Icahn Enterprises L.P. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Unaudited joint filing with Icahn Enterprises Holdings L.P.; the two entities’ consolidated results are substantially the same. Icahn Enterprises is a diversified holding company spanning investment, automotive, energy, metals, railcar, gaming, mining, food packaging, real estate and home fashion. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless noted.
Financial performance and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenues | $4,984 | $6,379 | $9,495 | $11,369 |
| Net sales | $3,979 | $4,867 | $7,544 | $9,533 |
| Net income | $541 | $1,123 | $963 | $1,200 |
| Net income attributable to Icahn Enterprises | $212 | $489 | $373 | $460 |
| Income per LP unit | $1.68 | $4.06 | $2.95 | $3.85 |
| Interest expense | $287 | $197 | $557 | $367 |
- Q2 total revenue fell 22% year over year; first-half revenue fell 16%. Net sales fell 18% and 21%, respectively. Investment gains were included in total revenue: $592 million in Q2 and $1.183 billion in the first half.
- Cash from operating activities was $153 million in the first half, versus cash used of $838 million in the prior-year period. Investing activities used $1.493 billion, principally for capital spending and acquisitions; financing activities provided $567 million.
- Cash and cash equivalents were $2.154 billion at June 30, down from $2.912 billion at year-end. A further $1.770 billion was held at consolidated affiliated partnerships or restricted. The filing reports $1.5 billion of restricted cash, including collateral posted for derivative positions.
- Total debt was $12.120 billion, up from $11.588 billion at December 31, 2014; total liabilities were $23.836 billion. The holding company had $222 million of cash and approximately $5.5 billion of debt. Management reported compliance with debt covenants and approximately $1.2 billion of additional borrowing capacity under its senior-note covenants.
- Depositary-unit distributions declared were $1.50 per unit in each quarter, with holders able to elect cash or additional units. A further $1.50 distribution was declared July 30, payable in September 2015.
Material changes and operating trends
- Investment: Investment Funds returned 3.9% in Q2 and 8.4% in the first half, versus 10.7% and 10.2% in 2014. The lower Q2 investment gain was a primary contributor to the decline in consolidated earnings. Investment-segment income attributable to Icahn Enterprises was $176 million in Q2 versus $501 million; first-half income was $360 million versus $506 million.
- Automotive: Segment net sales rose 8% in Q2 and 5% in the first half, reflecting acquisitions including Uni-Select U.S. auto-parts assets and TRW engine components, partly offset by adverse currency translation. Gross margin was 15% of sales versus 16% in both comparable periods. Federal-Mogul’s planned Motorparts separation was deferred; its board intended to revisit timing before year-end, with no assurance it would occur.
- Energy: Segment sales declined substantially with lower petroleum product prices, while stronger refining spreads supported results. Adjusted refining margin per barrel was $17.22 in Q2 versus $13.96 and $16.15 in the first half versus $14.95. A $27 million flood-insurance recovery was recorded in Q2. Derivative results turned to losses: $64 million in the first half versus gains of $145 million in 2014.
- Metals: Sales fell 45% in both Q2 and the first half as ferrous and non-ferrous shipment volumes and prices declined. Segment gross margin was negative $7 million in Q2 and negative $17 million in the first half.
- Railcar: First-half railcar shipments increased to 5,065 from 3,750; backlog was 8,454 railcars at June 30. Leasing revenues and gross margin improved, but demand for energy-related railcars remained uncertain amid oil-market volatility and new safety regulations.
- Mining: The company obtained control of Ferrous Resources in June, acquiring approximately 77.2% ownership. For the one month consolidated, Mining reported $6 million of sales and a $4 million loss attributable to Icahn Enterprises. The mines faced weak iron-ore prices; two operations had been placed in care and maintenance.
Outlook, risks and unusual items
- No consolidated earnings or revenue guidance is provided. Energy estimated 2015 Renewable Identification Number (RIN) costs of approximately $110–$150 million, subject to regulation and market conditions. The EPA’s proposed renewable-fuel volumes were expected to be finalized by November 30, 2015.
- Energy’s fertilizer reporting unit had fair value only about 1% above carrying value in preliminary goodwill testing, with forecast sales growth a key assumption. Management said a shortfall could cause a future impairment; testing was to be finalized in Q3 2015.
- Ferrous Resources was not profitable and had approximately $47 million of cash at June 30. Management disclosed substantial risks from depressed iron-ore prices, project financing needs, Brazilian currency and regulatory exposure, and access to transportation. The Viga 17 project was projected to require approximately $1.2 billion in capital expenditures from 2016–2019; required financing had not been secured by quarter-end.
- Investment activities carry substantial market and counterparty risk. Investment Funds’ written put options had maximum potential payouts of approximately $6.8 billion, mostly related to positions described as covered. Derivatives and securities sold short can create losses or collateral needs that exceed recorded liabilities.
- Other significant exposures include railcar accident and regulatory risks; Federal-Mogul environmental matters, with approximately $36 million of reasonably possible additional losses above recorded remediation estimates; and pension controlled-group exposure. ACF and Federal-Mogul pension plans would be underfunded by approximately $500 million if voluntarily terminated, and the filing notes the Icahn-group indemnity does not cover Federal-Mogul’s unfunded termination liability.
- Unusual or notable items included the $27 million flood-insurance recovery, a $3 million bargain-purchase gain on the Uni-Select acquisition, and $39 million of first-half restructuring expense, primarily at Federal-Mogul. Federal-Mogul expected approximately $30 million of additional charges for certain programs and $15 million for previously initiated programs.
Key facts for investors to verify
- Whether operating cash generation and available, unrestricted liquidity adequately support distributions, acquisitions, capital spending and debt service; distinguish corporate cash from restricted or partnership-held cash.
- Debt balances, maturities, subsidiary-level borrowing availability, covenant headroom and the effect of higher interest expense.
- How much of the earnings decline reflects weaker underlying operations versus investment gains, derivative marks, currency movements and other non-recurring items.
- Ferrous Resources’ cash runway, financing plan, mine economics at prevailing iron-ore prices, and progress on transport access and development projects.
- Outcome of Energy fertilizer goodwill testing and sensitivity to sales-growth assumptions, along with RIN costs and refining margins.
- Railcar demand, backlog conversion, fleet investment returns and costs or opportunities arising from new tank-car rules.
- Potential dilution from distributions paid in units, the effect of the general partner and affiliate ownership (approximately 88.7% of units), and material environmental, pension and litigation exposures.