Business context and reporting period
Icahn Enterprises L.P. is a diversified holding company with interests in investment management, automotive, gaming, railcar, food packaging, metals, real estate and home fashion. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2011. The prior-year comparisons exclude Gaming because Tropicana was not consolidated until November 15, 2010; comparisons are therefore not fully like-for-like.
Key financial metrics
Amounts are in millions, except per-unit data and percentages.
| Metric | Three months 2011 | Three months 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenues | $2,470 | $2,825 | $8,735 | $6,631 |
| Net income (loss) | $(52) | $765 | $1,128 | $493 |
| Net income (loss) attributable to Icahn Enterprises | $(39) | $298 | $490 | $117 |
| Basic earnings (loss) per LP unit | $(0.44) | $3.44 | $5.58 | $1.37 |
| Cash distributions declared per LP unit | $0.10 | $0.25 | $0.45 | $0.75 |
- Revenue mix and earnings volatility: Net sales were $2,280 in the quarter and $6,888 for nine months, up from $1,956 and $5,860, respectively. Total revenue includes investment gains or losses: investment activities recorded a $49 loss in the quarter versus a $793 gain in 2010, but a $1,158 gain for nine months versus a $540 gain in 2010.
- Cash flow: Nine-month operating cash flow was $1,860, compared with $(160) in 2010; investing cash outflow was $630 and financing cash outflow was $2,014. The operating cash figure was substantially affected by investment-fund trading and related cash movements, and should not be read as solely operating-business cash generation. Capital expenditures were $359.
- Balance sheet and liquidity: At September 30, cash and cash equivalents were $2,171; cash held at consolidated affiliated partnerships and restricted cash were $2,734, including approximately $2.4 billion restricted. Investments were $8,311. Total assets were $22,478, total liabilities $15,076 and total equity $7,402.
- Debt: Debt totaled $6,489, little changed from $6,509 at year-end 2010. Estimated fair value of long-term debt was about $6.3 billion versus $6.5 billion carrying value. The company reported compliance with debt covenants and approximately $1.2 billion of additional debt capacity under its senior-note covenants. Federal-Mogul had $540 million available on its revolving facility; WPI reported $35 million unused borrowing availability.
- Margins and segment results: Federal-Mogul’s gross margin was 15% for the quarter and 16% for nine months, versus 15% and 17% a year earlier. Railcar manufacturing returned to positive gross margin (10% quarterly; 8% nine-month) from losses in the comparable periods. Viskase gross margin was 24% quarterly and 25% nine-month, down one percentage point year over year. Metals gross margin remained thin at 2% quarterly and 4% nine-month. WPI’s gross margin fell to 4% quarterly and 7% nine-month from 5% and 8%.
Material changes versus prior comparable periods
- The quarter moved from $298 million of income attributable to Icahn Enterprises to a $39 million loss, primarily reflecting the reversal in investment-activity results. Investment Funds reported a gross return of negative 0.85% for the quarter, compared with positive 13.9% in 2010; the nine-month gross return was positive 19.8% versus 11.2%.
- Nine-month attributable income rose to $490 million from $117 million, supported by higher investment gains and improved results in Automotive, Railcar, Metals and Real Estate. Gaming contributed $15 million of attributable income for the nine months, but had no comparable consolidated results in 2010.
- Automotive net sales increased 12% for the quarter and 13% for nine months, reflecting higher vehicle production, market-share gains and favorable currency translation; aftermarket sales declined. Railcar shipments increased to about 3,060 for nine months from 1,130, and backlog rose to approximately 7,110 railcars from 1,050 at year-end.
- Metals revenue increased 53% for nine months, reflecting higher scrap prices, volumes and acquisitions. WPI sales declined 15% for nine months amid weak consumer and housing conditions and the exit of unprofitable programs.
- Investment Management returned all fee-paying capital to investors during 2011. No further incentive or special profits-interest allocations accrue after March 31, 2011. The segment’s revenue and earnings profile therefore changed materially.
- Total debt declined slightly, while total liabilities rose to $15,076 from $13,444, partly alongside higher broker-related balances and securities sold short. Cash and cash equivalents fell to $2,171 from $2,963.
Outlook, commentary, risks and unusual items
- No consolidated earnings or revenue guidance is provided. Management cautions that investment gains and losses can vary substantially and interim results are not indicative of full-year results.
- Management said railcar demand and backlog had improved and expected the upward shipment trend to continue through the remainder of 2011, while cautioning that market improvement and future orders were not assured.
- Tropicana faced weak discretionary spending, increased Atlantic City competition and gaming-market declines. Hurricane Irene caused a three-day mandated casino closure; Tropicana estimated approximately $5 million of lost net revenue at Tropicana AC.
- WPI continued restructuring and expected about $1 million of additional 2011 restructuring costs. The company was considering strategic alternatives for WPI, including joint ventures, alliances, sale or divestiture; any sale could yield materially less than carrying value.
- Federal-Mogul identified possible fourth-quarter 2011 impairment of trademarks and brand names based on recent product-line sales trends. Potential release of up to $230 million of tax valuation allowances could materially affect income if recognized; possible reductions in unrecognized tax benefits were also disclosed.
- Environmental liabilities included $17 million for Federal-Mogul and $29 million for PSC Metals at September 30. Federal-Mogul estimated reasonably possible additional environmental losses of about $44 million beyond its recorded best estimate. PSC Metals’ EPA consent decree was expected to require $0.8 million to $1.7 million of compliance costs plus a $199,000 penalty.
- Other exposures include a pending ARI-related commercial lawsuit with loss not estimable, a potential $62 million Federal-Mogul joint-venture put guarantee if triggering events occur, and Icahn-controlled-group pension exposure. ACF pension plans were underfunded by approximately $114 million on a voluntary termination basis; Starfire indemnified certain, but not all, related exposure and may be unable to fund its obligations.
- Market and instrument risks include securities sold short, derivatives, counterparty exposure, foreign exchange, commodity prices and interest rates. The filing estimates a 10% adverse change in Investment Funds’ investment values could reduce securities owned by $783 million, securities sold short by $214 million and derivatives by $18 million before non-controlling-interest effects.
- The Lions Gate and WPI ownership-related litigation was dismissed; the Tropicana trademark dispute was settled, with exclusive use rights divided by territory. The quarterly cash distribution declared November 1 was $0.10 per unit, payable December 1, 2011.
Most important facts for investors to verify
- How much of reported earnings and operating cash flow reflects investment marks, trading activity and consolidated fund cash movements rather than recurring operating businesses.
- The effect of returning fee-paying capital on Investment Management’s future revenue, liquidity needs and investment-fund leverage.
- Segment performance and cash generation—especially Federal-Mogul, Tropicana and WPI—and whether railcar backlog converts to shipments and profitable margins.
- Debt maturities, subsidiary-level restrictions on cash transfers, restricted cash availability and the sustainability of partnership distributions.
- Potential WPI strategic outcomes and impairment, Federal-Mogul tax and trademark exposures, environmental obligations, and controlled-group pension liabilities.