Icahn Enterprises L.P. — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; the filing is an annual report, with unaudited quarterly data for Q4. Amounts are in U.S. dollars unless noted. Icahn Enterprises is a diversified holding partnership with Investment, Automotive, Gaming, Railcar, Food Packaging, Metals, Real Estate and Home Fashion businesses. Affiliates of Carl Icahn held 92.6% of the units at year-end and approximately 93.0% after the January 2012 rights offering.
Financial performance and position
| Metric | 2011 | 2010 |
|---|---|---|
| Total revenue | $11.855 billion | $9.090 billion |
| Net sales | $9.128 billion | $7.904 billion |
| Net income | $1.764 billion | $743 million |
| Net income attributable to Icahn Enterprises | $750 million | $199 million |
| Basic / diluted income per LP unit | $8.55 / $8.33 | $2.32 / $2.32 |
| Operating cash flow | $1.995 billion | $41 million |
| Capital expenditures | $481 million | $422 million |
| EBITDA / Adjusted EBITDA, attributable basis | $1.463 billion / $1.562 billion | $876 million / $954 million |
| Cash and cash equivalents | $2.278 billion | $2.963 billion |
| Total debt | $6.473 billion | $6.509 billion |
| Total assets / total liabilities | $25.136 billion / $17.303 billion | $21.338 billion / $13.444 billion |
Total revenue includes investment gains and other operating revenue; it is not equivalent to net sales. Net gain from investment activities was $1.905 billion, versus $814 million in 2010. Interest expense was $436 million, up from $389 million. The reported income tax provision was $34 million, and the effective rate was 1.9%; partnership income is generally taxed to unitholders.
Operating cash flow was affected by a $2.805 billion increase in cash held at consolidated affiliated partnerships and restricted cash. Year-end restricted cash was approximately $4.8 billion, largely associated with investment activity and margin requirements, and is not generally available for corporate liquidity. Consolidated cash therefore should not be viewed as fully fungible. Holding Company cash was $517 million against approximately $3.1 billion of Holding Company debt.
Q4 snapshot: Total revenue was $3.175 billion, net sales $2.240 billion, net income $636 million and income attributable to Icahn Enterprises $260 million. In Q4 2010, the corresponding figures were $2.482 billion, $2.044 billion, $250 million and $82 million. Q4 comparisons are affected by the inclusion of Tropicana only from November 15, 2010 in the prior-year period.
Segments and changes versus prior year
- Investment: Segment net income attributable to Icahn Enterprises was $873 million, versus $348 million. Investment Funds reported a 34.5% gross return, compared with 15.2% in 2010. The return of all fee-paying investor capital during 2011 ended further incentive and special profits interest allocations after March 31; results are now primarily driven by the Funds’ performance and Icahn Enterprises’ interests.
- Automotive: Federal-Mogul sales rose 11% to $6.910 billion and gross margin was $1.088 billion, or 16% of sales, unchanged as a percentage. Segment income attributable to Icahn Enterprises was $121 million versus $116 million. Federal-Mogul had $2.8 billion of debt and $953 million of cash, including $578 million held by foreign subsidiaries.
- Gaming: Tropicana generated $624 million of net revenue and $13 million attributable income. Icahn Enterprises owned 65.1% at year-end. The segment was consolidated for all of 2011 but only from November 15, 2010 in 2010. Competition and weak discretionary spending pressured Atlantic City; flooding and Hurricane Irene also caused property closures.
- Railcar: Segment sales rose to $514 million from $270 million; attributable income was $2 million versus a $15 million loss. ARI shipped approximately 5,230 railcars versus 2,090, with year-end backlog of approximately 6,530 railcars versus 1,050. Management estimated 97% of backlog would ship in 2012.
- Food Packaging: Sales rose 7% to $339 million, but gross margin declined to $76 million from $82 million; attributable income fell to $4 million from $10 million. Higher material costs weighed on margins.
- Metals: Sales increased 51% to $1.095 billion, while gross margin slipped to $27 million from $28 million as higher scrap purchase costs offset volume and pricing gains. Attributable income was $6 million versus $4 million. PSC Metals made several acquisitions during the year.
- Real Estate: Attributable income increased to $18 million from $8 million. Housing demand remained weak; management expected continued softness in 2012.
- Home Fashion: Sales fell 25% to $322 million and attributable loss widened to $56 million from $42 million. Gross margin fell to 5% from 7%, reflecting lower volume, raw-material pressures and the exit from unprofitable programs. The segment reported $21 million of operating cash flow, primarily due to working-capital changes.
Liquidity, debt and distributions
Year-end consolidated debt was $6.473 billion, including $3.056 billion at the Holding Company and $2.737 billion at Federal-Mogul. Icahn Enterprises reported compliance with debt covenants. Its debt maturities included $658 million in 2013 and $2.147 billion in 2014; the filing identified approximately $1.2 billion of debt service and maturities through 2014 in its risk discussion. Contractual cash obligations totaled $9.587 billion, including debt, interest, pension and post-employment benefits, leases and other items; this schedule excludes the subsequent $700 million 2018 Notes issuance and securities sold short.
During 2011, quarterly distributions included cash and unit components; declared cash distributions totaled $0.55 per unit, down from $1.00 in 2010. In February 2012, the board declared a $0.35 per-unit distribution, comprising $0.10 cash and $0.25 in units. Future distributions remain discretionary and subject to liquidity, financing restrictions and other factors.
Outlook, risks, contingencies and unusual items
- No consolidated earnings or revenue guidance is provided. Segment commentary includes expected weakness in real estate housing demand, planned Home Fashion restructuring and ARI’s shipment expectations for its backlog.
- In January and February 2012, Icahn Enterprises issued an additional $700 million of 8% notes due 2018, with gross proceeds of $716 million for general corporate purposes. The January 2012 rights offering raised $500 million through issuance of 13.6 million units. These are subsequent events, not year-end balances.
- Key risks include investment-market volatility, leverage, short positions and derivatives; the Funds’ securities sold short were carried at $4.476 billion, with maximum written put-option payouts of approximately $1.7 billion. Subsidiary cash and distributions may be restricted by debt agreements, and the Holding Company depends on subsidiaries and investment returns to meet its obligations.
- Other significant risks include Federal-Mogul’s pension obligations, debt and foreign-exchange exposure; gaming competition, regulation, labor and property disruption; cyclical railcar and scrap markets; Home Fashion’s financing needs and customer concentration; and commodity, environmental and raw-material risks.
- WPI’s revolving credit facility matured in June 2012; its maximum availability was reduced from $45 million to $15 million effective January 2012, leaving approximately $4 million of unused availability. WPI was considering strategic alternatives, including alliances or a sale, without assurance of completion.
- Federal-Mogul recorded $48 million of Automotive impairment charges, including $37 million for trademarks and brand names. WPI recorded $18 million of impairment; Tropicana recorded $5 million. PSC Metals reported environmental remediation liabilities of $30 million; Federal-Mogul reported $16 million of environmental liabilities and $22 million of asset-retirement obligations.
- Potential exposure includes controlled-group liability for ACF pension plans estimated to be underfunded by approximately $112 million upon voluntary termination; Starfire indemnified Icahn Enterprises for certain liabilities, but may be unable to fund that indemnity. Aztar’s lawsuit against Marsh seeks $100 million or more; any recovery would benefit the Gaming business. The Dynegy-related action against Icahn Capital was stayed and its outcome was uncertain.
- Subsequent events included Federal-Mogul’s Thailand facility being flooded in October 2011, with operations suspended; it received a $25 million insurance advance in February 2012. The 2011 Lions Gate litigation was dismissed with prejudice. The filing reports unqualified audit opinions and effective internal controls over financial reporting.
Investor verification priorities
- Reconcile the $1.764 billion consolidated net income with the $750 million attributable to Icahn Enterprises, including non-controlling interests and the large Investment segment contribution.
- Assess the liquidity actually available to the parent: distinguish $2.278 billion of consolidated cash from restricted and affiliated-partnership cash, and review the parent’s $517 million cash and approximately $3.1 billion debt.
- Review the $700 million post-year-end notes, the $500 million rights offering, debt maturities and covenant headroom, and the terms and funding capacity of WPI’s reduced credit facility.
- Evaluate sustainability of Investment Fund returns and the post-March 2011 business model after fee-paying capital and incentive allocations ended; examine exposure from shorts, options, leverage and counterparty arrangements.
- Track segment-specific risks and estimates: Federal-Mogul pension and impairment assumptions, gaming labor and competition, railcar backlog conversion, Metals environmental reserves, and Home Fashion’s customer concentration, restructuring and strategic alternatives.
- Review related-party governance and transactions, including Mr. Icahn’s approximately 93% post-offering ownership and ARI’s railcar management arrangement with an Icahn affiliate.