Icahn Enterprises L.P. — Q3 2017 Form 10-Q
Business context and period: Joint report for Icahn Enterprises L.P. and Icahn Enterprises Holdings L.P., covering the quarter and nine months ended September 30, 2017. The diversified holding company operates across investment, automotive, energy, railcar, gaming, metals, mining, food packaging, real estate and home fashion. The two registrants’ results are substantially the same. Figures below are in U.S. dollars; financial statement amounts are in millions unless noted.
Key financial results
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Total reported revenues | $5,680 | $4,899 | $17,011 | $12,376 |
| Net income (loss) | $829 | $238 | $2,394 | $(1,656) |
| Net income (loss) attributable to Icahn Enterprises | $597 | $(16) | $2,132 | $(922) |
| Basic and diluted earnings (loss) per LP unit | $3.53 | $(0.12) | $13.23 | $(6.70) |
| Cash distributions declared per LP unit | $1.50 | $1.50 | $4.50 | $4.50 |
Reported revenues include investment gains and asset-disposition gains, so they are not equivalent to product and service sales. Q3 2017 included $446 million of net gains on asset dispositions; nine-month results included $1.966 billion, principally a roughly $1.5 billion pretax gain on the ARL railcar-leasing sale and a $456 million gain on the Las Vegas property sale. Nine-month results also benefited from improved investment results and a lower impairment charge ($82 million versus $670 million in 2016).
Cash flow and liquidity: For the first nine months, operating activities used $1.109 billion of cash, compared with $1.322 billion provided in 2016. Investing activities provided $334 million, including asset-sale proceeds, versus $1.667 billion used in 2016. Financing activities provided $858 million. Cash and cash equivalents were $2.038 billion at September 30, 2017; an additional $999 million was held at consolidated affiliated partnerships or restricted. Capital expenditures were $692 million.
Debt and balance sheet: Consolidated debt was $11.198 billion, versus $11.119 billion at year-end 2016; total liabilities were $21.619 billion and total equity $11.198 billion. Holding Company debt was about $5.5 billion, with $484 million cash. Subsidiaries reported $1.107 billion of additional borrowing availability under revolving facilities and were in compliance with debt covenants. The Holding Company’s senior-note covenants prohibited additional indebtedness at quarter-end, except permitted refinancing. Cash and debt figures are consolidated and include subsidiaries; subsidiary funds may be restricted from transfer to the parent.
Margins and operating trends: Automotive gross margin was 19% of sales in both Q3 and the nine-month period. Energy gross margin was 7% in Q3 versus 4% and 5% for nine months versus 4% in the prior-year periods, reflecting improved petroleum margins. Railcar manufacturing margin weakened to 4% in Q3 from 9%; nine-month margin was 8% versus 14%, amid lower volumes and competitive pricing. Metals returned to a 5% gross margin in both Q3 and nine months, versus losses in the comparable 2016 periods. Food Packaging margin was 24% for nine months, flat year over year. Consolidated operating-margin comparisons are not especially informative because reported revenue includes investment and disposal gains.
Material changes and unusual items
- The June sale of American Railcar Leasing (ARL) generated approximately $1.3 billion cash proceeds after repayment or assumption of applicable debt and a roughly $1.5 billion pretax gain. Leasing revenues and fleet size fell following the sale. Subsequent to quarter-end, a further 4,382 railcars were sold for $522 million, with a $154 million pretax gain.
- The Las Vegas development property sale was for $600 million, but only $225 million was cash proceeds at closing; $375 million was seller financing, including first- and second-lien mortgages. The gain was $456 million pretax.
- The Investment Funds returned 5.1% in Q3 and 6.6% for nine months, compared with 6.5% and negative 12.7%, respectively, in 2016. Gains on long positions were partly offset by losses on shorts, including broad-market hedges. Investment Funds’ net short notional exposure was 77% at quarter-end.
- The company issued $1.195 billion of senior notes in January to refinance notes due 2017, increasing the stated coupons to 6.25% and 6.75%. Federal-Mogul also issued euro-denominated secured notes and used proceeds to repay term and revolving borrowings.
- A $600 million rights offering closed in March; affiliates of Carl Icahn subscribed for most of the units. Icahn and affiliates owned approximately 90.8% of outstanding depositary units at September 30. Quarterly distributions may be paid in cash or units at each holder’s election; the board declared another $1.50 per unit after quarter-end.
- The nine-month tax expense was $110 million despite pretax income of about $2.5 billion; the filing cites partnership income not subject to entity-level tax and release of valuation allowances on tax assets as factors. Q3 other income included a $61 million tax-settlement gain.
Outlook, risks and contingencies
- No specific consolidated earnings or revenue guidance is provided. Management notes that investment results depend on market conditions and long/short exposures, and that past fund performance is not indicative of future results. The board reviews distributions quarterly; future amounts are not assured.
- Investment activity carries market, concentration, counterparty and derivative risks. A modeled 10% adverse fair-value change would reduce the fair value of securities owned by about $902 million, short securities by $126 million and derivatives by about $1.5 billion; the impact attributable to the partnership would be partly offset by non-controlling interests.
- Refining earnings are exposed to crude/product spreads, feedstock prices, and volatile Renewable Identification Number (RIN) costs. Nine-month RIN expense was $164 million; the recorded biofuel blending obligation was $185 million. The EPA’s 2018 renewable-fuel rule was still proposed at quarter-end.
- Railcar operations face lower demand, competitive pricing and inspection/repair obligations under an FRA directive. A settlement extended inspection timing; the company had a $13 million reserve and said additional possible costs could not be reasonably estimated.
- Controlled-group pension rules could make the partnership and subsidiaries liable for certain pension obligations of affiliates. ACF and Federal-Mogul plans were estimated to be underfunded by about $452 million on voluntary termination at September 30. An affiliate indemnity exists but may not be able to fund its obligations.
- Environmental liabilities were $49 million, including a Federal-Mogul estimate of up to approximately $40 million of reasonably possible additional losses beyond its recorded estimate. Routine litigation continues; the filing also describes an appraisal action related to the Federal-Mogul merger.
- The U.S. Attorney’s Office for the Southern District of New York requested information concerning the Renewable Fuels Standard and Mr. Icahn’s advisory role to the President. The company said it was cooperating, that no claims or allegations had been made, and that it did not expect a material impact.
Important facts for investors to verify
- How much of reported earnings came from asset sales, investment mark-to-market gains and the tax-settlement gain, and how recurring operations performed by segment.
- The collectability and timing of the $375 million seller-financed property-sale consideration, and the economics of the post-quarter railcar sale.
- Parent-level liquidity, debt maturities and covenant capacity, including limits on moving cash from subsidiaries to the Holding Company.
- Investment portfolio and derivative exposure, collateral needs, and sensitivity to market declines or short-position losses.
- Potential pension, environmental and FRA-related costs, and developments in the federal inquiry concerning RIN matters.
- Whether the $1.50-per-unit distribution remains sustainable given operating cash outflows and the possibility of unit rather than cash settlement.