ICAHN ENTERPRISES L.P. quarterly report, Q2 FY2013

Icahn Enterprises L.P. — Q2 2013 Form 10-Q

Business context and reporting period. This unaudited joint report covers the quarter and six months ended June 30, 2013. Icahn Enterprises is a diversified holding partnership with Investment, Automotive, Energy, Metals, Railcar, Gaming, Food Packaging, Real Estate and Home Fashion businesses. The consolidated results include Icahn Enterprises Holdings, which conducts substantially all operations. Results for 2012 Energy are not directly comparable because CVR was consolidated beginning May 4, 2012.

Key financial results

Metric	Q2 2013	Q2 2012	Six months 2013	Six months 2012
Total revenues	$4.618 billion	$4.226 billion	$9.937 billion	$6.910 billion
Net income	$76 million	$461 million	$771 million	$562 million
Net income attributable to Icahn Enterprises	$54 million	$257 million	$331 million	$306 million
Basic income per LP unit	$0.48	$2.44	$3.00	$2.97
Net cash from operating activities	Not separately presented for quarter	$434 million	$1.407 billion

Total revenue includes investment gains and losses, interest, dividends and other income, as well as operating sales; it is not solely sales from operating businesses. Q2 net loss from investment activities was $228 million, compared with a $299 million gain in Q2 2012. For the first half, investment activity recorded a $350 million gain, versus $357 million a year earlier.

Balance sheet, debt and liquidity

At June 30, 2013, total assets were $29.244 billion and total liabilities were $17.798 billion; total equity was $11.446 billion.
Debt was $8.245 billion, down from $8.548 billion at December 31, 2012. Holding Company debt was approximately $4.1 billion. The partnership reported compliance with debt covenants and approximately $2.6 billion of additional debt capacity under its senior-note indenture.
Cash and cash equivalents were $3.340 billion. Cash held at consolidated affiliated partnerships and restricted cash was another $1.635 billion; these balances should not be treated as wholly unrestricted liquidity. Due to brokers was $2.414 billion, and securities sold, not yet purchased, were $667 million.
For the six months, investing activities used $563 million, including $509 million of capital expenditures. Financing activities provided $417 million. Operating cash flow was substantially below the prior-year period.

Material changes and segment performance

Energy: Q2 segment net income was $262 million versus $69 million in the comparable 2012 period, which included CVR only from May 5 onward. Petroleum gross margin was $242 million; fertilizer gross margin was $40 million. Petroleum refining margin was $20.56 per throughput barrel, or $19.18 adjusted for FIFO impacts. RIN compliance costs were $66 million for Q2 and $98 million for the first half.
Automotive: Q2 sales rose 5% to $1.786 billion and gross margin increased to $280 million from $254 million; gross margin was 16% versus 15%. First-half gross margin was $528 million, slightly below $531 million. A $19 million post-employment benefit curtailment gain reduced Q2 and first-half SG&A.
Investment: the funds returned negative 2.8% in Q2, as short positions and market hedges lost value during a rising market; first-half return was positive 6.7%.
Metals: first-half sales declined 22% to $494 million amid lower ferrous volumes and scrap prices; the segment reported a $13 million loss.
Railcar: first-half sales and other revenues fell to $287 million from $338 million, while gross margin increased to $74 million from $64 million. Shipments fell to approximately 3,210 from 4,410; backlog was approximately 6,940 railcars at quarter-end.
Gaming: lower gaming volumes and room rates weighed on results; Q2 segment net income was $16 million versus $4 million. Management cited competition and lingering effects of Superstorm Sandy on Atlantic City customer visitation.
Food Packaging and Home Fashion: Food Packaging’s Q2 gross margin percentage improved to 25% from 22%, while Home Fashion sales declined 22% and its Q2 gross margin percentage fell to 10% from 14%.

Outlook, risks and unusual items

Management estimated 2013 petroleum-business RIN costs of approximately $200 million to $240 million, citing volatile prices and uncertainty around the final regulatory mandate; Wynnewood planned to seek hardship relief. RIN availability, pricing and potential penalties could materially affect Energy results.
CVR estimated 2013 capital spending of $315 million to $345 million. The filing also reported $66 million of Q2 RIN costs and an $83 million accrued biofuel blending obligation at June 30.
Management expected tank-railcar demand to remain strong and hopper demand, particularly plastic-pellet cars, to strengthen late in 2013, but cautioned that demand and orders could differ from expectations.
An annual Energy goodwill impairment test was underway, with results expected in Q3 2013; any resulting impairment would be recorded then. Energy goodwill was $930 million.
Unusual items included a $23 million Food Packaging tax settlement loss, a $47 million first-quarter Automotive asset-disposal loss and $5 million of additional Automotive disposal losses in Q2. CVR recorded a $5 million first-half gain on debt extinguishment.
Potential controlled-group pension exposure is significant. Following a July 2013 rights offering, Icahn Enterprises’ Federal-Mogul ownership rose to approximately 80.7%; Federal-Mogul pension plans were estimated to be underfunded by $639 million if voluntarily terminated. ACF plans had an estimated $125 million underfunding, for approximately $764 million combined. Starfire’s indemnity does not cover Federal-Mogul pension liability arising from Icahn Enterprises’ own ownership.
Other disclosed matters include environmental remediation and compliance obligations, a PSC Metals citizen Clean Water Act suit with no estimable loss range, and various litigation matters. The filing describes environmental and regulatory costs, including estimated remaining costs for refinery consent-decree work and MSAT II compliance.

Investor facts to verify

How much of reported cash is freely available after considering restricted cash, affiliated partnership balances and broker obligations.
Whether the expected $200–$240 million 2013 RIN expense, hardship-relief request and related regulatory assumptions remain valid.
The outcome of the Energy goodwill impairment test and the effect of commodity margins and CVR distributions on parent-company liquidity.
The extent of potential pension obligations after the Federal-Mogul ownership increase, including the scope and collectability of any indemnity.
Whether segment comparisons adequately account for CVR’s partial consolidation in 2012 and the significant investment-market losses in Q2 2013.
Subsequent events: the August 1 issuance of $500 million of senior notes due 2020, the $434 million Federal-Mogul rights-offering investment, and the declared $1.25 per-unit distribution payable in October 2013.