ICAHN ENTERPRISES L.P. quarterly report, Q2 FY2012

Icahn Enterprises L.P. — Q2 2012 Form 10-Q

Reporting period: Three and six months ended June 30, 2012. Unaudited consolidated results cover a diversified holding company with Investment, Automotive, Energy, Gaming, Railcar, Food Packaging, Metals, Real Estate and Home Fashion businesses. The company acquired control of CVR Energy on May 4, 2012, so CVR results are included only from that date; this materially affects comparisons.

Key financial results

Metric	Q2 2012	Q2 2011	Six months 2012	Six months 2011
Total revenues	$4.205bn	$3.142bn	$6.889bn	$6.220bn
Net income	$450m	$584m	$551m	$1.180bn
Net income attributable to Icahn Enterprises	$240m	$289m	$289m	$529m
Basic income per LP unit	$2.35	$3.25	$2.86	$5.95
Operating cash flow	Not presented by quarter	$1.407bn	$1.380bn

Revenue includes investment gains: net gains from investment activities were $278m in Q2 and $336m in the first half, versus $590m and $1.207bn, respectively, in 2011. The decline in investment gains was a major factor in lower earnings. Q2 operating results also reflected $1.410bn of CVR revenue for the period after consolidation began.

First-half cash flow: investing activities used $1.743bn, chiefly reflecting the CVR acquisition and capital spending; financing activities provided $1.267bn, including $716m from senior notes and $510m from the rights offering. Capital expenditures were $429m. Cash and cash equivalents were $3.209bn at June 30, up from $2.278bn at year-end; cash held at consolidated affiliated partnerships and restricted cash was $1.372bn, down from $4.979bn. The filing reports restricted cash of approximately $1.0bn at June 30, versus $4.8bn at year-end.

At June 30, total debt was $8.205bn, compared with $6.473bn at December 31, 2011; interest expense was $245m for the first half, versus $222m. Total assets were $24.014bn and total liabilities $14.312bn. Long-term debt’s estimated fair value was $8.4bn versus its $8.2bn carrying value. The company reported compliance with debt covenants and approximately $1.5bn of capacity to incur additional debt under its senior-note indenture.

Cash distributions declared were $0.10 per LP unit in cash for Q2 and $0.20 for the first half. The quarterly distribution was $0.35 per unit, consisting of $0.10 cash and $0.25 in units.

Material changes and segment developments

CVR acquisition: Icahn Enterprises paid $1.754bn cash for shares in the acquisition; consideration including its previously held interest was $2.132bn. It held approximately 82% of CVR at June 30. The preliminary allocation included $894m of goodwill. CVR’s reported Q2 contribution covered May 5–June 30 and included $79m net income, of which $57m was attributable to Icahn Enterprises.
Investment: First-half segment revenue was $366m versus $1.203bn, and attributable income was $148m versus $542m. Investment Funds returned 5.2% in Q2 and 6.2% in the first half, compared with 10.2% and 20.8% in 2011. Fee-paying capital had been returned in 2011; no further incentive or special profits allocations accrue.
Automotive: First-half sales fell 2% to $3.468bn and segment income attributable to Icahn Enterprises fell to $46m from $83m. Gross margin declined to 15.3% from 16.4%, with lower volumes and unfavorable product mix, particularly in Europe, partly offset by sourcing savings. Restructuring charges were $14m; impairment charges were $29m. Federal-Mogul expected approximately $42m of charges for the initial phase of a capacity-reduction and production-transfer plan.
Railcar: First-half revenue increased to $338m from $194m; attributable income was $14m versus a $3m loss. Higher shipments, pricing and a shift toward tank railcars supported results. Backlog was approximately 6,800 railcars at June 30.
Metals: First-half revenue rose to $636m from $567m, but the segment recorded a $16m attributable loss versus $11m income. Management cited falling scrap prices, compressed margins and a $6m lower-of-cost-or-market inventory charge.
Home Fashion: First-half sales declined 33% to $120m, while the segment’s attributable loss was $11m versus $11m. Sales fell following the exit from unprofitable programs and customers.
Gaming: First-half net revenues increased to $319m from $302m and attributable income to $10m from $3m. Results benefited from higher casino activity, while room revenue and occupancy declined. Tropicana refinanced its prior facility with a $175m term loan carrying a 7.5% floor.

Outlook, risks and unusual items

No consolidated earnings or revenue guidance is provided. CVR expected $130m–$135m of petroleum capital spending and $60m–$70m of fertilizer capital spending for the remainder of 2012; its UAN expansion was expected to complete by January 1, 2013, with total project spending estimated at about $125m. CVR stated it expected available cash, operating cash flow and credit facilities to meet anticipated needs for at least 12 months, subject to operating and market conditions.
CVR reported an unfavorable $99m FIFO inventory impact for May 5–June 30, 2012; refining margin adjusted for FIFO impact was $28.85 per crude-oil-throughput barrel. Management highlighted volatility in crude and product prices, crude supply and pipeline access, RIN compliance costs, seasonality, refinery interruptions, fertilizer pricing and weather as significant risks.
The first-half $118m income tax benefit, versus a $42m expense in 2011, reflected valuation-allowance changes and other tax items. Disclosed items included approximately $48m of WPH valuation allowance release and approximately $111m associated with the CVR acquisition; these are not equivalent to the reported tax benefit. Federal-Mogul said up to $260m of valuation allowances could potentially be released within 12 months.
Other notable items include $34m of consolidated impairment charges and $16m of restructuring charges in the first half. A July 2012 Federal-Mogul retiree-benefit change was expected to produce an approximately $50m pretax curtailment gain in Q3.
Environmental and legal exposures include CVR refinery compliance investments, including approximately $49m of remaining FCCU-control costs under its consent decree; a disputed $18.5m Goldman Sachs fee claim, fully accrued; and unresolved property-tax appeals. PSC Metals could not estimate potential liability related to lead sampling near its Festus, Missouri facility. The filing also describes potential controlled-group pension exposure: ACF plans were underfunded by approximately $134m on a voluntary termination basis, with an affiliate indemnity whose ability to pay is not assured.
Investment-related exposure includes securities sold short and derivatives. Written put options had maximum payout amounts of approximately $8.8bn, although much of this related to covered positions; this is not the same as a recognized liability. The filing also reports significant short equity and foreign-currency notional exposures.
After quarter-end, Icahn Enterprises issued $300m additional 8% notes due 2018 and invested another $300m in the Investment Funds. It declared a further $0.35-per-unit distribution, split between cash and units.

Important facts for investors to verify

Separate underlying operating performance from investment gains, tax benefits and the partial-period consolidation of CVR; compare CVR results with its own filings and pro forma information.
Review the CVR purchase accounting, final goodwill allocation, acquisition financing, post-quarter debt issuance and the terms and outcome of the offer for remaining CVR shares.
Assess cash availability by distinguishing unrestricted cash from restricted and affiliated-partnership cash, and consider subsidiary-level debt restrictions and cash needs.
Monitor refining margins, FIFO effects, crude sourcing and Seaway-related supply changes, RIN costs, turnaround spending and the UAN expansion’s cost and completion.
Track Automotive restructuring and potential goodwill impairment, Metals margin recovery, Home Fashion customer and sales trends, and the resolution of environmental, tax, pension and litigation contingencies.