Icahn Enterprises L.P. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; unaudited. Icahn Enterprises Holdings L.P. filed jointly. Its results are substantially the same as Icahn Enterprises’ results, with differences primarily related to debt and general-partner allocations.
Business context
Diversified holding company with Investment, Automotive, Energy, Metals, Railcar, Gaming, Mining, Food Packaging, Real Estate and Home Fashion businesses. Carl Icahn and affiliates held approximately 89.5% of outstanding depositary units at June 30, 2016.
Financial results and liquidity
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenues | $4.350bn | $4.984bn | $7.477bn | $9.495bn |
| Net income (loss) | $(285)m | $541m | $(1.894)bn | $963m |
| Net income (loss) attributable to Icahn Enterprises | $(69)m | $212m | $(906)m | $373m |
| Loss per LP unit | $(0.50) | Income per unit $1.68 | $(6.68) | Income per unit $2.95 |
| Operating cash flow | Not separately stated | Not separately stated | $992m | $153m |
| Investing cash flow | Not separately stated | Not separately stated | $(1.482)bn | $(1.493)bn |
| Financing cash flow | Not separately stated | Not separately stated | $338m | $567m |
- Net sales were $4.094bn in Q2 (up from $3.979bn) and $7.642bn for six months (up from $7.544bn). Total revenues fell because investment results shifted from gains to losses.
- Investment activities recorded losses of $308m in Q2 and $1.244bn for six months, versus gains of $592m and $1.183bn in the comparable 2015 periods. The Investment Funds returned -6.0% in Q2 and -18.0% for six months, compared with 3.9% and 8.4%.
- Six-month results included a $574m Energy goodwill impairment, representing all remaining goodwill allocated to the Petroleum reporting unit. The impairment assessment remained subject to finalization in Q3.
- Cash and cash equivalents were $1.920bn at June 30, down from $2.078bn at year-end; an additional $694m was held at consolidated affiliated partnerships and in restricted cash. Total assets were $32.550bn and total equity $8.598bn.
- Debt was $12.969bn, compared with $12.594bn at December 31, 2015. Estimated fair value of long-term debt was $12.6bn. The partnership reported compliance with debt covenants, but its senior-note covenants barred it from incurring additional indebtedness.
- Automotive gross margin on net sales improved to 20% in Q2 and 19% for six months, from 15% in both 2015 periods, partly reflecting the acquisitions of IEH Auto and Pep Boys. Energy petroleum refining margin adjusted for FIFO impacts fell to $9.56 per barrel in Q2 and $8.44 for six months, from $17.22 and $16.15.
- Distributions declared were $1.50 per depositary unit quarterly, or $3.00 per unit for the six months. Holders could elect cash or additional units. A further $1.50 quarterly distribution was declared August 3, 2016.
Material changes and unusual items
- Pep Boys became wholly owned in February 2016; the reported acquisition value was approximately $1.2bn. Trump Entertainment emerged from bankruptcy in February, with Icahn Enterprises converting its secured debt into 100% ownership. CVR Partners acquired CVR Nitrogen in April for consideration including $99m cash, newly issued units and assumed debt.
- CVR Partners issued $645m of 9.25% secured notes due 2023 and used proceeds in part to refinance debt and fund a tender offer; approximately $315m of its 6.5% notes due 2021 were repurchased.
- Acquisitions and higher Automotive sales increased reported revenue, while Energy and Railcar operating trends weakened. Railcar manufacturing shipments fell to 1,017 in Q2 from 2,397; six-month shipments were 2,347 versus 5,065. Railcar backlog was 5,601 at quarter-end.
- Energy’s six-month loss included the goodwill impairment; Petroleum sales and refining margins declined amid lower product prices, weaker spreads and increased renewable identification number (RIN) costs. Metals sales and volumes also declined.
Outlook, risks and contingencies
- Management estimated 2016 RIN costs of approximately $200m–$235m, subject to volatile RIN prices, regulatory requirements and operating factors. RIN expense was $94m in the first half, versus $74m a year earlier.
- Federal-Mogul restructuring programs were expected to continue through 2017, with less than $1m of additional charges anticipated for one program; previously initiated programs were expected to continue through 2018 with approximately $4m of additional charges.
- Management described challenging iron-ore and steel-market conditions. Other key exposures include investment market losses, refinery margins and commodity prices, RIN costs, foreign currency movements, interest rates, and the ability of subsidiaries to distribute cash to the holding company.
- Risks and contingencies include environmental matters, ongoing litigation, and pension exposure through the Icahn controlled group. ACF and Federal-Mogul pension plans had an estimated $533m combined underfunding on a voluntary termination basis; an affiliate indemnity exists but may not be able to fund its obligations. Federal-Mogul estimated up to $44m of reasonably possible additional environmental losses beyond its accrued estimate.
- After quarter-end, the company sold 250,000 CVR Refining units, reducing its and affiliates’ ownership to 69.99% and permanently lowering the threshold for a potential partnership call right from 95% to 80%.
Important facts for investors to verify
- How much of the reported loss reflects investment-market performance versus ongoing operating results, and how the Investment Funds’ short exposure and derivatives may affect future liquidity.
- The final amount and assumptions for the Energy goodwill impairment, and the recovery prospects for petroleum refining margins and fertilizer operations.
- Debt maturities, borrowing availability and restrictions on subsidiary distributions, including the holding company’s inability to incur additional debt under its note covenants.
- Actual RIN costs against the 2016 estimate, and the operational and financial consequences of changes in RIN prices or requirements.
- Completion of acquisition valuations and the Federal-Mogul merger proposal process; assess related-party transactions and the effects of acquisitions on comparability.
- Developments in environmental, litigation and controlled-group pension exposures, and whether recorded reserves and the affiliate indemnity are adequate.