Icahn Enterprises L.P. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Unaudited results cover a diversified holding company with Investment, Automotive, Energy, Metals, Railcar, Gaming, Food Packaging, Real Estate and Home Fashion businesses. Icahn Enterprises and Icahn Enterprises Holdings report substantially similar consolidated results. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenues | $4.422bn | $5.771bn | $15.791bn | $15.810bn |
| Net income (loss) | $(627)m | $1.236bn | $573m | $2.039bn |
| Net income (loss) attributable to Icahn Enterprises | $(355)m | $472m | $105m | $803m |
| Basic earnings (loss) per LP unit | $(2.90) | $4.13 | $0.87 | $7.22 |
| Cash distributions declared per LP unit | $1.50 | $1.25 | $4.50 | $3.25 |
- Revenue composition matters: Q3 total revenue includes a $592m net investment-activity loss, compared with a $1.201bn gain in Q3 2013. Excluding that line, operating and other revenue categories were not directly comparable to total revenue; the filing does not present a single adjusted revenue measure.
- Cash flow, nine months: Operating activities used $619m, versus $406m provided in 2013; investing activities used $1.585bn, versus $786m; financing activities provided $2.013bn, versus $638m. Ending cash and cash equivalents were $3.080bn, down from $3.262bn at year-end 2013. The balance sheet also reports $1.301bn of cash held at consolidated affiliated partnerships and restricted cash; restricted cash was approximately $1.2bn.
- Balance sheet at September 30: Total assets were $36.198bn, total liabilities $22.326bn, debt $11.519bn and equity $13.872bn. Debt was $9.295bn at December 31, 2013. Long-term debt carrying and estimated fair values were each approximately $11.5bn.
- Margins: Automotive gross margin was 14% of sales in Q3 versus 15% a year earlier, and 15% for both nine-month periods. Energy gross margin declined to $29m in Q3 from $58m, and to $412m for nine months from $725m. Railcar gross margin rose to $83m in Q3 from $60m and to $243m for nine months from $186m. These are segment measures, not consolidated operating margins.
Changes versus prior comparable periods
- Q3 results reversed from substantial prior-year profit to a loss, principally reflecting investment performance: Investment segment attributable results were a $270m loss versus $529m income in Q3 2013. Investment Funds returned negative 5.3% in Q3 2014 versus positive 18.4% in Q3 2013. Nine-month returns were positive 4.4%, down from 26.3%.
- Nine-month attributable income fell to $105m from $803m. Investment segment attributable income declined to $236m from $690m, while Energy declined to $185m from $340m. Higher Railcar and Gaming results partly offset these declines.
- Net sales increased in Automotive and Energy, but decreased in Metals. Automotive reported nine-month organic sales growth of 4%, with acquisition and currency effects also affecting reported sales. Metals nine-month sales fell 24%, primarily on lower shipment volumes.
- Interest expense increased to $226m in Q3 from $141m and to $593m for nine months from $422m. Management cited Investment segment broker balances, Automotive’s refinancing and higher Railcar debt balances among the drivers.
Outlook, management commentary, risks and unusual items
- No consolidated earnings or revenue guidance was provided. Management reported that Federal-Mogul expected to complete a proposed tax-free separation of Powertrain and Motorparts in the first half of 2015, subject to approvals and other conditions; completion and timing were not assured.
- Federal-Mogul completed the Affinia chassis and Honeywell brake-friction acquisitions. It also agreed to acquire certain TRW engine-component assets for approximately $385m, with closing expected in Q1 2015 subject to approvals. Federal-Mogul estimated 2014 capital expenditures of $370m–$420m.
- CVR estimated 2014 RIN compliance costs of approximately $100m–$125m and Energy segment 2014 capital spending of approximately $225m–$250m. In October 2014, CVR approved a hydrogen plant at an estimated cost of $123m, with completion anticipated in Q2 2016.
- CVR’s Coffeyville refinery suffered a July 2014 fire, resulting in a fatality, other injuries and a temporary shutdown. The interruption affected Q3 production; the refinery returned to operation in mid-August, with the isomerization unit still out of operation at quarter-end. Gross repair and other costs were $6m; a $1m insurance receivable had been recorded.
- Nine-month debt-refinancing transactions generated $162m of extinguishment losses. Federal-Mogul restructuring charges were $63m for nine months; management expected additional charges under programs scheduled through 2015.
- CVR faced two investment-banking fee judgments totaling approximately $45.3m; amounts were accrued and CVR appealed. The filing also describes environmental exposures, including Federal-Mogul’s $14m recorded environmental liabilities and estimated reasonably possible additional losses of approximately $42m, and a $443m estimated voluntary termination underfunding of Federal-Mogul and ACF pension plans. The latter may create controlled-group exposure; Starfire provided an indemnity, but its ability to fund it was not assured.
- Investment-related market and counterparty risks are significant. At September 30, written put options had maximum payout amounts of $13.7bn, mostly covered by existing short positions; the amount is a contractual maximum, not a reported expected loss. Restricted cash and collateral posted for derivative positions were substantial. A 10% adverse move in the fair value of Investment segment securities and derivatives could materially affect reported values and earnings.
- Management stated that the partnership was in compliance with debt covenants and could incur approximately $1.8bn of additional indebtedness under its senior-note covenants. Subsidiary cash distributions to the holding company may nevertheless be limited by operating results, law or debt covenants. Icahn and affiliates owned approximately 88.3% of outstanding depositary units, and the quarterly $1.50 distribution could be received in cash or additional units.
Important facts for investors to verify
- How much of reported earnings and revenue movement reflects investment gains and losses, versus operating performance at controlled businesses?
- What portion of the $3.080bn cash balance is freely available, given restricted cash, investment collateral and subsidiary-level restrictions?
- How will refinancing, variable-rate borrowing and higher debt balances affect interest expense and covenant headroom?
- What are the eventual costs and operational effects of the Coffeyville incident, Federal-Mogul restructuring and pending acquisitions or separation?
- What are the potential outcomes of CVR’s appeals, environmental matters and pension-related controlled-group exposure, including the collectability of the Starfire indemnity?
- Will the announced $1.50 quarterly distribution remain sustainable, and how much will be paid in cash versus additional units?