Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2007, for Icahn Enterprises L.P. (formerly American Real Estate Partners, L.P.). The company is a diversified holding company with three primary continuing operating segments: Investment Management, Real Estate, and Home Fashion. A significant event during the period was the acquisition on August 8, 2007, of the general partnership interests in the General Partners and New Icahn Management, which manage the company's Private Funds. This acquisition resulted in the restatement of financial statements to include these entities on a consolidated basis. The company also reported discontinued operations related to its former Gaming and Oil & Gas segments, as well as the retail operations of its Home Fashion subsidiary, WestPoint International Inc. (WPI).
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2007 | Nine Months Ended Sep 30, 2007 | Three Months Ended Sep 30, 2006 | Nine Months Ended Sep 30, 2006 |
|---|---|---|---|---|
| Total Revenues | $214.5 million | $1,528.5 million | $519.1 million | $1,522.7 million |
| Net Earnings | $13.8 million | $282.5 million | $160.6 million | $381.3 million |
| Net Earnings Attributable to Limited Partners | $34.8 million | $104.4 million | $102.5 million | $228.8 million |
| Basic EPS (Limited Partnership Unit) | $0.53 | $1.65 | $1.65 | $3.70 |
| Total Assets | $13.46 billion | (N/A) | $9.06 billion (Dec 31, 2006) | (N/A) |
| Long-Term Debt | $2.04 billion | (N/A) | $0.95 billion (Dec 31, 2006) | (N/A) |
| Cash and Cash Equivalents | $2.84 billion | (N/A) | $1.86 billion (Dec 31, 2006) | (N/A) |
Material Changes Versus Prior Period
- Investment Management Performance: The Investment Management segment reported a net loss of $6.2 million for the three months ended September 30, 2007, compared to net earnings of $56.0 million in the same period in 2006. This decline was driven by negative returns in the Private Funds due to volatile market conditions, resulting in a reversal of previously accrued incentive allocations. However, for the nine-month period, the segment reported net earnings of $191.4 million, an increase from $147.9 million in the prior year, driven by strong performance in the first two quarters.
- Home Fashion Segment: WPI reported a loss from continuing operations of $36.8 million for the quarter, compared to a loss of $23.0 million in the prior year. Net sales declined 17.8% to $183.4 million. The segment incurred significant restructuring and impairment charges, including a $3.0 million impairment of trademarks and charges related to plant closures. The company announced the closure of substantially all retail stores, reclassifying these operations as discontinued.
- Real Estate Segment: Revenues decreased 6.6% to $30.4 million for the quarter, primarily due to lower property development sales activity. Income from continuing operations was $5.0 million, down slightly from $5.4 million in the prior year.
- Debt and Liquidity: Long-term debt increased significantly to $2.04 billion from $0.95 billion at year-end 2006, reflecting the issuance of $500 million in 7.125% senior notes in January 2007 and $600 million in variable rate convertible notes in April 2007. Cash and cash equivalents increased to $2.84 billion, bolstered by proceeds from debt issuances and the sale of the SandRidge position.
Guidance, Outlook, and Risks
- Investment Management Outlook: Management noted that the Private Funds experienced their first negative quarter since inception in Q3 2007 (-1.5% gross return) due to market volatility. However, preliminary performance for October 2007 was approximately 5.2%. Future revenues depend heavily on Assets Under Management (AUM) and fund performance. AUM grew to $7.1 billion as of September 30, 2007.
- Home Fashion Restructuring: WPI expects to incur additional restructuring costs of $15.0 million to $20.0 million over the next twelve months. The company is shifting manufacturing to lower-cost overseas facilities and closing U.S. plants. Management anticipates improvements in gross earnings in the fourth quarter and fiscal 2008 as underutilization charges diminish.
- Real Estate Outlook: Management expects residential sales to continue in a downward trend for the remainder of fiscal 2007 and into fiscal 2008 due to market conditions. Additional asset impairment charges may be incurred if sales price assumptions are not met.
- Discontinued Operations: The company expects to close the sale of its remaining gaming operations (ACEP) by the end of the first quarter of fiscal 2008, anticipating a gain of approximately $570 million after taxes. The transaction is subject to regulatory approval.
- Risks: Key risks include the volatility of the Private Funds' performance, the success of WPI's restructuring efforts, potential additional impairments in the Real Estate segment, and ongoing litigation regarding WPI ownership and the Lear Corporation merger break-up fee.
Important Facts for Investor Verification
- Private Fund Performance: Verify the sustainability of the Private Funds' returns given the Q3 2007 loss and the reliance on specific activist equity positions.
- WPI Restructuring Costs: Monitor the actual restructuring costs incurred against the estimated range of $15.0 million to $20.0 million and the timeline for closing retail stores and plants.
- ACEP Sale Closing: Confirm the closing of the $1.3 billion sale of ACEP (gaming operations) and the realization of the anticipated $570 million gain.
- Debt Covenants: Review compliance with debt covenants, particularly the cash flow to fixed charges ratio and unencumbered assets ratio, given the increased debt load.
- Legal Proceedings: Track the outcome of the WPI litigation (Contrarian Funds and Beal Bank cases) and the Lear Corporation break-up fee dispute, as these could impact ownership stakes and financial results.