Icahn Enterprises L.P. — FY 2013 Form 10-K
Reporting period: Year ended December 31, 2013; this is an annual report, not a standalone fourth-quarter filing. Icahn Enterprises and Icahn Enterprises Holdings filed jointly and report substantially the same operating results. The company is a diversified holding partnership spanning investment management and eight operating sectors. Comparisons are affected by CVR being consolidated from May 2012 and by New ARL being accounted for as a common-control entity.
Financial performance and liquidity
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Net sales | $17.785 billion | $14.574 billion |
| Total revenues, including investment gains and other income | $20.682 billion | $15.796 billion |
| Net income | $2.444 billion | $762 million |
| Net income attributable to Icahn Enterprises | $1.025 billion | $396 million |
| Basic income per limited partner unit | $9.14 | $3.72 |
| Adjusted EBITDA attributable to Icahn Enterprises (non-GAAP) | $1.896 billion | $1.546 billion |
| Cash and cash equivalents at year-end | $3.262 billion | $3.108 billion |
| Total debt at year-end | $9.295 billion | $9.873 billion |
| Operating cash flow | $717 million | $1.607 billion |
| Capital expenditures | $1.161 billion | $936 million |
| Distributions declared per unit | $4.50 | $0.40 |
Net income growth reflected strong investment-fund gains and tax benefits, as well as changes in the consolidated business mix. Net income attributable to non-controlling interests was $1.419 billion, so consolidated net income substantially exceeded the amount attributable to Icahn Enterprises’ partners. The company reported a $118 million income tax benefit; releases of valuation allowances included $287 million in Automotive and $51 million in Food Packaging.
Net sales less cost of goods sold implies gross margin of about $1.976 billion, or 11.1% of net sales, versus $1.968 billion, or 13.5%, in 2012. This simple consolidated measure includes businesses with different economics. Interest expense was $560 million, down from $572 million. Cash flow from investing activities was negative $1.456 billion and financing activities provided $907 million; cash increased by $154 million during the year.
Material changes and segment highlights
- Investment: Investment Funds returned 30.8% in 2013, compared with 6.6% in 2012; Icahn Enterprises’ share of their net profit was $812 million versus $157 million. Its direct investment in the funds had a year-end fair value of about $3.7 billion.
- Automotive: Federal-Mogul net sales rose 4% to $6.905 billion and gross margin increased to $1.020 billion from $911 million. The segment’s attributable income was $250 million, compared with a $24 million loss. A $73 million restructuring program is planned over 2013–2015; $39 million was charged in 2013.
- Energy: Segment revenue was $9.063 billion and attributable income was $289 million, but the prior-year comparison covers only the period after CVR’s May 2012 acquisition. Petroleum refining margin adjusted for FIFO impacts fell to $16.59 per barrel from $30.08 for the comparable May–December 2012 period. RIN compliance costs were $181 million in 2013.
- Metals: Net sales fell 16% to $929 million; the segment recorded a $19 million gross loss and $28 million attributable loss, amid weaker scrap volumes, prices and margins.
- Railcar: Segment revenue was $744 million versus $799 million, while attributable income was $30 million versus $29 million. Year-end lease fleet exceeded 34,700 cars; backlog was about 8,560 cars.
- Gaming: Revenue declined to $571 million from $611 million and attributable income to $13 million from $21 million. Consolidated gaming volumes fell 7.6%; Atlantic City faced competition and lingering effects from Superstorm Sandy.
- Food Packaging: Revenue rose 8% to $346 million, with attributable income of $32 million versus $4 million. Gross margin remained 23% of sales.
- Real Estate and Home Fashion: Real Estate revenue was $85 million versus $88 million. Home Fashion revenue declined 19% to $187 million; its attributable loss narrowed to $16 million from $27 million as it exited unprofitable programs.
Outlook, risks and unusual items
- Distributions: The general partner’s board raised the annualized distribution from $1.40 at the start of 2013 to $5.00 during the year, then announced an increase to $6.00 on March 3, 2014. The board reviews distributions quarterly; payment is not assured. Holders may elect additional units instead of cash, and Mr. Icahn’s affiliates generally elected units.
- Capital spending and transactions: Management estimated 2014 capital expenditures of $363 million for Energy; Federal-Mogul estimated $370–$420 million; Railcar expected $510–$535 million, largely for lease-fleet expansion. Tropicana’s $260 million Lumière acquisition remained subject to conditions, including Missouri gaming approval; FTC approval was received in January 2014. Federal-Mogul also agreed to acquire two businesses for base prices of approximately $155 million and $150 million, subject to approvals.
- Debt and liquidity: The company issued $3.65 billion of notes in January 2014 to refinance $3.5 billion of existing notes, and separately issued $1.35 billion of 2022 notes. These post-year-end borrowings and refinancing are not reflected in the December 31, 2013 debt total. Federal-Mogul had a $1.597 billion Tranche B term loan maturing in December 2014; an Icahn affiliate provided a conditional backstop commitment of up to $1.6 billion if refinancing could not be completed, subject to definitive documentation and independent-director approval. Subsidiary debt covenants and limits on upstreaming cash may constrain holding-company liquidity.
- Significant exposures: Potential termination underfunding of ACF and Federal-Mogul pension plans was estimated at $592 million at year-end; the disclosed Icahn-affiliate indemnity does not cover Federal-Mogul’s unfunded termination liability. Investment activities include short sales and derivatives; put options written by the Investment Funds had maximum potential payouts of about $8.0 billion, and securities sold, not yet purchased were carried at $884 million.
- Operating and legal risks: Refining margins, crude-oil differentials, outages and volatile RIN prices may materially affect Energy results; management estimated 2014 RIN costs of $75–$150 million. Environmental compliance, remediation, commodity cycles, customer concentration, labor disputes and competition affect multiple segments. Two employees died in a 2012 Wynnewood refinery boiler explosion; OSHA citations and SVEP placement were being contested, and a related civil suit was at a preliminary stage.
- Strategy and controls: Management described an activist, value-investing strategy focused on undervalued businesses, operational change and acquisitions. The financial statements received an unqualified audit opinion; management and the auditor reported effective internal control over financial reporting for Icahn Enterprises.
Important facts for investors to verify
- Separate investment gains, tax-valuation-allowance releases and non-controlling interests from recurring operating performance; review segment results and the non-GAAP Adjusted EBITDA reconciliation.
- Assess the sustainability of Investment Fund returns and the valuation, concentration, liquidity and leverage of the fund portfolio and derivative positions.
- Reconcile the year-end debt and maturity schedule with the January 2014 refinancing, new notes, subsidiary debt and subsequent cash requirements.
- Track Federal-Mogul’s Tranche B refinancing or backstop, pension exposure, restructuring execution and planned acquisitions.
- Monitor Energy refining margins, RIN costs, refinery reliability, environmental matters and the outcome of the Wynnewood-related claims; confirm Lumière closing conditions and acquisition funding.
- Evaluate whether the $6 annualized distribution is supportable from cash available to the holding partnership after subsidiary restrictions, capital spending, debt service and unit issuance.