71. Capital expenditures were $587 and business acquisitions, net of cash acquired, were $402.
Holding Company cash was approximately $1.1 billion and Holding Company debt approximately $5.5 billion. Management notes that its ability to service debt and make unit distributions depends in part on subsidiary distributions, financing, investment returns and asset sales; subsidiary transfers may be restricted.
Quarterly distributions were increased to $1.50 per unit, payable in cash or additional units at each holder’s election. A further $1.50 distribution was declared July 31, 2014.

Material changes and segment developments

Investment: Funds returned 10.7% in Q2 and 10.2% for the first half, versus negative 2.8% and positive 6.7%, respectively, in 2013. Gains on long equity positions were partly offset by losses on shorts and hedges. Investment-fund investment value attributable to Icahn Enterprises was approximately $5.1 billion at June 30.
Automotive: Q2 net sales rose 5% to $1,872; first-half sales rose 4% to $3,651. Federal-Mogul cited organic Powertrain growth, partly offset by Motorparts softness. It acquired Affinia’s chassis business for approximately $150 million and completed a refinancing that increased applicable term-loan interest rates. Federal-Mogul estimated 2014 capital spending at $370–$420 million.
Energy: Q2 segment net sales increased, but gross margin fell to $183 from $282; first-half gross margin was $383 versus $667. Lower refining margins reflected lower product prices and higher crude costs. Management estimated 2014 RIN costs of $100–$150 million and Energy capital spending of $275–$300 million.
Metals: First-half sales declined 24% to $377, with lower shipment volumes amid weather, supply constraints and reduced non-ferrous activity; gross margin remained negative.
Railcar: First-half gross margin increased to $160 from $126, supported by higher manufacturing shipments and leasing revenue. Backlog was approximately 9,530 railcars at June 30. Management expected strong hopper and tank demand for the next several quarters but cautioned that demand and regulation could change.
Gaming: Tropicana acquired Lumière in St. Louis for a preliminary $263 million. The acquisition contributed to higher gaming volumes and revenues. Tropicana sold River Palms on July 1 for $7 million in cash.
Other operations: Food Packaging’s first-half sales were flat with improved gross margin percentage. Home Fashion sales fell 8%, while gross margin percentage improved as it shifted away from lower-margin programs.

Outlook, risks and unusual items

No consolidated earnings guidance is provided. Segment estimates include 2014 RIN costs of $100–$150 million, Energy capital expenditures of $275–$300 million and Federal-Mogul capital expenditures of $370–$420 million.
On July 29, CVR’s Coffeyville refinery suffered a fire that injured four employees and led to a shutdown. CVR preliminarily expected about four weeks of downtime; repair costs were under assessment. Property insurance has a $5 million deductible, and business-interruption coverage has a 45-day waiting period; management did not then expect that coverage to be triggered.
First-half debt extinguishment losses totaled $162 million, including $108 million at the parent-level refinancing and losses at Automotive and Food Packaging. The Q2 consolidated result also included $1,132 million of investment gains and $145 million of first-half Energy derivative gains.
Investment-related exposures include short securities, derivatives and written options. At June 30, derivative liabilities were approximately $1,465 million, and collateral posted across counterparties was about $1.2 billion. Certain written puts had maximum payout amounts of $4.6 billion, mostly covered by existing short positions.
Environmental liabilities, regulatory requirements and litigation remain relevant. Federal-Mogul estimated up to $44 million of reasonably possible additional environmental losses beyond its recorded estimate. Federal-Mogul and ACF pension plans were underfunded by approximately $450 million on a voluntary termination basis; Icahn Enterprises may face controlled-group pension exposure, and the Starfire indemnity may not be able to fund its obligations.
Management reported compliance with debt covenants. Parent indentures permitted approximately $2.4 billion of additional indebtedness at June 30. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.

Investor verification priorities

Assess how much reported earnings depends on volatile investment gains, including fair-value estimates and the performance of the funds’ largest positions.
Review the refinery fire’s actual repair timeline, lost production, insurance recovery and any business-interruption impact.
Reconcile debt growth and refinancing proceeds with future interest costs, maturities, covenant capacity and availability of subsidiary cash to the holding company.
Track RIN prices and compliance costs, refining margins, crude/product spreads and the effects of environmental regulation.
Monitor railcar demand, backlog conversion and potential tank-car regulation, as well as automotive restructuring and acquisition integration.
Evaluate cash versus unit elections for distributions, dilution from unit-paid distributions and the sustainability of distributions given operating cash flow.
Review contingent pension, environmental and litigation exposures, including the scope and financial strength of the Starfire indemnity.