Icahn Enterprises L.P. — Q2 2011 Form 10-Q
Business context and period. The unaudited filing covers the quarter and six months ended June 30, 2011. Icahn Enterprises is a diversified holding partnership with businesses in investment management, automotive, gaming, railcar, food packaging, metals, real estate and home fashion. Tropicana was consolidated beginning November 15, 2010, so its results are not included in the prior-year comparable periods.
Financial performance
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenues | $3.161 billion vs. $1.891 billion in 2010 | $6.265 billion vs. $3.806 billion in 2010 |
| Net income (loss) | $584 million vs. $(222) million | $1.180 billion vs. $(272) million |
| Net income (loss) attributable to Icahn Enterprises | $289 million vs. $(116) million | $529 million vs. $(181) million |
| Basic earnings (loss) per LP unit | $3.29 vs. $(1.33) | $6.02 vs. $(2.13) |
| Net sales / cost of goods sold / gross margin | $2.365 billion / $2.010 billion / $355 million | $4.622 billion / $3.935 billion / $687 million |
Gross margin on net sales was approximately 15.0% in Q2 and 14.9% for the six-month period, versus approximately 15.8% in each prior-year period. Revenue and earnings comparisons were strongly affected by investment gains: net gain from investment activities was $590 million in Q2 and $1.207 billion for six months, versus losses of $252 million and $253 million, respectively. The Investment Funds reported gross returns of 10.2% for Q2 and 20.8% for six months.
- Segment trends: Automotive net sales rose 13% in Q2 and 14% for six months, with gross margin dollars higher; railcar manufacturing sales increased with shipments and returned to positive manufacturing gross margin. Metals sales rose with higher scrap prices, volumes and acquisitions. Gaming contributed $145 million of Q2 and $302 million of six-month operating revenue following consolidation. Home Fashion sales declined 23% in Q2 and 5% for six months, and gross margin percentages fell.
- Cash flow: Six-month operating cash flow was $1.380 billion, investing cash outflow $246 million and financing cash outflow $1.517 billion. Cash and cash equivalents decreased $358 million to $2.607 billion. Operating cash flow was driven largely by Investment Management activity and changes in cash held at consolidated affiliated partnerships and restricted cash.
- Balance sheet and liquidity: At June 30, total assets were $23.725 billion, total liabilities $15.992 billion and total equity $7.733 billion. Cash and cash equivalents were $2.607 billion; cash held at consolidated affiliated partnerships and restricted cash was $3.760 billion. Total debt was $6.877 billion, up from $6.509 billion at year-end 2010. Interest expense was $113 million for Q2 and $222 million for six months. The Holding Company reported $929 million cash and approximately $3.1 billion debt; it said it could incur about $1.3 billion of additional debt under its senior-note covenants. Management reported compliance with debt covenants.
Material changes and notable items
- The Private Funds returned all fee-paying investor capital by March 31, 2011. No further incentive or special profits interest allocations accrue after that date, changing the basis for future Investment Management revenues. Affiliates of Mr. Icahn contributed $250 million to the Investment Funds on April 1.
- Investment Funds redeemed $203 million of SPV notes during Q2. Icahn Enterprises decided not to extend the notes and expected the remaining principal and accrued interest to be redeemed in full by September 10, 2011; debt reported at June 30 included $392 million of Investment Management senior notes.
- Investment Funds distributed Tropicana shares valued at $216 million to Icahn Enterprises in April; in June they transferred approximately $71 million of Tropicana Exit Facility loans. Icahn Enterprises directly held 51.5% of Tropicana’s shares and over 50% of those loans at quarter-end.
- PSC Metals acquired CSMI and Wedel for approximately $35 million in aggregate. After quarter-end, it agreed to acquire Shapiro Brothers for approximately $22 million, subject to closing.
- WPI’s prior $250 million revolving facility matured in June and was replaced with a one-year facility with maximum availability of $45 million. WPI had $36 million unused availability and $32 million unrestricted cash at June 30.
Outlook, risks and contingencies
- No consolidated full-year earnings or revenue guidance is provided. ARI said it expected fiscal 2011 railcar shipments to increase year over year; backlog rose from approximately 1,050 cars at December 31, 2010 to 5,290 at June 30, with more than 2,200 additional orders received afterward. Management cautioned that market improvement and higher shipments are not assured.
- Management cited weak economic conditions and competition as risks to Gaming, including Atlantic City market revenue declines and competition from Pennsylvania table games. Gaming results also depend on customer spending, hold percentages, regulation and seasonality.
- Home Fashion faces weak housing and retail conditions, higher input and transportation costs, and customer concentration. The partnership is considering strategic alternatives, including joint ventures, alliances, or a sale or divestiture of all or a significant portion of WPI; no outcome or terms are assured, and a sale could be below carrying value.
- Investment activities involve market, counterparty and leverage risks. Securities sold, not yet purchased totaled $3.333 billion; maximum potential payouts on certain written put options were $744 million. The filing also describes potential payment obligations under derivatives and SPV-related swaps.
- Contingencies include environmental matters, litigation and pension exposure. Federal-Mogul estimated reasonably possible environmental losses of up to $45 million above its recorded remediation estimate. PSC Metals estimated $28 million in site remediation liabilities and was negotiating an EPA settlement with a $199,000 penalty and estimated injunctive-relief costs of $0.8–$1.7 million. ACF pension plans were underfunded by approximately $107 million on a voluntary termination basis; Icahn Enterprises could have controlled-group exposure, while an affiliate indemnity may not be funded. The Lions Gate litigation had one remaining claim, and Tropicana trademark litigation remained unresolved; loss estimates were not reasonably determinable.
Investor verification priorities
- Assess how much reported earnings came from investment gains and whether returns can be sustained after the return of fee-paying capital.
- Confirm redemption of the remaining SPV notes by September 10, 2011 and review liquidity available for that repayment.
- Reconcile restricted and partnership-held cash to cash available for corporate debt service and distributions, including restrictions on subsidiary transfers.
- Track debt, interest costs, covenant headroom and the impact of subsidiary-level debt and refinancing needs.
- Monitor operating performance and strategic decisions at WPI, and the resolution and potential financial effects of environmental, litigation and pension contingencies.
The interim financial statements were reviewed by independent accountants, not audited.