Icahn Enterprises L.P. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual report, not a standalone fourth-quarter report. Icahn Enterprises is a diversified holding company; its results are substantially the same as those of Icahn Enterprises Holdings, which conducts substantially all operations.
Business context and reporting period
Continuing businesses comprise Investment, Energy, Automotive, Food Packaging, Metals, Real Estate, Home Fashion and Mining. Energy and Automotive together generated most consolidated net sales. The report also presents Federal-Mogul, Tropicana Entertainment and American Railcar Industries (ARI) as discontinued operations following their 2018 sales. Railcar leasing ended after the remaining railcars were sold.
Key financial metrics
| Metric | 2018 | 2017 |
|---|---|---|
| Net sales | $10.576 billion | $9.306 billion |
| Total revenues | $11.777 billion | $12.619 billion |
| Income from continuing operations | $282 million | $2.357 billion |
| Continuing income (loss) attributable to Icahn Enterprises | $(213) million | $2.273 billion |
| Net income attributable to Icahn Enterprises, including discontinued operations | $1.507 billion | $2.430 billion |
| Basic and diluted income per LP unit, including discontinued operations | $11.46 | $14.80 |
| Cash distributions declared per LP unit | $7.00 | $6.00 |
| Cash and cash equivalents | $2.656 billion | $1.164 billion |
| Total debt | $7.326 billion | $7.372 billion |
Consolidated net income was $2.046 billion, versus $2.591 billion in 2017. The difference between consolidated results and amounts attributable to Icahn Enterprises reflects non-controlling interests and partnership allocations. The 2018 per-unit result includes substantial discontinued-operation gains; continuing operations produced a loss of $1.16 per LP unit.
Net cash provided by operating activities was $915 million, compared with cash used of $1.428 billion in 2017. This included $479 million from discontinued operations; continuing-operations operating cash flow was $436 million, versus cash used of $2.122 billion in 2017. Investing activities provided $2.590 billion, primarily reflecting asset-sale proceeds; capital expenditures were $272 million. Cash, cash equivalents and restricted cash totaled $5.338 billion at year-end, including $2.648 billion held by consolidated affiliated investment partnerships and not available for general liquidity needs.
Holding Company liquidity included approximately $1.8 billion of cash and $5.505 billion of debt. Holding Company investments in the Investment Funds had a fair value of approximately $5.1 billion and could be redeemed upon notice, subject to investment performance and related liquidity considerations. Operating subsidiaries held $817 million of cash and had $1.821 billion of debt, with $621 million of reported revolving-facility availability. Subsidiary financing terms may restrict transfers to the Holding Company.
Energy gross margin rose to $671 million from $189 million; margin as a share of net sales was reported as 9% versus 3%. Automotive gross margin increased to $882 million from $745 million; margin on net sales and automotive services labor revenue was 31% versus 27%. Consolidated margins are not presented as a single comparable operating measure in the supplied filing text.
Material changes versus the prior comparable period
- Net sales increased 14% year over year, mainly reflecting higher Energy sales; total revenue fell, with results also affected by the absence of prior-year disposition gains and changes in investment and segment activity.
- Continuing income attributable to Icahn Enterprises shifted from $2.273 billion of income to a $213 million loss. Lower Investment-segment results attributable to the parent and a $639 million Holding Company loss contributed; discontinued-operation sale gains lifted reported full-year net income.
- Energy sales increased 19%; stronger refining crack spreads and lower renewable identification number (RIN) costs improved gross margin, partly offset by lower sales volumes.
- Automotive revenue increased 5%, led by services and acquisitions. The segment continued a multi-year transformation plan and recorded a $87 million goodwill impairment in its Parts reporting unit.
- Investment Funds returned 7.9% in 2018 versus 2.1% in 2017. 2018 gains in short positions were partly offset by long-position losses; the 2017 pattern was reversed.
- Cash and cash equivalents increased, while total debt was broadly stable. The balance sheet’s assets held for sale fell sharply as major dispositions closed.
Outlook, commentary, risks and unusual items
- Strategy: Management emphasized investing in undervalued assets, active engagement to unlock value, and potential acquisitions. It stated that cash flow and asset coverage from operating subsidiaries should support liquidity, while cautioning that future results depend on investment performance and market conditions.
- Dispositions: The Federal-Mogul, Tropicana and ARI sales generated approximately $3.2 billion in aggregate cash proceeds and approximately $1.2 billion of Tenneco equity consideration. The filing reports approximately $1.4 billion of aggregate pre-tax gains attributable to Icahn Enterprises from these discontinued-operation sales.
- Pending transaction: A definitive agreement to sell Ferrous Resources for $550 million was announced; closing was expected in the first half of 2019. The filing does not establish that the transaction subsequently closed.
- Debt and distributions: Holding Company senior notes totaled about $5.505 billion, with maturities from 2020 to 2025. The partnership reported covenant compliance and approximately $2.0 billion of additional debt capacity under note covenants. A $2.00-per-unit quarterly distribution was declared in February 2019, payable in cash or units at each holder’s election; future distributions remain subject to quarterly review and restrictions.
- Key operating risks: Refining margins, crude-oil differentials, commodity prices and volatile RIN costs; environmental regulation and potential compliance spending; competition and execution of the Automotive transformation; concentrated and potentially leveraged Investment Fund positions; and restrictions on subsidiary distributions.
- Contingencies: CVR Refining received government allegations concerning Clean Air Act and consent-decree violations at its Coffeyville refinery; the company said it could not estimate potential costs. CVR Energy also faces early-stage litigation over the CVR Refining call option. The filing discloses a federal inquiry concerning the Renewable Fuel Standard; it says no claims or allegations had been made against Icahn Enterprises or Mr. Icahn and that the company was cooperating.
- Other exposure: Because of common control-group ownership, the partnership may be liable for certain affiliate pension obligations; ACF plans would have been underfunded by approximately $80 million if voluntarily terminated at year-end. An affiliate indemnity exists, but the filing cautions that the indemnitor may not be able to meet its obligations.
- Governance and accounting: Mr. Icahn and affiliates owned approximately 91.7% of outstanding units, creating significant control and potential conflicts. The partnership is exempt from certain NASDAQ governance requirements. The auditor gave an unqualified opinion on the financial statements and Icahn Enterprises’ internal controls; management also concluded disclosure controls were effective.
Most important facts for investors to verify
- Separate continuing-operation performance from the $1.4 billion of reported pre-tax gains on discontinued-operation sales; verify the resulting recurring earnings and cash generation.
- Review liquidity available to the Holding Company versus cash held in affiliated Investment Funds, and assess subsidiary dividend restrictions and debt maturities.
- Assess the sustainability of Energy’s improved refining margins and the sensitivity of earnings and cash flows to RIN prices, crude differentials and commodity conditions.
- Track Automotive’s transformation plan, Parts business performance and any further impairment or funding needs.
- Follow the Ferrous Resources sale, refinery environmental allegations, CVR call-option litigation and the Renewable Fuel Standard inquiry for developments, costs or resolution.
- Consider Investment Fund concentration, derivatives, short exposure and valuation risk; the filing identifies the top five holdings as approximately 43% of Investment-segment assets under management.
- Evaluate distribution sustainability and the implications of the general partner’s control, affiliate transactions and potential affiliate pension liabilities.