Business context and reporting period
Icahn Enterprises L.P. filed this joint Form 10-Q with Icahn Enterprises Holdings L.P. for the three months ended March 31, 2013. The diversified holding company reports nine operating segments. Results are substantially the same for both partnerships; differences primarily reflect debt and general-partner allocations. Mr. Icahn and affiliates held approximately 90.5% of Icahn Enterprises’ outstanding depositary units at quarter-end.
Comparability is affected by the May 4, 2012 acquisition and consolidation of CVR Energy: 2013 includes CVR’s results, while first-quarter 2012 does not.
Key financial metrics
Amounts are in millions of dollars except per-unit data, percentages and where noted.
| Metric | Q1 2013 | Q1 2012 / prior date |
|---|---|---|
| Total revenues | $5,319 | $2,684 |
| Net income | $695 | $101 |
| Net income attributable to Icahn Enterprises | $277 | $49 |
| Basic / diluted income per LP unit | $2.56 / $2.50 | $0.48 / $0.48 |
| Operating cash flow | $41 | $85 |
| Cash and cash equivalents at quarter-end | $2,437 | $3,071 at Dec. 31, 2012 |
| Cash held at consolidated affiliated partnerships and restricted cash | $1,424 | $1,419 at Dec. 31, 2012 |
| Total debt | $8,184 | $8,548 at Dec. 31, 2012 |
| Total assets / total equity | $26,261 / $10,929 | $24,556 / $9,773 at Dec. 31, 2012 |
| Cash distribution declared per LP unit | $1.00 | $0.10 |
Revenue growth was approximately 98%; net income attributable to Icahn Enterprises increased to $277 million from $49 million. The consolidated net income margin was approximately 13.1% versus 3.8%, but this comparison is heavily influenced by investment activity and CVR’s inclusion. Net gain from investment activities was $578 million, versus $58 million. The filing does not present a single consolidated operating-margin measure that is meaningful across the company’s diverse businesses.
Cash flow from investing activities was a use of $354 million, including $278 million of capital expenditures. Financing activities used $308 million. Cash and cash equivalents fell by $634 million during the quarter. The balance sheet also reported $620 million of securities sold, not yet purchased and $423 million due to brokers. The reported $1,424 million balance of affiliated-partnership and restricted cash includes approximately $1.3 billion of restricted cash.
Material changes versus the prior comparable period
- Investment segment net income attributable to Icahn Enterprises rose to $233 million from $31 million; the Investment Funds returned 9.7% net of expenses, compared with 1.0% in Q1 2012. Long equity positions drove gains; short positions detracted as markets rose.
- Energy contributed $151 million of net income attributable to Icahn Enterprises, following CVR’s acquisition and consolidation in May 2012. CVR Refining completed its IPO in January 2013, generating $556 million of net proceeds to the Energy segment after specified proceeds and uses.
- Automotive net sales declined 3% to $1,713 million and gross margin fell to $248 million from $277 million. Lower European and commercial-vehicle volumes and less favorable product mix weighed on results, partly offset by sourcing savings.
- Metals net sales declined 20% to $264 million; lower ferrous shipment volumes and prices contributed to a gross loss of $3 million.
- Railcar segment external revenues declined to $136 million from $181 million, while manufacturing margin improved. The backlog was approximately 6,400 railcars; the leasing fleet grew to approximately 4,100 railcars.
- Gaming net income attributable to Icahn Enterprises declined to $3 million from $8 million, with lower gaming volumes and room occupancy. Home Fashion sales fell 18%, but gross margin improved to 11% of sales from 4%, reflecting exited unprofitable business and lower commodity costs.
Outlook, risks, contingencies and unusual items
- Outlook: No consolidated earnings guidance is provided. Management said Federal-Mogul expected cash on hand, operating cash flow and facility availability to fund operations and capital expenditures through 2013, while noting execution and financing risks. CVR estimated 2013 capital spending of $293–$323 million and believed available resources would meet anticipated needs for at least 12 months, subject to operating and market conditions. Railcar management cited strong tank-car demand but cautioned that demand and orders may not persist or follow industry trends.
- Debt and liquidity: The company reported compliance with debt covenants. Icahn Enterprises could incur approximately $2.4 billion of additional indebtedness under its senior-note covenants. Federal-Mogul had $504 million of revolving-credit availability; CVR’s refining ABL had $373 million of availability and no borrowings outstanding. The $600 million variable-rate convertible notes were discharged in January after cash was placed in trust for principal and interest through maturity in August 2013; holders lost conversion rights.
- Distributions and financing: Icahn Enterprises raised $194 million net in a February unit offering. A $1.00-per-unit distribution was declared for Q1, payable in cash or additional units at holders’ election; another $1.00 distribution was declared in April for payment in July. CVR adopted a quarterly cash-dividend policy, with its initial dividend expected in Q2 2013.
- Unusual items: First-quarter results included a $47 million loss on sale of a discontinued business, a $5 million gain on debt extinguishment and $8 million of restructuring charges. Federal-Mogul’s new 2013 restructuring plan is expected to cost $82 million over 2013–2015. A $19 million post-employment benefit curtailment gain was expected in Q2 following a facility closure.
- Risks and contingencies: Investment results are exposed to market movements, short positions, derivatives, counterparties and potential collateral or termination demands. Refining and fertilizer results are sensitive to commodity prices, refining margins, regulation and environmental compliance; volatile renewable identification number (RIN) costs could materially affect CVR. Other risks include automotive demand and foreign exchange, cyclical scrap markets, railcar demand, and gaming competition. Federal-Mogul estimated up to $42 million of reasonably possible additional environmental losses above its recorded estimate. CVR faced environmental and regulatory matters, including OSHA citations following a fatal 2012 boiler incident; it contested the citations. The filing also describes pending litigation and potential exposure under pension controlled-group rules, including ACF plan underfunding of approximately $127 million, with an affiliate indemnity that may not be funded.
- Governance and related parties: Mr. Icahn controls the general partner and affiliates own approximately 90.5% of outstanding units. The filing describes related-party railcar arrangements and an expense-sharing and ownership arrangement involving Insight Portfolio Group.
- Controls and review: Management concluded disclosure controls were effective and reported no material changes in internal control over financial reporting. Independent accountants conducted interim reviews, not audits, and reported no material modifications they believed were needed.
Important facts for investors to verify
- How much of the earnings increase is attributable to investment gains and CVR’s first-time inclusion, rather than recurring operating improvement.
- The availability and restrictions on cash, particularly the approximately $1.3 billion of restricted cash, and cash upstreaming capacity from subsidiaries.
- Debt maturities, interest costs, covenant headroom and the implications of the variable-rate notes’ cash discharge.
- CVR’s refining margins, RIN compliance costs, environmental capital requirements and ability to sustain distributions.
- Federal-Mogul’s restructuring costs, operating recovery, refinancing alternatives and the estimated environmental exposure.
- Developments in material litigation, pension controlled-group exposure, related-party arrangements and Mr. Icahn’s control of the partnership.