(Mark One) | ||
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
(Exact Name of Registrant as Specified in Its Charter)
Delaware | 13-3398766 | |
(State or Other Jurisdiction of Incorporation or Organization) |
(IRS Employer Identification No.) |
(Address of Principal Executive Offices) (Zip Code)
(Registrants Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check One).
Large Accelerated Filer o | Accelerated Filer x | |
Non-accelerated Filer o | Smaller Reporting Company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes o No x
As of November 3, 2008, there were 70,489,510 depositary units and 12,502,254 preferred units outstanding.
i
September 30, 2008 |
December 31, 2007 |
|||||||
ASSETS | (unaudited) | |||||||
Investment Management: |
||||||||
Cash and cash equivalents | $ | 8,457 | $ | 26,027 | ||||
Cash held at consolidated affiliated partnerships and restricted cash | 2,939,909 | 1,104,748 | ||||||
Securities owned, at fair value | 5,930,257 | 5,920,209 | ||||||
Due from brokers | 554,571 | 847,891 | ||||||
Other assets | 257,072 | 151,012 | ||||||
9,690,266 | 8,049,887 | |||||||
Automotive: |
||||||||
Cash and cash equivalents | 781,547 | | ||||||
Accounts receivable, net | 1,185,634 | | ||||||
Inventories, net | 1,033,968 | | ||||||
Property, plant and equipment, net | 2,014,884 | | ||||||
Goodwill and intangible assets | 2,072,341 | | ||||||
Other assets | 814,706 | | ||||||
7,903,080 | | |||||||
Metals, Real Estate and Home Fashion: |
||||||||
Cash and cash equivalents | 264,747 | 328,099 | ||||||
Other assets | 1,566,807 | 1,129,100 | ||||||
1,831,554 | 1,457,199 | |||||||
Holding Company: |
||||||||
Cash and cash equivalents | 1,531,474 | 1,758,706 | ||||||
Restricted cash | 30,901 | 36,872 | ||||||
Other assets | 385,385 | 1,130,982 | ||||||
1,947,760 | 2,926,560 | |||||||
Total Assets | $ | 21,372,660 | $ | 12,433,646 | ||||
LIABILITIES AND PARTNERS' EQUITY |
||||||||
Investment Management: |
||||||||
Accounts payable, accrued expenses and other liabilities | $ | 595,279 | $ | 467,581 | ||||
Securities sold, not yet purchased, at fair value | 1,038,768 | 206,128 | ||||||
Due to brokers | 1,606,667 | | ||||||
3,240,714 | 673,709 | |||||||
Automotive: |
||||||||
Accounts payable, accrued expenses and other liabilities | 1,860,541 | | ||||||
Debt | 2,907,721 | | ||||||
Postemployment benefit liability | 980,777 | | ||||||
5,749,039 | | |||||||
Metals, Real Estate and Home Fashion: |
||||||||
Accounts payable, accrued expenses and other liabilities | 195,584 | 188,974 | ||||||
Debt | 88,303 | 116,496 | ||||||
283,887 | 305,470 | |||||||
Holding Company: |
||||||||
Accounts payable, accrued expenses and other liabilities | 176,055 | 358,381 | ||||||
Debt | 1,926,183 | 1,924,957 | ||||||
Preferred limited partnership units | 128,153 | 123,538 | ||||||
2,230,391 | 2,406,876 | |||||||
Total Liabilities | 11,504,031 | 3,386,055 | ||||||
Commitments and contingencies (Note 20) |
||||||||
Non-controlling interests: |
||||||||
Investment Management | 5,816,251 | 6,594,014 | ||||||
Automotive | 1,084,847 | | ||||||
Holding Company and other | 118,518 | 140,549 | ||||||
Partners' equity: |
||||||||
Limited partners |
||||||||
Depository units: 92,400,000 authorized; issued 71,626,710 at September 30, 2008 and December 31, 2007; outstanding 70,489,510 at September 30, 2008 and December 31, 2007 | 3,312,323 | 3,056,598 | ||||||
General partner | (451,389 | ) | (731,649 | ) | ||||
Treasury units at cost | (11,921 | ) | (11,921 | ) | ||||
Total Partners' Equity | 2,849,013 | 2,313,028 | ||||||
Total Liabilities and Partners' Equity | $ | 21,372,660 | $ | 12,433,646 |
See notes to consolidated financial statements.
1
Three Months Ended September 30, |
||||||||
2008 | 2007 | |||||||
(unaudited) | ||||||||
Revenues: |
||||||||
Investment Management | $ | (594,906 | ) | $ | (78,413 | ) | ||
Automotive | 1,724,680 | | ||||||
Metals | 406,596 | 199,607 | ||||||
Real Estate | 27,723 | 32,719 | ||||||
Home Fashion | 116,307 | 185,597 | ||||||
Holding Company | 114,893 | 75,003 | ||||||
Total revenues | 1,795,293 | 414,513 | ||||||
Expenses: |
||||||||
Investment Management | 35,371 | 20,453 | ||||||
Automotive | 1,699,141 | | ||||||
Metals | 373,561 | 189,336 | ||||||
Real Estate | 22,633 | 27,122 | ||||||
Home Fashion | 126,785 | 220,549 | ||||||
Holding Company | 39,589 | 47,275 | ||||||
Total expenses | 2,297,080 | 504,735 | ||||||
Loss from continuing operations before income taxes and non-controlling interests in (income) loss | (501,787 | ) | (90,222 | ) | ||||
Income tax expense | (32,553 | ) | (9,952 | ) | ||||
Non-controlling interests in (income) loss: |
||||||||
Investment Management | 560,516 | 94,276 | ||||||
Automotive | (5,409 | ) | | |||||
Holding Company and other | 3,955 | 12,681 | ||||||
559,062 | 106,957 | |||||||
Income from continuing operations | 24,722 | 6,783 | ||||||
Discontinued operations: |
||||||||
Income from discontinued operations, net of income taxes | 11 | 4,538 | ||||||
Non-controlling interests in loss | 26 | 4,959 | ||||||
(Loss) gain on dispositions, net of income taxes | (1,423 | ) | 7,660 | |||||
(Loss) income from discontinued operations | (1,386 | ) | 17,157 | |||||
Net earnings | $ | 23,336 | $ | 23,940 | ||||
Net earnings (loss) attributable to: |
||||||||
Limited partners | $ | 22,872 | $ | 34,783 | ||||
General partner | 464 | (10,843 | ) | |||||
$ | 23,336 | $ | 23,940 | |||||
Net earnings per LP unit: |
||||||||
Basic and diluted earnings (loss): |
||||||||
Income from continuing operations | $ | 0.34 | $ | 0.27 | ||||
(Loss) income from discontinued operations | (0.02 | ) | 0.25 | |||||
Basic and diluted earnings per LP unit | $ | 0.32 | $ | 0.52 | ||||
Weighted-average LP units outstanding | 70,490 | 66,830 | ||||||
Cash distributions declared per LP unit | $ | 0.25 | $ | 0.15 |
See notes to consolidated financial statements.
2
Nine Months Ended September 30, |
||||||||
2008(1) | 2007 | |||||||
(unaudited) | ||||||||
Revenues: |
||||||||
Investment Management | $ | (1,290,399 | ) | $ | 694,762 | |||
Automotive | 4,392,212 | | ||||||
Metals | 1,143,727 | 622,454 | ||||||
Real Estate | 74,879 | 89,904 | ||||||
Home Fashion | 327,934 | 540,871 | ||||||
Holding Company | 142,278 | 204,033 | ||||||
Total revenues | 4,790,631 | 2,152,024 | ||||||
Expenses: |
||||||||
Investment Management | 56,962 | 82,934 | ||||||
Automotive | 4,257,440 | | ||||||
Metals | 1,020,951 | 594,785 | ||||||
Real Estate | 66,761 | 78,719 | ||||||
Home Fashion | 385,483 | 657,558 | ||||||
Holding Company | 122,363 | 116,900 | ||||||
Total expenses | 5,909,960 | 1,530,896 | ||||||
(Loss) income from continuing operations before income taxes and non-controlling interests in (income) loss | (1,119,329 | ) | 621,128 | |||||
Income tax expense | (108,602 | ) | (13,807 | ) | ||||
Non-controlling interests in (income) loss: |
||||||||
Investment Management | 1,188,675 | (417,242 | ) | |||||
Automotive | (50,594 | ) | | |||||
Holding Company and other | 19,492 | 43,644 | ||||||
1,157,573 | (373,598 | ) | ||||||
(Loss) income from continuing operations | (70,358 | ) | 233,723 | |||||
Discontinued operations: |
||||||||
Income from discontinued operations, net of income taxes | 7,756 | 49,772 | ||||||
Non-controlling interests in loss | 76 | 4,428 | ||||||
Gain on dispositions, net of income taxes | 478,094 | 21,686 | ||||||
Income from discontinued operations | 485,926 | 75,886 | ||||||
Net earnings | $ | 415,568 | $ | 309,609 | ||||
Net earnings attributable to: |
||||||||
Limited partners | $ | 411,255 | $ | 104,429 | ||||
General partner | 4,313 | 205,180 | ||||||
$ | 415,568 | $ | 309,609 | |||||
Net earnings per LP unit: |
||||||||
Basic and diluted earnings (loss): |
||||||||
(Loss) income from continuing operations | $ | (1.27 | ) | $ | 0.47 | |||
Income from discontinued operations | 7.10 | 1.17 | ||||||
Basic and diluted earnings per LP unit | $ | 5.83 | $ | 1.64 | ||||
Weighted-average LP units outstanding | 70,490 | 63,533 | ||||||
Cash distributions declared per LP unit | $ | 0.75 | $ | 0.40 |
(1) | Automotive segment results are for the period March 1, 2008 through September 30, 2008. |
See notes to consolidated financial statements.
3
General Partners Deficit | Limited Partners Equity Depositary Units | Held in Treasury |
Total Partners' Equity |
|||||||||||||||||
Amounts | Units | |||||||||||||||||||
Balance, December 31, 2007 | $ | (731,649 | ) | $ | 3,056,598 | $ | (11,921 | ) | 1,137 | $ | 2,313,028 | |||||||||
Comprehensive income: |
||||||||||||||||||||
Net earnings | 4,313 | (1) | 411,255 | | | 415,568 | ||||||||||||||
Net unrealized losses on available-for-sale securities | (206 | ) | (10,158 | ) | | | (10,364 | ) | ||||||||||||
Translation adjustments and other | 40,765 | (98,949 | ) | | | (58,184 | ) | |||||||||||||
Comprehensive income | 44,872 | 302,148 | | | 347,020 | |||||||||||||||
Acquisition of Federal-Mogul | 236,330 | | 236,330 | |||||||||||||||||
Partnership distributions | (1,073 | ) | (52,867 | ) | | | (53,940 | ) | ||||||||||||
Change in subsidiary equity and other | 131 | 6,444 | | | 6,575 | |||||||||||||||
Balance, September 30, 2008 | $ | (451,389 | ) | $ | 3,312,323 | $ | (11,921 | ) | 1,137 | $ | 2,849,013 |
(1) | Includes a charge of $24,761 relating to the sale of ACEP. |
See notes to consolidated financial statements.
4
Nine Months Ended September 30, |
||||||||
2008(1) | 2007 | |||||||
Cash Flows from operating activities: |
||||||||
Net (loss) earnings: |
||||||||
Investment Management | $ | (158,958 | ) | $ | 191,411 | |||
Automotive, Holding Company and other | 88,600 | 42,312 | ||||||
Income from discontinued operations | 485,926 | 75,886 | ||||||
Net earnings | $ | 415,568 | $ | 309,609 | ||||
(Loss) income from continuing operations: |
||||||||
Investment Management: | $ | (158,958 | ) | $ | 191,411 | |||
Adjustments to reconcile net (loss) earnings to net cash used in operating activities: |
||||||||
Non-controlling interests in (loss) income | (1,188,675 | ) | 417,242 | |||||
Deferred income tax expense | | (2,504 | ) | |||||
Investment losses (gains) | 1,755,641 | (646,454 | ) | |||||
Purchases of securities | (5,717,750 | ) | (6,907,622 | ) | ||||
Proceeds from sales of securities | 3,643,648 | 4,812,569 | ||||||
Purchases to cover securities sold, not yet purchased | (417,304 | ) | (1,223,657 | ) | ||||
Proceeds from securities sold, not yet purchased | 1,558,357 | 1,513,698 | ||||||
Net premiums received on derivative contracts | 116,049 | | ||||||
Changes in operating assets and liabilities: |
||||||||
Cash held at consolidated affiliated partnerships and restricted cash | (1,835,161 | ) | (29,737 | ) | ||||
Due from brokers | 293,320 | (761,686 | ) | |||||
Other assets | (52,732 | ) | 159,324 | |||||
Due to broker | 1,606,667 | | ||||||
Accounts payable, accrued expenses and other liabilities | 115,136 | 195,651 | ||||||
Net cash used in continuing operations | (281,762 | ) | (2,281,765 | ) | ||||
Automotive, Holding Company and other: | 88,600 | 42,312 | ||||||
Adjustments to reconcile net earnings to net cash used in operating activities: |
||||||||
Depreciation and amortization | 236,261 | 28,716 | ||||||
Investment gains | (81,892 | ) | (75,644 | ) | ||||
Preferred LP unit interest expense | 4,615 | 4,393 | ||||||
Non-controlling interests in income (loss) | 31,102 | (43,644 | ) | |||||
Deferred income tax expense | (2,191 | ) | 5,954 | |||||
Impairment loss on long-lived assets | 6,220 | 22,432 | ||||||
Net cash used in activities on trading securities | | (38,505 | ) | |||||
Other, net | 7,434 | (6,724 | ) | |||||
Changes in operating assets and liabilities: |
||||||||
Trade, notes and other receivables, net | (77,901 | ) | (40,089 | ) | ||||
Other assets | 42,663 | 17,020 | ||||||
Inventories, net | 88,548 | (9,144 | ) | |||||
Accounts payable, accrued expenses and other liabilities | (101,743 | ) | (961 | ) | ||||
Net cash provided by (used in) continuing operations | 241,716 | (93,884 | ) | |||||
Net cash used in continuing operations | (40,046 | ) | (2,375,649 | ) | ||||
Income from discontinued operations | 485,926 | 75,886 | ||||||
Depreciation and amortization | 5 | 8,610 | ||||||
Net gain from sales of businesses and properties | (478,094 | ) | (11,749 | ) | ||||
Change in operating assets and liabilities | (15,037 | ) | 2,412 | |||||
Net cash (used in) provided by discontinued operations | (7,200 | ) | 75,159 | |||||
Net cash used in operating activities | (47,246 | ) | (2,300,490 | ) |
(1) | Automotive segment results are for the period March 1, 2008 through September 30, 2008. |
See notes to consolidated financial statements.
5
Nine Months Ended September 30, |
||||||||
2008 | 2007 | |||||||
Cash flows from investing activities: |
||||||||
Automotive, Holding Company and other: |
||||||||
Capital expenditures | (699,420 | ) | (48,424 | ) | ||||
Purchases of marketable equity and debt securities | (3,525 | ) | (151,133 | ) | ||||
Proceeds from sales of marketable equity and debt securities | 215,124 | 364,994 | ||||||
Net proceeds from the sales and disposition of long-lived assets | 38,493 | 17,260 | ||||||
Acquisitions of businesses, net of cash acquired | (67,959 | ) | (46,886 | ) | ||||
Other | | 1,164 | ||||||
Net cash (used in) provided by investing activities from continuing operations | (517,287 | ) | 136,975 | |||||
Discontinued operations: |
||||||||
Capital expenditures | (5,272 | ) | (19,252 | ) | ||||
Net proceeds from the sales and disposition of assets | 1,222,944 | 18,442 | ||||||
Other, net | (97,846 | ) | 12,116 | |||||
Net cash provided by investing activities from discontinued operations | 1,119,826 | 11,306 | ||||||
Net cash provided by investing activities | 602,539 | 148,281 | ||||||
Cash flows from financing activities: |
||||||||
Investment Management: |
||||||||
Capital distributions to partners | | (442,501 | ) | |||||
Capital subscriptions received in advance | 720 | 23,336 | ||||||
Capital distributions to non-controlling interests | (430,292 | ) | (59,366 | ) | ||||
Capital contributions by non-controlling interests | 683,764 | 2,525,273 | ||||||
Net cash provided by financing activities from continuing operations | 254,192 | 2,046,742 | ||||||
Automotive, Holding Company and other: |
||||||||
Partners equity: |
||||||||
Partnership distributions | (53,940 | ) | (26,566 | ) | ||||
General partner contribution | | 16,446 | ||||||
Purchase of treasury shares by subsidiary | (16,652 | ) | | |||||
Dividends paid to minority holders of subsidiary | | (18,529 | ) | |||||
Proceeds from issuance of senior notes payable | | 492,130 | ||||||
Proceeds from variable rate notes | | 600,000 | ||||||
Proceeds from other borrowings | 301 | 62,411 | ||||||
Repayments of other borrowings | (66,453 | ) | (31,305 | ) | ||||
Other | (1,823 | ) | 104 | |||||
Net cash (used in) provided by financing activities from continuing operations | (138,567 | ) | 1,094,691 | |||||
Net cash provided by financing activities from continuing operations | 115,625 | 3,141,433 | ||||||
Net cash used in financing activities from discontinued operations | (255,000 | ) | (370 | ) | ||||
Net cash (used in) provided by financing activities | (139,375 | ) | 3,141,063 | |||||
Effect of exchange rate changes on cash | (11,585 | ) | 3,199 | |||||
Net increase in cash and cash equivalents* | 404,333 | 992,053 | ||||||
Net change in cash of assets held for sale | 69,060 | (32,730 | ) | |||||
Cash and cash equivalents, beginning of period | 2,112,832 | 1,884,477 | ||||||
Cash and cash equivalents, end of period | $ | 2,586,225 | $ | 2,843,800 | ||||
*Net increase in cash and cash equivalents consists of the following: |
||||||||
Investment Management | $ | (27,570 | ) | $ | (235,023 | ) | ||
Automotive, Holding Company and other | (425,723 | ) | 1,140,981 | |||||
Discontinued operations | 857,626 | 86,095 | ||||||
$ | 404,333 | $ | 992,053 | |||||
Supplemental information: |
||||||||
Cash payments for interest | $ | 276,183 | $ | 93,799 | ||||
Cash payments for income taxes, net of refunds | $ | 165,542 | $ | 19,596 | ||||
Net realized losses on securities available for sale | $ | (10,364 | ) | $ | (20,520 | ) | ||
LP unit issuance | $ | | $ | 810,000 | ||||
Receipt of Lear common stock | $ | | $ | 12,500 | ||||
Redemptions payable to non-controlling interests | $ | 75,154 | $ | |
See notes to consolidated financial statements.
6
Icahn Enterprises L.P. (Icahn Enterprises or the Company) is a master limited partnership formed in Delaware on February 17, 1987. We own a 99% limited partner interest in Icahn Enterprises Holdings L.P. (Icahn Enterprises Holdings). Icahn Enterprises Holdings and its subsidiaries own substantially all of our assets and liabilities and conduct substantially all of our operations. Icahn Enterprises G.P. Inc. (Icahn Enterprises GP), which is owned and controlled by Mr. Carl C. Icahn, owns a 1% general partner interest in both us and Icahn Enterprises Holdings, representing an aggregate 1.99% general partner interest in us and Icahn Enterprises Holdings. As of September 30, 2008, affiliates of Mr. Icahn owned 64,288,061 of our depositary units and 10,819,213 of our preferred units, which represented approximately 91.2% and 86.5% of our outstanding depositary units and preferred units, respectively.
We are a diversified holding company owning subsidiaries currently engaged in the following continuing operating businesses: Investment Management, Automotive, Metals, Real Estate and Home Fashion. We also report the results of our Holding Company, which includes the unconsolidated results of Icahn Enterprises and Icahn Enterprises Holdings, and investment activity and expenses associated with the Holding Company. Further information regarding our continuing reportable segments is contained in Note 3, Operating Units, and Note 18, Segment Reporting.
The accompanying consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and related notes contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007 (fiscal 2007). The financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the SEC) related to interim financial statements. The financial information contained herein is unaudited; however, management believes all adjustments have been made that are necessary to present fairly the results for the interim periods. All such adjustments are of a normal and recurring nature. Certain prior year amounts have been reclassified in order to conform to the current year presentation.
In accordance with United States generally accepted accounting principles (U.S. GAAP), assets transferred between entities under common control are accounted for at historical cost similar to a pooling of interests, and the financial statements of previously separate companies for all periods under common control prior to the acquisition are restated on a consolidated basis.
The consolidated financial statements include the accounts of (i) Icahn Enterprises, (ii) the wholly and majority owned subsidiaries of Icahn Enterprises in which control can be exercised (including Federal-Mogul Corporation (Federal-Mogul), which now comprises our Automotive segment) and (iii) entities in which Icahn Enterprises has a controlling, general partner interest or in which it is the primary beneficiary of a variable interest entity in accordance with Financial Accounting Standards Board (FASB) Interpretation No. (FIN) 46R, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 (FIN 46R). Icahn Enterprises is considered to have control if it has a direct or indirect ability to make decisions about an entitys activities through voting or similar rights. As a result, there are entities that are consolidated in our financial statements in which we only have a minority interest in the equity and income. The majority interests in these entities are reflected as non-controlling interests in our consolidated financial statements. All material intercompany accounts and transactions have been eliminated in consolidation.
We conduct and plan to continue to conduct our activities in such a manner as not to be deemed an investment company under the Investment Company Act of 1940 (the 40 Act). Therefore, no more than 40% of our total assets will be invested in investment securities, as such term is defined in the 40 Act. In addition, we do not invest or intend to invest in securities as our primary business. We intend to structure our investments to continue to be taxed as a partnership rather than as a corporation under the applicable publicly traded partnership rules of the Internal Revenue Code, as amended (the Code).
7
Because of the nature of our business, the results of operations for quarterly and other interim periods are not indicative of the results to be expected for the full year. Variations in the amount and timing of gains and losses on our investments can be significant. Variations in the results of our Investment Management segment can be significant. The results of our Real Estate and Home Fashion segments are seasonal. The results of our Automotive segment are moderately seasonal.
As discussed in further detail in Note 2 Acquisition of Controlling Interest in Federal-Mogul Corporation, on July 3, 2008, we acquired, through a subsidiary, a 50.5% majority interest in Federal-Mogul, from Thornwood Associates Limited Partnership (Thornwood) and Thornwoods general partner, Barberry Corp. (Barberry). Thornwood and Barberry are wholly owned by Mr. Carl C. Icahn. The transaction contemplated a series of events including the acquisition by Thornwood of 25,141,924 shares of Federal-Mogul common stock (Federal-Mogul Shares) as a result of Federal-Moguls emergence from bankruptcy on December 27, 2007 and the exercise on February 25, 2008 of options by Thornwood to acquire an additional 50,100,000 Federal-Mogul Shares, culminating in the acquisition by us on July 3, 2008 of a 50.5% majority interest in Federal-Mogul Shares from Thornwood. The acquisition of the controlling interest in Federal-Mogul is accounted for as a combination of entities under common control and recorded at the historical basis of the assets and liabilities acquired at the effective date of control by Mr. Icahn, February 25, 2008. During the third quarter of fiscal 2008, Federal-Mogul purchased approximately 1.1 million shares of its own capital stock which effectively increased our majority ownership to 51.1%.
For accounting purposes, Federal-Moguls earnings prior to our acquisition of the controlling interest in Federal-Mogul on July 3, 2008 have been allocated to Icahn Enterprises GP, our general partner, and therefore are excluded from the computation of basic and diluted earnings per limited partnership unit.
In connection with our acquisition of the controlling interest in Federal-Mogul, we have applied the following additional accounting policies as of March 1, 2008:
Trade Accounts Receivable: Our Automotive segment has subsidiaries in Brazil, France, Germany, Italy and Spain that are party to accounts receivable factoring arrangements. Gross accounts receivable factored under these facilities were $298 million as of September 30, 2008. Of this amount, $270 million was factored without recourse and treated as a sale under Statement of Financial Accounting Standards (SFAS) No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. Under terms of these factoring arrangements Federal-Mogul is not obligated to draw cash immediately upon the factoring of accounts receivable. Thus, as of September 30, 2008, our Automotive segment had outstanding factored amounts of $12 million for which cash had not yet been drawn.
Pension and Other Postemployment Obligations: Pension and other postemployment benefit costs are dependent upon assumptions used in calculating such costs. These assumptions include discount rates, health care cost trends, expected returns on plan assets and other factors. In accordance with U.S. GAAP, actual results that differ from the assumptions used are accumulated and amortized over future periods and, accordingly, generally affect recognized expense and the recorded obligation in future periods.
Revenue Recognition: Our Automotive segment records sales when products are shipped and title has transferred to the customer, the sales price is fixed and determinable, and the collectibility of revenue is reasonably assured. Accruals for sales returns and other allowances are provided at the time of shipment based upon past experience. Adjustments to such returns and allowances are made as new information becomes available.
8
Rebates/Sales Incentives: Our Automotive segment accrues for rebates pursuant to specific arrangements with certain of its customers, primarily in the aftermarket. Rebates generally provide for price reductions based upon the achievement of specified purchase volumes and are recorded as a reduction of sales as earned by such customers.
Shipping and Handling Costs: Our Automotive segment recognizes shipping and handling costs as a component of cost of products sold in the statement of operations.
Engineering and Tooling Costs: Pre-production tooling and engineering costs that our Automotive segment will not own and that will be used in producing products under long-term supply arrangements are expensed as incurred unless the supply arrangement provides our Automotive segment with the noncancelable right to use the tools, or the reimbursement of such costs is agreed to by the customer. Pre-production tooling costs that are owned by our Automotive segment are capitalized as part of machinery and equipment, and are depreciated over the shorter of the toolings expected life or the duration of the related program.
Research and Development and Advertising Costs: Our Automotive segment expenses research and development (R&D) costs and costs associated with advertising and promotion as incurred.
Foreign Currency Translation: Exchange adjustments related to international currency transactions and translation adjustments for international subsidiaries whose functional currency is the U.S. dollar (principally those located in highly inflationary economies) are reflected in the consolidated statements of operations. Translation adjustments of international subsidiaries for which the local currency is the functional currency are reflected in the consolidated balance sheets as a component of accumulated other comprehensive income. Deferred taxes are not provided on translation adjustments as the earnings of the subsidiaries are considered to be permanently reinvested.
Restructuring: Our Automotive segment defines restructuring expense to include costs directly related to exit or disposal activities accounted for in accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, employee severance costs incurred as a result of an exit or disposal activity accounted for in accordance with SFAS No. 88, Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, and SFAS No. 112, Employers' Accounting for Postemployment Benefits, and pension and other postemployment benefit costs incurred as a result of an exit or disposal activity accounted for in accordance with SFAS No. 87, Employers' Accounting for Pensions, and SFAS No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions.
The Investment Management segment adopted Method 2 of Emerging Issues Task Force (EITF) Topic D-96, Accounting for Management Fees Based on a Formula (EITF D-96), related to a new special profits interest allocation agreement, effective January 1, 2008 as more fully described in Note 3, Operating Units Investment Management.
The Investment Management segment enters into various derivative contracts, such as credit default swaps, and has adopted FIN 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45), as more fully described in Note 8, Financial Instruments.
SFAS No. 141(R). In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (SFAS No. 141(R)). SFAS No. 141(R) requires the acquiring entity in a business combination to record all assets acquired and liabilities assumed at their respective acquisition-date fair values. Certain forms of contingent consideration and certain acquired contingencies will be recorded at fair value at the acquisition date. SFAS No. 141(R) also requires that acquisition-related costs be expensed as incurred and restructuring costs
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be expensed in periods after the acquisition date. This statement is effective for financial statements issued for fiscal years beginning after December 15, 2008. Early adoption of SFAS No. 141(R) is not permitted. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after January 1, 2009.
SFAS No. 160. In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements An Amendment of ARB No. 51 (SFAS No. 160). SFAS No. 160 requires a company to clearly identify and present ownership interests in subsidiaries held by parties other than the company in the consolidated financial statements within the equity section but separate from the companys equity. It also requires that the amount of consolidated net income attributable to the parent and to the non-controlling interest be clearly identified and presented on the face of the consolidated statement of income; changes in ownership interest be accounted for similarly as equity transactions; and, when a subsidiary is deconsolidated, any retained non-controlling equity investment in the former subsidiary and the gain or loss on the deconsolidation of the subsidiary be measured at fair value. SFAS No. 160 applies prospectively as of January 1, 2009, except for the presentation and disclosure requirements which will be applied retrospectively for all periods presented. Early adoption of SFAS No. 160 is not permitted.
SFAS No. 161. In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133 (SFAS No. 161), which requires enhanced disclosures about an entitys derivative and hedging activities thereby improving the transparency of financial reporting. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early adoption encouraged. We are currently evaluating the provisions of this standard and the impact of adopting this standard as of January 1, 2009.
Federal-Mogul is a reporting company under the Securities Exchange Act of 1934, as amended (the Exchange Act), and files annual, quarterly and current reports. Each of these reports is separately filed with the SEC and is publicly available.
On July 3, 2008, Icahn Enterprises Holdings and its newly formed, wholly owned subsidiary, IEH FM Holdings LLC (Acquisition Sub), entered into a Stock Purchase Agreement (the Agreement) with Thornwood and Thornwoods general partner, Barberry, pursuant to which we acquired a 50.5% majority interest in Federal-Mogul. Thornwood and Barberry are wholly owned by Mr. Carl C. Icahn. Prior to the acquisition of the shares by Icahn Enterprises Holdings, Thornwood owned 75,241,924 Federal-Mogul Shares, which represented approximately 74.87% of the total issued and outstanding shares of capital stock of Federal-Mogul. Thornwood acquired 50,100,000 Federal-Mogul Shares pursuant to the exercise of two options on February 25, 2008 that were acquired in December 2007 from the Federal-Mogul Asbestos Personal Injury Trust (the Trust Stock) and 25,141,924 Federal-Mogul Shares pursuant to and in connection with Federal-Mogul Plan of Reorganization under Chapter 11 of the United States Code, which become effective on December 27, 2007.
Pursuant to the Agreement, on July 3, 2008, Acquisition Sub purchased from Thornwood 50,750,000 Federal-Mogul Shares for an aggregate purchase price of $862,750,000 in cash (or $17.00 per share, which represented a discount to Thornwoods purchase price for such shares). The purchased shares represented approximately 50.5% of the total issued and outstanding shares of capital stock of Federal-Mogul. During the third quarter of fiscal 2008, Federal-Mogul purchased approximately 1.1 million shares of its own capital stock which effectively increased our majority ownership to 51.1%.
The acquisition of the controlling interest in Federal-Mogul was approved by the audit committee of the independent directors of Icahn Enterprises GP. The audit committee was advised by its own legal counsel and
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independent financial advisor with respect to the transaction. The audit committee received an opinion from its financial adviser as to the fairness to us, from a financial point of view, of the consideration paid.
Federal-Mogul is a leading global supplier of parts, accessories, modules and systems to customers in the automotive, small engine, heavy-duty, marine, railroad, aerospace and industrial markets. Federal-Mogul has established a global presence and conducts its operations through various manufacturing, distribution and technical centers that are wholly owned subsidiaries or partially owned joint ventures, organized into five product groups: Powertrain Energy, Powertrain Sealing and Bearings, Vehicle Safety and Protection, Automotive Products and Global Aftermarket. Federal-Mogul offers its customers a diverse array of market-leading products for original equipment manufacturers (OEM) and replacement parts (aftermarket) applications, including engine bearings, pistons, piston rings, piston pins, ignition products, fuel products, cylinder liners, valve seats and guides, sealing products, element resistant systems protection sleeving products, electrical connectors and sockets, disc pads and brake shoes, lighting, wiper and steering products. Federal-Moguls principal customers include most of the worlds OEMs of vehicles and industrial products and aftermarket retailers and wholesalers.
The predecessor to Federal-Mogul (the Predecessor Company) and all of its then-existing wholly owned U.S. subsidiaries filed voluntary petitions on October 1, 2001 for reorganization under Chapter 11 of Title 11 of the United States Code (the Bankruptcy Code) with the United States Bankruptcy Court for the District of Delaware (the Bankruptcy Court). On October 1, 2001 (the Petition Date), certain of the Predecessor Companys United Kingdom subsidiaries (together with the U.S. Subsidiaries, the Debtors) also filed voluntary petitions for reorganization under the Bankruptcy Code with the Bankruptcy Court. On November 8, 2007, the Bankruptcy Court entered an Order (the Confirmation Order) confirming the Fourth Amended Joint Plan of Reorganization for Debtors and Debtors-in-Possession (as Modified) (the Plan) and entered Findings of Fact and Conclusions of Law regarding the Plan (the Findings of Fact and Conclusions of Law). On November 14, 2007, the United States District Court for the District of Delaware (the District Court) entered an order affirming the Confirmation Order and adopting the Findings of Fact and Conclusions of Law. On December 27, 2007, the Plan became effective in accordance with its terms (the Effective Date). On the Effective Date, the Predecessor Company merged with and into New Federal-Mogul Corporation whereupon (i) the separate corporate existence of the Predecessor Company ceased, (ii) New Federal-Mogul Corporation became the surviving corporation and continued to be governed by the laws of the State of Delaware and (iii) New Federal-Mogul Corporation was renamed Federal-Mogul Corporation (also referred herein as Federal-Mogul or the Successor Company).
In accordance with U.S. GAAP, Federal-Mogul was required to adopt fresh-start reporting effective upon emergence from bankruptcy on December 27, 2007. Upon adoption of fresh-start reporting, the recorded amounts of assets and liabilities were adjusted to reflect their estimated fair values.
Additional information concerning the emergence of Federal-Mogul from bankruptcy proceedings on December 27, 2007 and the settlement of claims related thereto can be found in the financial statements and footnotes of Federal-Mogul included in our current report on Form 8-K/A filed with the SEC on August 7, 2008.
In accordance with U.S. GAAP, assets transferred between entities under common control are accounted for at historical cost similar to a pooling of interests. As of February 25, 2008 (the effective date of control by Thornwood and, indirectly, Carl C. Icahn), and thereafter, as a result of our acquisition of a majority interest in Federal-Mogul on July 3, 2008, we consolidated the financial position, results of operations and cash flows of Federal-Mogul.
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We evaluated the activity between February 25, 2008 and February 29, 2008 and, based on the immateriality of such activity, concluded that the use of an accounting convenience date of February 29, 2008 was appropriate.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed of Federal-Mogul recorded on February 29, 2008. The initial fair values of the assets acquired are based on estimated fair values of Federal-Mogul upon emergence from bankruptcy on December 27, 2007, as modified by Federal-Moguls operating results for the period January 1, 2008 through February 29, 2008. In accordance with SFAS No. 141, Business Combinations (SFAS No. 141), certain long-term assets have been increased by $13.2 million as a result of our required utilization of Thornwoods underlying basis in such assets.
Fair Value | Fair Value over Basis | February 29, 2008 | ||||||||||
(Millions of Dollars) | ||||||||||||
Cash and equivalents | $ | 800.5 | $ | | $ | 800.5 | ||||||
Accounts receivable, net | 1,186.9 | | 1,186.9 | |||||||||
Inventories, net | 1,107.2 | | 1,107.2 | |||||||||
Property, plant and equipment, net | 2,105.1 | | 2,105.1 | |||||||||
Goodwill and intangible assets | 1,826.2 | 13.2 | 1,839.4 | |||||||||
Other assets | 1,139.3 | | 1,139.3 | |||||||||
Assets Acquired | 8,165.2 | 13.2 | 8,178.4 | |||||||||
Accounts payable, accrued expenses and other liabilities | 2,072.6 | | 2,072.6 | |||||||||
Debt | 2,934.0 | | 2,934.0 | |||||||||
Postemployment benefits liability | 1,008.3 | | 1,008.3 | |||||||||
Liabilities Assumed | 6,014.9 | | 6,014.9 | |||||||||
Net Assets Acquired | $ | 2,150.3 | $ | 13.2 | 2,163.5 | |||||||
Non-Controlling interest | (1,064.5 | ) | ||||||||||
$ | 1,099.0 |
In accordance with SFAS No. 141, the preliminary allocation of the reorganization value is subject to additional adjustment within one year after emergence from Federal-Moguls bankruptcy to provide Federal-Mogul with adequate time to complete the valuation of its assets and liabilities. Future adjustments, if any, may result from:
| Completion of valuation reports associated with long-lived tangible and intangible assets which may result in further adjustments or recording of additional assets or liabilities; |
| Adjustments to deferred tax assets and liabilities, which may be based upon additional information, including adjustments to fair value estimates of underlying assets or liabilities; or |
| Adjustments to amounts recorded based upon estimated fair values or upon other measurements, which could change the amount of recorded goodwill. |
The following table summarizes unaudited pro forma financial information assuming the acquisition of the controlling interest in Federal-Mogul had occurred on January 1, 2007. This unaudited pro forma financial information does not necessarily represent what would have occurred if the transaction had taken place on the dates presented and should not be taken as representative of our future consolidated results of operations or financial position (in millions, except per unit data):
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Nine Months Ended September 30, 2008 | ||||||||||||||||
Icahn Enterprises |
Federal-Mogul | Pro Forma Adjustments | Total | |||||||||||||
(January 1, 2008 to February 29, 2008) | ||||||||||||||||
Revenues | $ | 4,790.6 | $ | 1,222.4 | $ | | $ | 6,013.0 | ||||||||
Loss from continuing operations | $ | (70.4 | ) | $ | (30.6 | ) | $ | 66.8 | $ | (34.2 | ) | |||||
Net earnings (loss) | $ | 415.6 | $ | (30.6 | ) | $ | 66.8 | $ | 451.8 | |||||||
Basic and diluted loss per LP unit continuing operations |
$ | (1.27 | ) | $ | (0.76 | ) |
Nine Months Ended September 30, 2007 | ||||||||||||||||
Icahn Enterprises |
Federal-Mogul | Pro Forma Adjustments | Total | |||||||||||||
Revenues | $ | 2,152.0 | $ | 5,225.4 | $ | (29.8 | ) | $ | 7,347.6 | |||||||
Income from continuing operations | $ | 233.7 | $ | 22.2 | $ | 14.0 | $ | 269.9 | ||||||||
Net earnings | $ | 309.6 | $ | 22.2 | $ | 14.0 | $ | 345.8 | ||||||||
Basic and diluted earnings per LP unit continuing operations |
$ | 0.47 | $ | 1.03 |
The pro forma adjustments relate to the elimination of Chapter 11 expenses, adjustments relating to the adoption of fresh-start reporting and the 49.5% of Federal-Moguls income allocable to the non-controlling interests.
On August 8, 2007, we entered into a Contribution and Exchange Agreement (the Contribution Agreement) with CCI Offshore Corp., CCI Onshore Corp., Icahn Management LP, a Delaware limited partnership (Icahn Management), and Carl C. Icahn. Pursuant to the Contribution Agreement, we acquired the general partnership interests in Icahn Onshore LP (the Onshore GP) and Icahn Offshore LP (the Offshore GP and, together with the Onshore GP, the General Partners), acting as general partners of Icahn Partners LP (the Onshore Fund) and the Offshore Master Funds (as defined below), and Icahn Capital Management LP (New Icahn Management), a Delaware limited partnership.
Prior to January 1, 2008, the General Partners and New Icahn Management provided investment advisory and certain management services to the Private Funds (as defined below). As further discussed below, effective January 1, 2008, in addition to providing investment advisory services to the Private Funds, the General Partners provide or cause their affiliates to provide certain administrative and back office services to the Private Funds that had been previously provided by New Icahn Management. The General Partners do not provide such services to any other entities, individuals or accounts. Interests in the Private Funds are offered only to certain sophisticated and accredited investors on the basis of exemptions from the registration requirements of the federal securities laws and are not publicly available. As referred to herein, the Offshore Master Funds consist of (i) Icahn Partners Master Fund LP, (ii) Icahn Partners Master Fund II L.P. and (iii) Icahn Partners Master Fund III L.P. The Onshore Fund and the Offshore Master Funds are collectively referred to herein as the Investment Funds. In addition, the Offshore Funds consist of (i) Icahn Fund Ltd. (referred to herein as the Offshore Fund), (ii) Icahn Fund II Ltd. and (iii) Icahn Fund III Ltd.
The Offshore GP also acts as general partner of certain funds formed as Cayman Islands exempted limited partnerships that invest in the Offshore Master Funds. These funds, together with other funds that also
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invest in the Offshore Master Funds, constitute the Feeder Funds and, together with the Investment Funds, are referred to herein as the Private Funds.
Effective January 1, 2008, the management agreements between New Icahn Management and the Private Funds were terminated, resulting in the termination of the Feeder Funds and the Onshore Funds obligations to pay management fees thereunder. In addition, the limited partnership agreements of the Investment Funds (the Investment Fund LPAs) were amended to provide that, as of January 1, 2008, the General Partners will provide or cause their affiliates to provide to the Private Funds the administrative and back office services that were formerly provided by New Icahn Management (the Services) and, in consideration of providing the Services, the General Partners will receive special profits interest allocations from the Investment Funds. As of January 1, 2008, New Icahn Management distributed its net assets to Icahn Capital L.P. (Icahn Capital). Effective January 1, 2008, we have adopted a new revenue recognition policy with respect to the special profits interest allocation as discussed below.
Prior to January 1, 2008, the management agreements provided for the management fees to be paid by each of the Feeder Funds and the Onshore Fund to New Icahn Management at the beginning of each quarter, generally in an amount equal to 0.625% (2.5% annualized) of the net asset value of each Investors (as defined below) investment in the Feeder Fund or the Onshore Fund, as applicable, and the management fees were recognized quarterly.
Effective January 1, 2008, the Investment Fund LPAs provide that the applicable General Partner will receive a special profits interest allocation at the end of each calendar year from each capital account maintained at the Investment Funds that is attributable to: (i) in the case of the Onshore Fund, each limited partner in the Onshore Fund and (ii) in the case of the Feeder Funds, each investor in the Feeder Funds (excluding certain investors that were not charged management fees, which include affiliates of Mr. Icahn) (in each case, an Investor). This allocation is generally equal to 0.625% of the balance in each fee-paying capital account as of the beginning of each quarter (for each Investor, the Target Special Profits Interest Amount) except that amounts are allocated to the General Partners in respect of special profits interest allocations only to the extent net increases (i.e., net profits) are allocated to an Investor for the fiscal year. Accordingly, any special profits interest allocations allocated to the General Partners in respect of an Investor in any year cannot exceed the net profits allocated to such Investor in such year.
In the event that sufficient net profits are not generated by an Investment Fund with respect to a capital account to meet the full Target Special Profits Interest Amount for an Investor for a calendar year, a special profits interest allocation will generally be made to the extent of such net profits, if any, and the shortfall will be carried forward (without interest or a preferred return thereon) and added to the Target Special Profits Interest Amount determined for such Investor for the next calendar year. Appropriate adjustments will be made to the calculation of the special profits interest allocation for new subscriptions and withdrawals by Investors. In the event that an Investor withdraws or redeems in full from a Feeder Fund or the Onshore Fund before the entire Target Special Profits Interest Amount determined for such Investor has been allocated to the applicable General Partner in the form of a special profits interest allocation, the amount of the Target Special Profits Interest Amount that has not yet been allocated to such General Partner will be forfeited and the General Partner will never receive it.
Each Target Special Profits Interest Amount will be deemed contributed to a separate hypothetical capital account (that is not subject to an incentive allocation or a special profits interest allocation) in the applicable Investment Fund and any gains or losses that would have been allocated on such amounts will be credited or debited, as applicable, to such hypothetical capital account. The special profits interest allocation attributable to an Investor will be deemed to be made from (and thereby debited from) such hypothetical capital account
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and, accordingly, the aggregate amount of any special profits interest allocation attributable to such Investor will also depend upon the investment returns of the Investment Fund in which such hypothetical capital account is maintained.
In addition to receiving special profits interest allocations as described above, the General Partners receive incentive allocations from the Private Funds. Incentive allocations, which are primarily earned on an annual basis, are generally 25% of the net profits (both realized and unrealized) generated by fee-paying investors in the Private Funds that we manage. The incentive allocations are subject to a high water mark (whereby the General Partners do not earn incentive allocations during a particular year even though the fund had a positive return in such year until losses in prior periods are recovered). These allocations are calculated and allocated to the capital accounts of the General Partners annually except for incentive allocations earned as a result of investor redemption events during interim periods. Therefore, our Investment Management segments revenues will be affected by the combination of fee-paying assets under management (AUM) and the investment performance of the Private Funds. The General Partners incentive allocations and special profits interest allocations earned from the Private Funds are accrued on a quarterly basis in accordance with Method 2 of EITF Topic D-96 and are allocated to the General Partners at the end of the Private Funds fiscal year (or sooner on redemptions). Such quarterly accruals may be reversed as a result of subsequent investment performance prior to the conclusion of the Private Funds fiscal year.
For the three and nine months ended September 30, 2008, the Target Special Profits Interest Amount was $19.3 million and $79.3 million, respectively. No accrual for special profits interest allocation was made for the three and nine months ended September 30, 2008 due to losses in the Investment Funds. The Target Special Profits Interest Amount will be carried forward and will be accrued to the extent that there are sufficient net profits in the Investment Funds during the investment period to cover such amounts. There was no special profits interest allocation for the three and nine months ended September 30, 2007 because the special profits interest allocations started effective January 1, 2008.
We conduct our Automotive segment through our majority ownership in Federal-Mogul. Federal-Mogul is a leading global supplier of a broad range of parts, accessories, modules and systems to the automotive, small engine, heavy-duty, marine, railroad, agricultural, off-road, aerospace and industrial markets, including customers in both the OEM market and the aftermarket. Federal-Mogul is organized into five product groups: Powertrain Energy, Powertrain Sealing and Bearings, Vehicle Safety and Protection, Automotive Products and Global Aftermarket.
Federal-Mogul believes that the Automotive segment sales are well balanced between OEM and aftermarket, as well as domestic and international markets. Federal-Moguls customers include the worlds largest light and commercial vehicle OEMs and major distributors and retailers in the independent aftermarket. Federal-Mogul has operations in established markets, such as Canada, France, Germany, Italy, Japan, Spain, the United Kingdom and the United States, and emerging markets, including Brazil, China, Czech Republic, Hungary, India, Korea, Mexico, Poland, Russia, Thailand and Turkey. The attendant risks of Federal-Moguls international operations are primarily related to currency fluctuations, changes in local economic and political conditions and changes in laws and regulations.
Federal-Moguls restructuring activities are undertaken as necessary to execute its strategy and streamline operations, consolidate and take advantage of available capacity and resources, and ultimately achieve net cost reductions. Restructuring activities include efforts to integrate and rationalize Federal-Moguls businesses and to relocate manufacturing operations to lower cost markets. These activities generally fall into one of the following categories:
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1. | Closure of facilities and relocation of production in connection with Federal-Moguls strategy, certain operations have been closed and related production relocated to best cost countries or to other locations with available capacity. |
2. | Consolidation of administrative functions and standardization of manufacturing processes as part of its productivity strategy, Federal-Mogul has acted to consolidate its administrative functions and change its manufacturing processes to reduce selling, general and administrative costs and improve operating efficiencies through standardization of processes. |
In September 2008, Federal-Mogul announced a restructuring plan, herein referred to as Restructuring 2009, designed to improve operating performance and respond to increasingly challenging conditions in the global automotive market. This plan, when combined with other workforce adjustments, is expected to reduce Federal-Moguls global workforce by approximately 8%. Federal-Mogul continues to solidify the individual components of this plan, and will announce those components as plans are finalized. For the period March 1, 2008 through September 30, 2008, Federal-Mogul has recorded the amount of severance that is probable and estimable, and that is not attributable to future service from the current employees. For the period March 1, 2008 through September 30, 2008, Federal-Mogul has recorded $10.7 million in restructuring charges associated with Restructuring 2009, and expects to incur additional restructuring charges up to $69 million through its fiscal year ending December 31, 2009, or fiscal 2009. As the majority of the costs expected to be incurred in relation to Restructuring 2009 are related to severance, such activities are expected to yield future annual savings at least equal to the incurred costs.
Federal-Mogul expects to finance its restructuring programs, including the restructuring program initiated in September 2008 as discussed above, over the next several years through cash generated from its ongoing operations or through cash available under the Exit Facilities, subject to the terms of applicable covenants. Federal-Mogul does not expect that the execution of these programs will have an adverse impact on its liquidity position.
As of March 1, 2008, the accrued liability balance relating to restructuring programs was $14.3 million. For the three months ended September 30, 2008 and the period March 1, 2008 through September 30, 2008, Federal-Mogul incurred $11.3 million and $14.3 million of restructuring charges, respectively. Federal-Mogul paid $12.0 million of restructuring charges during the seven months ended September 30, 2008. Restructuring charges are included in expenses within our consolidated statement of operations. As of September 30, 2008, the accrued liability balance was $16.3 million, which is included in accounts payable, accrued expenses and other liabilities in our consolidated balance sheet.
Total cumulative restructuring charges for the period March 1, 2008 through September 30, 2008 were $14.3 million. We report cumulative restructuring charges for Federal-Mogul effective March 1, 2008, the date on which Federal-Mogul is under common control with us.
We conduct our Metals segment through our indirect wholly owned subsidiary, PSC Metals, Inc. (PSC Metals). PSC Metals collects industrial and obsolete scrap metal, processes it into reusable forms and supplies the recycled metals to its customers including electric-arc furnace mills, integrated steel mills, foundries, secondary smelters and metals brokers. PSC Metals ferrous products include shredded, sheared and bundled scrap metal and other purchased scrap metal such as turnings (steel machining fragments), cast furnace iron and broken furnace iron. PSC Metals also processes non-ferrous metals including aluminum, copper, brass, stainless steel and nickel-bearing metals. Non-ferrous products are a significant raw material in the production of aluminum and copper alloys used in manufacturing. PSC Metals also operates a secondary products business that includes the supply of secondary plate and structural grade pipe that is sold into niche markets for counterweights, piling and foundations, construction materials and infrastructure end-markets. For the nine
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months ended September 30, 2008 and 2007, sales to PSC Metals top five customers amounted to approximately 40% and 31% of net sales, respectively. Two customers accounted for approximately 22% of PSC Metals net sales for the nine months ended September 30, 2008.
Our Real Estate segment consists of rental real estate, property development and associated resort activities.
As of September 30, 2008 and December 31, 2007, we owned 31 and 32 rental real estate properties, respectively. In August 2008, the Real Estate segment acquired two net leased properties for $464.5 million pursuant to a Code Section 1031 exchange. The acquisition of these two net leased properties was funded from a portion of the gross proceeds received from the sale of our Gaming segment. Our property development operations are run primarily through Bayswater, a real estate investment, management and development subsidiary that focuses primarily on the construction and sale of single-family and multi-family homes, lots in subdivisions and planned communities and raw land for residential development. Our New Seabury development property in Cape Cod, Massachusetts and our Grand Harbor and Oak Harbor development property in Vero Beach, Florida each include land for future residential development of approximately 365 and 900 units of residential housing, respectively. Both developments operate golf and resort operations as well. We also completed a residential community in Westchester County, New York during the third quarter of fiscal 2008.
For the three and nine months ended September 30, 2008, property development expenses include asset impairment charges of approximately $1.5 million and $2.0 million, respectively, primarily attributable to inventory units at our Grand Harbor and Oak Harbor, Florida divisions. For the nine months ended September 30, 2007, property development expenses include asset impairment charges of approximately $1.8 million related to certain condominium land in our Oak Harbor, Florida subdivision.
As of September 30, 2008 and December 31, 2007, $53.6 million and $80.0 million, respectively, of the net investment in financing leases and net real estate leased to others was pledged to collateralize the payment of nonrecourse mortgages payable.
We conduct our Home Fashion segment through our majority ownership in WestPoint International, Inc. (WPI), a manufacturer and distributor of home fashion consumer products. WPI is engaged in the business of manufacturing, sourcing, marketing and distributing bed and bath home fashion products, including, among others, sheets, pillowcases, comforters, blankets, bedspreads, pillows, mattress pads, towels and related products. WPI recognizes revenue primarily through the sale of home fashion products to a variety of retail and institutional customers. In addition, WPI receives a small portion of its revenues through the licensing of its trademarks. During the fourth quarter of fiscal 2007, WPI sold the inventory at all of its 30 retail outlet stores and subsequently ceased operations of its retail stores. Therefore, the portion of the business related to the stores retail operations has been classified for all periods presented as discontinued operations.
A relatively small number of customers have historically accounted for a significant portion of WPIs net sales. For the nine months ended September 30, 2008 and 2007, sales to five customers amounted to approximately 45% and 47% of net sales, respectively. Two customers accounted for approximately 13% and 12%, respectively, of WPIs net sales in the nine months ended September 30, 2008, and one customer accounted for approximately 16% of WPIs net sales in the nine months ended September 30, 2007.
To improve WPIs competitive position, WPI management intends to continue to significantly reduce its cost of goods sold by restructuring its operations in the plants located in the United States, increasing production within its non-U.S. facilities and joint venture operation and sourcing goods from lower cost overseas facilities. In the second quarter of fiscal 2008, WPI entered into an agreement with a third party to manage the
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majority of its U.S. warehousing and distribution operations, which WPI is consolidating into its Wagram, NC facility. As of September 30, 2008, approximately $175.5 million of WPIs assets are located outside of the United States, primarily in Bahrain.
Included in restructuring expenses are cash charges associated with the ongoing costs of closed plants, employee severance, benefits and related costs and transition expenses. The amount of accrued restructuring costs at December 31, 2007 was $0.8 million. During the three and nine months ended September 30, 2008, WPI incurred additional restructuring costs of $4.5 million and $16.6 million, respectively. During the three and nine months ended September 30, 2007, WPI incurred restructuring charges of $4.6 million and $13.9 million, respectively. Restructuring charges are included in expenses within our consolidated statement of operations. WPI paid $16.4 million of restructuring charges during the nine months ended September 30, 2008. As of September 30, 2008, the accrued liability balance was $1.0 million, which is included in accounts payable, accrued expenses and other liabilities in our consolidated balance sheet.
Total cumulative impairment and restructuring charges from August 8, 2005 (acquisition date) through September 30, 2008 were $118.5 million.
WPI incurred non-cash impairment charges related to plants that have closed of $3.7 million and $5.2 million for the three and nine months ended September 30, 2008, respectively, and $6.5 million and $21.9 million for the three and nine months ended September 30, 2007, respectively.
WPI anticipates that restructuring charges will continue to be incurred throughout fiscal 2008. WPI anticipates incurring restructuring costs and impairment charges in fiscal 2008 relating to the current restructuring plan between $26.0 million and $29.0 million primarily related to the continuing costs of its closed facilities, transition expenses and impairment charges. Restructuring costs could be affected by, among other things, WPIs decision to accelerate or delay its restructuring efforts. As a result, actual costs incurred could vary materially from these anticipated amounts.
On February 20, 2008, we consummated the sale of our subsidiary, American Casino & Entertainment Properties LLC (ACEP), for $1.2 billion to an affiliate of Whitehall Street Real Estate Fund, realizing a gain of approximately $472 million, after taxes. The sale of ACEP included the Stratosphere and three other Nevada gaming properties, which represented all of our remaining gaming operations.
In connection with the closing, we repaid all of ACEPs outstanding 7.85% Senior Secured Notes due 2012, which were tendered pursuant to ACEPs previously announced tender offer and consent solicitation. In addition, ACEP repaid in full all amounts outstanding, and terminated all commitments, under its credit facility with Bear Stearns Corporate Lending Inc., as administrative agent, and the other lenders thereunder.
We elected to deposit approximately $1.2 billion of the gross proceeds from the sale into escrow accounts to fund investment activities through tax-deferred exchanges under Section 1031 of the Code. During the third quarter of fiscal 2008, we invested $464.5 million of the gross proceeds to purchase two net leased properties within our Real Estate segment, resulting in a deferral of $103 million in taxes. The balance of the escrow accounts was subsequently released.
WPI closed all of its retail stores based on a comprehensive evaluation of the stores long-term growth prospects and their on-going value to the business. On October 18, 2007, WPI entered into an agreement to sell the inventory at all of its retail stores and subsequently ceased operations of its retail stores. Accordingly,
18
it has reported the retail outlet stores business as discontinued operations for all periods presented. As a result of the sale, WPI accrued in fiscal 2007 approximately $8.1 million of expense relating to the estimated liability for termination of the leases relating to its retail outlet stores facilities. As of September 30, 2008 and December 31, 2007, the accrued lease termination liability balance was approximately $3.2 million and $7.1 million, respectively, which is included in accounts payable, accrued expenses and other liabilities in our consolidated balance sheets.
Operating properties are reclassified to held for sale when subject to a contract. The operations of such properties are classified as discontinued operations. The properties classified as discontinued operations changed during the nine months ended September 30, 2008 and certain amounts in the consolidated statements of operations for the three and nine months ended September 30, 2007 and cash flows for the nine months ended September 30, 2007 have been reclassified to conform to the properties that have been classified as held for sale in the current periods.
The financial position and results of operations for our Gaming and certain portions of the Home Fashion and Real Estate segments described below are presented as assets and liabilities of discontinued operations held for sale in the consolidated balance sheets and discontinued operations in the consolidated statements of operations for all periods presented in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.
A summary of the results of operations for our discontinued operations for the three and nine months ended September 30, 2008 and 2007 is as follows (in $000s):
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Revenues: |
||||||||||||||||
Gaming(1) | $ | | $ | 109,367 | $ | 59,619 | $ | 336,393 | ||||||||
Real Estate | 191 | 631 | 1,002 | 2,707 | ||||||||||||
Home Fashion retail stores | | 16,010 | | 44,654 | ||||||||||||
Total revenues | $ | 191 | $ | 126,008 | $ | 60,621 | $ | 383,754 | ||||||||
Income (loss) from discontinued operations: |
||||||||||||||||
Gaming | $ | | $ | 23,410 | $ | 13,430 | $ | 77,956 | ||||||||
Real Estate | 79 | 415 | 680 | 1,680 | ||||||||||||
Home Fashion retail stores | (80 | ) | (15,129 | ) | (234 | ) | (18,908 | ) | ||||||||
Total (loss) income from discontinued operations before income taxes, interest and other income | (1 | ) | 8,696 | 13,876 | 60,728 | |||||||||||
Interest expense | | (4,385 | ) | (2,564 | ) | (15,285 | ) | |||||||||
Interest and other income | | 660 | 322 | 19,994 | ||||||||||||
Income (loss) from discontinued operations before income taxes and non-controlling interests in loss | (1 | ) | 4,971 | 11,634 | 65,437 | |||||||||||
Income tax benefit (expense) | 12 | (433 | ) | (3,878 | ) | (15,665 | ) | |||||||||
11 | 4,538 | 7,756 | 49,772 | |||||||||||||
Non-controlling interest in loss | 26 | 4,959 | 76 | 4,428 | ||||||||||||
(Loss) gain on sales of discontinued operations, net of income tax expense | (1,423 | ) | 7,660 | 478,094 | 21,686 | |||||||||||
(Loss) income from discontinued operations | $ | (1,386 | ) | $ | 17,157 | $ | 485,926 | $ | 75,886 |
(1) | Gaming segment results for the nine months ended September 30, 2008 are through February 20, 2008, the date of the ACEP sale. |
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Interest and other income for the nine months ended September 30, 2007 includes approximately $8.3 million relating to a real estate tax refund received by Atlantic Coast Entertainment Holdings, Inc. and approximately $10.1 million representing the net gain on settlement of litigation relating to GB Holdings Inc.
The gain on sales of discontinued operations for the nine months ended September 30, 2008 includes approximately $472 million, net of income taxes of approximately $260 million, recorded on the sale of ACEP on February 20, 2008. Of the $260 million in taxes recorded on the sale of ACEP, $103 million was deferred in a Code 1031 Exchange transaction during the third quarter of fiscal 2008. The gain on sales of discontinued operations for the nine months ended September 30, 2007 includes approximately $12.4 million of gain on sales of real estate assets and $9.3 million relating to a working capital adjustment to the gain recorded on the sale of our Oil and Gas business in November 2006.
A summary of assets and liabilities of discontinued operations held for sale as of September 30, 2008 and December 31, 2007 is as follows (in $000s):
September 30, 2008 |
December 31, 2007 |
|||||||
Cash and cash equivalents | $ | | $ | 107,265 | ||||
Trade, notes and other receivables | | 5,615 | ||||||
Property, plant and equipment | 24,272 | 459,149 | ||||||
Other assets | | 60,248 | ||||||
Assets of discontinued operations held for sale | $ | 24,272 | $ | 632,277 | ||||
Accounts payable and accrued expenses | $ | | $ | 49,013 | ||||
Debt | | 257,330 | ||||||
Other liabilities | 3,419 | 11,002 | ||||||
Liabilities of discontinued operations held for sale | $ | 3,419 | $ | 317,345 |
In our consolidated balance sheets, assets of discontinued operations are classified within other assets while liabilities of discontinued operations are classified within accounts payable, accrued expenses and other liabilities.
From time to time, we have entered into several transactions with entities affiliated with Carl C. Icahn. The transactions include purchases by us of business and business interests, including debt, of the affiliated entities. Additionally, other transactions have occurred as described below.
All related party transactions are reviewed and approved by our Audit Committee. Our Audit Committee obtains independent legal counsel on all related party transactions and independent financial advice when appropriate.
In accordance with U.S. GAAP, assets transferred between common control entities are accounted for at historical cost similar to a pooling of interests, and the financial statements of previously separate companies for periods prior to the acquisition are restated on a consolidated basis. Additionally, prior to the acquisition, the earnings, losses, capital contributions and distributions of the acquired entities are allocated to the general partner as an adjustment to equity, and the consideration in excess of the basis of net assets acquired is shown as a reduction to the general partners capital account.
20
Until August 8, 2007, Icahn Management elected to defer management fees from the Offshore Funds and such amounts remain invested in the Offshore Funds. At September 30, 2008, the balance of the deferred management fees payable (included in accounts payable, accrued expenses and other liabilities) by the Offshore Funds to Icahn Management was $119.1 million and depreciation upon them was $11.2 million and $24.9 million for the three and nine months ended September 30, 2008, respectively. For the three and nine months ended September 30, 2007, the deferred management fees from the Offshore Funds and related appreciation were eliminated in consolidation. (Prior to August 8, 2007, Icahn Managements financial results were consolidated into our consolidated financial statements).
Effective January 1, 2008, Icahn Capital and the Holding Company paid for salaries and benefits of certain employees who may also perform various functions on behalf of certain other entities beneficially owned by Carl C. Icahn (collectively, Icahn Affiliates), including accounting, administrative, investment, legal and tax services. Prior to January 1, 2008, Icahn & Co. LLC paid for such services. Under a separate expense-sharing agreement, Icahn Capital and the Holding Company have charged Icahn Affiliates $1.1 million and $2.9 million for such services for the three and nine months ended September 30, 2008, respectively. Icahn Affiliates charged Icahn Management $0.9 million and $4.9 million for such services for the three and nine months ended September 30, 2007, respectively. Management believes that all allocated amounts are reasonable based upon the nature of the services provided.
In addition, effective January 1, 2008, certain expenses borne by Icahn Capital have been reimbursed by Icahn Affiliates, as appropriate, when such expenses were incurred. The expenses included investment-specific expenses for investments acquired by both the Private Funds and Icahn Affiliates that were allocated based on the amounts invested by each party, as well as investment management-related expenses that were allocated based on estimated usage agreed upon by Icahn Capital and Icahn Affiliates.
Carl C. Icahn, along with his affiliates (other than Icahn Enterprises and its affiliates), makes investments in the Private Funds. These investments are not subject to special profits interest allocations effective January 1, 2008 (and prior to January 1, 2008, management fees) or incentive allocations. As of September 30, 2008, the total value of these investments was approximately $1.46 billion.
On July 3, 2008, Icahn Enterprises Holdings and its newly formed, wholly owned subsidiary, Acquisition Sub, entered into a Stock Purchase Agreement with Thornwood and Thornwoods general partner, Barberry, pursuant to which we acquired a majority interest in Federal-Mogul. For further information on this transaction, see Note 2, Acquisition of Controlling Interest in Federal-Mogul Corporation.
Prior to our acquisition of PSC Metals on November 5, 2007, PSC Metals was wholly owned by Philip Services Corporation (Philip), which entered into a Tax Allocation Agreement (the Agreement) with Starfire Holding Corporation (Starfire). Mr. Icahn is the sole shareholder of Starfire. The Agreement provided that Starfire would pay all consolidated federal income taxes on behalf of the Philip consolidated group, which included PSC Metals. Philip was required to make payments to Starfire in an amount equal to the tax liability, if any, that it would have if it was to file as a consolidated group separate and apart from Starfire. Subsequent to our acquisition of PSC Metals on November 5, 2007, PSC Metals is no longer a party to the Agreement with Starfire.
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PSC Metals sold material to Alliance Castings for the three and nine months ended September 30, 2008 of approximately $7.4 million and $16.1 million, respectively, and for the three and nine months ended September 30, 2007, approximately $2.0 million and $7.0 million, respectively. Mr. Icahn is a major shareholder of Alliance Castings.
Philip issued approximately $6.3 million in letters of credit collateralizing certain of PSC Metals obligations, which remained outstanding at December 31, 2007. During the third quarter of fiscal 2008, PSC Metals replaced the letters of credit issued through Philip and issued its own letters of credit.
In July 2005, we entered into a license agreement with an affiliate for the non-exclusive use of approximately 1,514 square feet for which we paid monthly base rent of $13,000 plus 16.4% of certain additional rent (as defined herein). The license agreement was amended effective August 8, 2007 to reflect an increase in our portion of the office space to approximately 4,246 square feet or approximately 64.76% of the total space leased to an affiliate, of which 3,125 square feet is allocated to Icahn Capital. Under the amended license agreement, effective August 8, 2007, the monthly base rent is approximately $147,500, of which approximately $39,000 is allocated to the Holding Company and approximately $108,500 is allocated to Icahn Capital. We also pay 64.76% of the additional rent payable under the license agreement, which is allocated 17.10% to the Holding Company and 47.66% to Icahn Capital. The license agreement expires in May 2012. Under the amended agreement, base rent is subject to increases in July 2008 and December 2011. We are also entitled to certain annual rent credits each December beginning December 2005 and continuing through December 2011. For the three and nine months ended September 30, 2008, we paid such affiliate $0.6 million and $1.5 million, respectively, and for the three and nine months ended September 30, 2007, $0.4 million and $1.2 million, respectively, in connection with this licensing agreement.
An affiliate occupies a portion of certain office space leased by us. Monthly payments from the affiliate for the use of the space began on October 12, 2006. For each of the three and nine months ended September 30, 2008 and 2007, we received $20,000 and $60,000, for the use of such space, respectively.
For the three and nine months ended September 30, 2008, we paid $201,000 and $570,000 respectively, to XO Holdings, Inc., an affiliate of Icahn Enterprises GP, our general partner, for telecommunication services, and for the three and nine months ended September 30, 2007, we paid $220,000 and $721,000 respectively.
We provide certain professional services to an affiliate of Icahn Enterprises GP for which we charged $0.6 million and $1.7 million for three and nine months ended September 30, 2008, respectively, and for the three and nine months ended September 30, 2007, we charged $0.2 million and $0.5 million, respectively. As of September 30, 2008, accounts payable, accrued expenses and other liabilities in the consolidated balance sheet included $1.5 million to be applied to our charges to the affiliate for services to be provided to it.
An affiliate provided certain professional services to WPI for which it incurred charges of approximately $323,000 and $397,000 for the three and nine months ended September 30, 2008, respectively, and, for the three and nine months ended September 30, 2007, it incurred $97,000 and $411,000, respectively.
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Securities owned, and securities sold, not yet purchased consist of equities, bonds, bank debt and other corporate obligations, and derivatives, all of which are reported at fair value in our consolidated balance sheets. The following table summarizes the Private Funds securities owned, securities sold, not yet purchased and unrealized gains and losses on derivatives (in $000s):
September 30, 2008 | December 31, 2007 | |||||||||||||||
Amortized Cost | Carrying Value | Amortized Cost | Carrying Value | |||||||||||||
Securities Owned, at fair value: |
||||||||||||||||
Common stock | $ | 6,920,782 | $ | 4,849,193 | $ | 4,929,067 | $ | 5,133,486 | ||||||||
Convertible preferred stock | 13,376 | 7,666 | 30,400 | 28,272 | ||||||||||||
Call options | 143,453 | 70,039 | 196,562 | 177,127 | ||||||||||||
Put options | | | 48,325 | 67,387 | ||||||||||||
Corporate debt | 1,205,184 | 1,003,359 | 558,402 | 513,937 | ||||||||||||
Total Securities Owned, at fair value | $ | 8,282,795 | $ | 5,930,257 | $ | 5,762,756 | $ | 5,920,209 | ||||||||
Securities Sold, Not Yet Purchased, at fair value: |
||||||||||||||||
Common stock | $ | 1,266,209 | $ | 1,037,522 | $ | 177,157 | $ | 192,935 | ||||||||
Put options | 4,652 | 337 | 5,315 | 8,480 | ||||||||||||
Corporate debt | 987 | 909 | 11,061 | 4,713 | ||||||||||||
Total Securities Sold, Not Yet Purchased, at fair value | $ | 1,271,848 | $ | 1,038,768 | $ | 193,533 | $ | 206,128 | ||||||||
Unrealized Gains on Derivative Contracts, at fair value(1): | $ | 12,151 | $ | 128,243 | $ | 74,340 | $ | 110,181 | ||||||||
Unrealized Losses on Dervivative Contracts, at fair value(2): | $ | 71,464 | $ | 209,898 | $ | 17,602 | $ | 15,726 |
(1) | Amounts are included in other assets in our consolidated financial statements |
(2) | Amounts are included in accounts payable, accrued expenses and other liabilities in our consolidated financial statements |
Upon the adoption of Statement of Position No. 07-1, Clarification of the Scope of the Audit and Accounting Guide Investment Companies and Accounting by Parent Companies and Equity Method Investors for Investment Companies (SOP 07-1), the General Partners lost their ability to retain specialized accounting pursuant to the AICPA Audit and Accounting Guide Investment Companies. For those investments that (i) were deemed to be available-for-sale securities, (ii) fall outside the scope of SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities (SFAS No. 115) or (iii) the Private Funds would otherwise account for under the equity method, the Private Funds apply the fair value option pursuant to SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FAS 115 (SFAS No. 159). The application of the fair value option pursuant to SFAS No. 159 is irrevocable. The Private Funds record unrealized gains and losses for the change in the fair value of these securities as a component of net gain from investment activities in the consolidated statements of operations.
The following table summarizes those investments for which the Private Funds would otherwise apply the equity method of accounting under Accounting Principles Board Opinion No. 18, The Equity Method of
23
Accounting for Investments in Common Stock (APB 18), and are presented before non-controlling interests. The Private Funds applied the fair value option pursuant to SFAS No. 159 to such investments through September 30, 2008 (in $000s):
Private Funds Stock Ownership Percentage |
Gains (Losses) | Gains (Losses) | ||||||||||||||||||||||
Fair Value September 30, 2008 |
Three Months Ended September 30, |
Nine Months Ended September 30, |
||||||||||||||||||||||
Investment | 2008 | 2007 | 2008 | 2007 | ||||||||||||||||||||
Adventrx Pharmaceuticals Inc. |
3.83 | % | $ | 657 | $ | (631 | ) | $ | 113 | $ | (899 | ) | $ | (1,306 | ) | |||||||||
Blockbuster Inc. | 7.70 | % | 27,407 | (7,897 | ) | 13,924 | (28,954 | ) | 512 | |||||||||||||||
WCI Communities Inc. | 11.42 | % | 963 | (6,021 | ) | (51,488 | ) | (17,243 | ) | (64,867 | ) | |||||||||||||
$ | 29,027 | $ | (14,549 | ) | $ | (37,451 | ) | $ | (47,096 | ) | $ | (65,661 | ) |
The Private Funds assess the applicability of APB 18 to their investments based on a combination of qualitative and quantitative factors, including overall stock ownership of the Private Funds combined with those of affiliates of Icahn Enterprises.
We believe that these investments as noted in the above table are not material, individually or in the aggregate, to our consolidated financial statements. These companies are registered SEC reporting companies and their consolidated financial statements are available at www.sec.gov.
The General Partners consolidate certain variable interest entities (VIEs) when they are determined to be their primary beneficiary, either directly or indirectly through other consolidated subsidiaries. The assets of the consolidated VIEs are primarily classified within cash and cash equivalents and securities owned, at fair value in the consolidated balance sheets. The liabilities of the consolidated VIEs are primarily classified within securities sold, not yet purchased, at fair value, and accounts payable, accrued expenses and other liabilities in the consolidated balance sheets and are non-recourse to the General Partners general credit. Any creditors of VIEs do not have recourse against the general credit of the General Partners solely as a result of our including these VIEs in our consolidated financial statements.
The consolidated VIEs consist of the Offshore Fund and each of the Offshore Master Funds. The General Partners sponsored the formation of and manage each of these VIEs and, in some cases, have an investment therein.
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The following table presents information regarding interests in VIEs for which the General Partners hold a variable interest as of September 30, 2008 (in $000s):
General Partners are the Primary Beneficiary |
General Partners are not the Primary Beneficiary |
|||||||||||||||||||
Net Assets | General Partners Interests |
Pledged Collateral(1) |
Net Assets | General Partners Interests |
||||||||||||||||
Offshore Fund and Offshore Master Funds | $ | 3,752,012 | $ | 6,523 | (2) | $ | 290,615 | $ | 655,410 | $ | 123 | (2) |
(1) | Includes collateral pledged in connection with securities sold, not yet purchased, derivative contracts and collateral held for securities loaned. |
(2) | Amount represents General Partners maximum exposure to loss |
Investments included within other assets on the consolidated balance sheets for Automotive, Metals, Home Fashion and Holding Company consist of the following (in $000s):
September 30, 2008 | December 31, 2007 | |||||||||||||||
Amortized Cost | Carrying Value |
Amortized Cost | Carrying Value |
|||||||||||||
Available for Sale |
||||||||||||||||
Marketable equity and debt securities | $ | 75,898 | $ | 68,092 | $ | 118,785 | $ | 118,872 | ||||||||
Other investments | | | 172,197 | 173,323 | ||||||||||||
Total available for sale | 75,898 | 68,092 | 290,982 | 292,195 | ||||||||||||
Trading |
||||||||||||||||
Investment in ImClone Systems, at fair value | 122,122 | 284,769 | 122,122 | 196,235 | ||||||||||||
Investment in Lear Corporation, at fair value | 12,500 | 3,523 | 12,500 | 9,282 | ||||||||||||
Total trading | 134,622 | 288,292 | 134,622 | 205,517 | ||||||||||||
Other investments | 321,901 | 321,901 | 14,848 | 14,848 | ||||||||||||
Total investments | $ | 532,421 | $ | 678,285 | $ | 440,452 | $ | 512,560 |
With the exception of the Automotive segment as discussed below, it is our policy to apply the fair value option to all of our investments that would be subject to the equity method of accounting pursuant to APB 18. We record unrealized gains and losses for the change in fair value of such investments as a component of revenues in the consolidated statements of operations. We believe that these investments, individually or in the aggregate, are not material to our consolidated financial statements. These companies are registered SEC reporting companies and their consolidated financial statements are available at www.sec.gov.
25
The following table summarizes those investments for which the Holding Company has applied the fair value option pursuant to SFAS No. 159 through September 30, 2008 (in $000s).
Holding Company Stock Ownership Percentage |
Gains (Losses) | Gains (Losses) | ||||||||||||||||||||||
Fair Value September 30, 2008 |
Three Months Ended September 30, |
Nine Months Ended September 30, |
||||||||||||||||||||||
Investment | 2008 | 2007 | 2008 | 2007 | ||||||||||||||||||||
ImClone Systems Incorporated | 5.3 | % | $ | 284,769 | $ | 100,126 | $ | 27,290 | $ | 88,534 | $ | 66,537 | ||||||||||||
Lear Corporation | 0.4 | % | 3,523 | (1,235 | ) | (1,728 | ) | (5,758 | ) | (1,728 | ) | |||||||||||||
$ | 288,292 | $ | 98,891 | $ | 25,562 | $ | 82,776 | $ | 64,809 |
Federal-Mogul maintains investments in 14 non-consolidated affiliates, which are located in China, Germany, Italy, Japan, Korea, Turkey, the United Kingdom and the United States. Federal-Moguls direct ownership in such affiliates ranges from approximately 1% to 50%. The aggregate investment in these affiliates approximates $319 million at September 30, 2008 and is included in our consolidated balance sheets as a component of other assets. Upon the adoption of fresh-start reporting, Federal-Moguls investments in non-consolidated affiliates were adjusted to estimated fair value. These estimated fair values were determined based upon internal and external valuations that considered various relevant market rates and transactions, and discounted cash flow valuation methods, among other factors, as further described in Note 2, Acquisition of Controlling Interest in Federal-Mogul Corporation.
Equity in the earnings of non-consolidated affiliates amounted to approximately $14.4 million for the period March 1, 2008 through September 30, 2008. For the period March 1, 2008 through September 30, 2008, these entities generated sales of approximately $407 million, net income of approximately $49 million and distributed dividends to Federal-Mogul of approximately $25 million. As of September 30, 2008, these entities had total net assets of approximately $370 million.
Federal-Mogul does not hold a controlling interest in an entity based on exposure to economic risks and potential rewards (variable interests) for which it is the primary beneficiary. Further, Federal-Moguls joint ventures are businesses established and maintained in connection with its operating strategy and are not special purpose entities.
Federal-Mogul holds a 50% non-controlling interest in a joint venture located in Turkey. This joint venture was established in 1995 for the purpose of manufacturing and marketing automotive parts, including pistons, piston rings, piston pins and cylinder liners, to original equipment and aftermarket customers. Pursuant to the joint venture agreement, Federal-Moguls partner holds an option to put its shares to a subsidiary of Federal-Mogul at the higher of the current fair value and a guaranteed minimum amount. The term of the contingent guarantee is indefinite, consistent with the terms of the joint venture agreement. However, the contingent guarantee would not survive termination of the joint venture agreement.
The guaranteed minimum amount represents a contingent guarantee of the initial investment of the joint venture partner and can be exercised at the discretion of the partner. As of September 30, 2008, the total amount of the contingent guarantee, were all triggering events to occur, approximated $59 million. Federal-Mogul believes that this contingent guarantee is substantially less than the estimated current fair value of the guarantees interest in the affiliate. As such, the contingent guarantee does not give rise to a contingent liability and, as a result, no amount is recorded for this guarantee. If this put option were exercised, the consideration paid and net assets acquired would be accounted for in accordance with SFAS No. 141.
26
If this put option were exercised at its estimated current fair value, such exercise could have a material effect on Federal-Moguls liquidity. Any value in excess of the guaranteed minimum amount of the put option would be the subject of negotiation between Federal-Mogul and its joint venture partner.
In accordance with SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, Federal-Mogul has determined that its investments in Chinese joint venture arrangements are considered to be limited-lived as such entities have specified durations ranging from 30 to 50 years pursuant to regional statutory regulations. In general, these arrangements call for extension, renewal or liquidation at the discretion of the parties to the arrangement at the end of the contractual agreement. Accordingly, a reasonable assessment cannot be made as to the impact of such arrangements on the future liquidity position of Federal-Mogul.
We adopted SFAS No. 157, Fair Value Measurements (SFAS No. 157), as of January 1, 2007, which, among other things, requires enhanced disclosures about investments that are measured and reported at fair value. SFAS No. 157 establishes a hierarchal disclosure framework that prioritizes and ranks the level of market price observability used in measuring investments at fair value. Market price observability is impacted by a number of factors, including the type of investment and the characteristics specific to the investment. Investments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.
Investments measured and reported at fair value are classified and disclosed in one of the following categories:
Level 1 Quoted prices are available in active markets for identical investments as of the reporting date. The type of investments included in Level 1 include listed equities and listed derivatives. As required by SFAS No. 157, we do not adjust the quoted price for these investments, even in situations where we hold a large position.
Level 2 Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date, and fair value is determined through the use of models or other valuation methodologies. Investments that are generally included in this category include corporate bonds and loans, less liquid and restricted equity securities and certain over-the-counter derivatives.
Level 3 Pricing inputs are unobservable for the investment and include situations where there is little, if any, market activity for the investment. The inputs into the determination of fair value require significant management judgment or estimation.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investments level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the investment.
27
The following table summarizes the valuation of our investments by the above SFAS No. 157 fair value hierarchy levels as of September 30, 2008 (in $000s).
Level 1 | Level 2 | Total | ||||||||||
ASSETS |
||||||||||||
Securities owned | $ | 4,758,789 | $ | 1,171,468 | $ | 5,930,257 | ||||||
Unrealized gains on derivative contracts(1) | 67,230 | 61,013 | 128,243 | |||||||||
$ | 4,826,019 | $ | 1,232,481 | $ | 6,058,500 | |||||||
LIABILITIES |
||||||||||||
Securities sold, not yet purchased | $ | 1,037,005 | $ | 1,763 | $ | 1,038,768 | ||||||
Unrealized losses on derivative contracts(2) | | 209,898 | 209,898 | |||||||||
$ | 1,037,005 | $ | 211,661 | $ | 1,248,666 |
Level 1 | Level 2 | Total | ||||||||||
ASSETS(1) |
||||||||||||
Available for sale investments: |
||||||||||||
Marketable equity and debt securities | $ | 68,092 | $ | | $ | 68,092 | ||||||
Other securities | | | | |||||||||
68,092 | | 68,092 | ||||||||||
Trading investments: |
||||||||||||
Investment in ImClone Systems Inc. | 284,769 | | 284,769 | |||||||||
Investment in Lear Corporation | 3,523 | | 3,523 | |||||||||
288,292 | | 288,292 | ||||||||||
Hedge instruments | | 1,400 | 1,400 | |||||||||
Unrealized gains on derivative contracts | | 3,128 | 3,128 | |||||||||
$ | 356,384 | $ | 4,528 | $ | 360,912 | |||||||
LIABILITIES(2) |
||||||||||||
Unrealized losses on derivative contracts | $ | | $ | 2,881 | $ | 2,881 | ||||||
$ | | $ | 2,881 | $ | 2,881 |
(1) | Amounts are classified within other assets in our consolidated balance sheets |
(2) | Amounts are classified within accounts payable, accrued expenses and other liabilities in our consolidated balance sheets |
The Private Funds currently maintain cash deposits and cash equivalents with major financial institutions. As of September 30, 2008, most of the Onshore Funds and Offshore Master Funds investments are held and its depository and clearing operations are transacted by a single prime broker and a custodian bank. The Onshore Fund and the Offshore Master Funds have prime broker arrangements in place with two other prime
28
brokers. These financial institutions are members of major securities exchanges. The Onshore Fund and Offshore Master Funds also have relationships with several financial institutions with whom they trade derivative and other financial instruments.
In the normal course of business, the Private Funds trade various financial instruments and enter into certain investment activities, which may give rise to off-balance-sheet risk. Currently, the Private Funds invest in futures, options, credit default swaps and securities sold, not yet purchased. These financial instruments represent future commitments to purchase or sell other financial instruments or to exchange an amount of cash based on the change in an underlying instrument at specific terms at specified future dates. Risks arise with these financial instruments from potential counterparty non-performance and from changes in the market values of underlying instruments.
Securities sold, not yet purchased represent obligations of the Private Funds to deliver the specified security, thereby creating a liability to repurchase the security in the market at prevailing prices. Accordingly, these transactions result in off-balance-sheet risk, as the Private Funds satisfaction of the obligations may exceed the amount recognized in the consolidated balance sheets. The Private Funds investments in securities and amounts due from broker are partially restricted until the Private Funds satisfy the obligation to deliver the securities sold, not yet purchased.
The Private Funds and the Holding Company have entered into various types of swap contracts with other counterparties. These agreements provide that we are entitled to receive or are obligated to pay in cash an amount equal to the increase or decrease, respectively, in the value of the underlying shares, debt and other instruments that are the subject of the contracts, during the period from inception of the applicable agreement to its expiration. In addition, pursuant to the terms of such agreements, we are entitled to receive other payments, including interest, dividends and other distributions made in respect of the underlying shares, debt and other instruments during the specified time frame. We are also required to pay to our counterparty a floating interest rate equal to the product of the notional amount multiplied by an agreed-upon rate, and we receive interest on any cash collateral that we post to the counterparty at the federal funds or LIBOR rate in effect for such period.
The Private Funds trade futures contracts. A futures contract is a firm commitment to buy or sell a specified quantity of a standardized amount of a deliverable grade commodity, security, currency or cash at a specified price and specified future date unless the contract is closed before the delivery date. Payments (or variation margin) are made or received by the Private Funds each day, depending on the daily fluctuations in the value of the contract, and the whole value change is recorded as an unrealized gain or loss by the Private Funds. When the contract is closed, the Private Funds record a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed.
The Private Funds utilize forward contracts to seek to protect their assets denominated in foreign currencies from losses due to fluctuations in foreign exchange rates. The Private Funds exposure to credit risk associated with non-performance of forward foreign currency contracts is limited to the unrealized gains or losses inherent in such contracts, which are recognized in unrealized gains or losses on derivative, futures and foreign currency contracts, at fair value in the consolidated balance sheets.
From time to time, the Private Funds also purchase and write option contracts. As a writer of option contracts, the Private Funds receive a premium at the outset and then bear the market risk of unfavorable changes in the price of the underlying financial instrument. As a result of writing option contracts, the Private Funds are obligated to purchase or sell, at the holders option, the underlying financial instrument. Accordingly, these transactions result in off-balance-sheet risk, as the Private Funds satisfaction of the obligations may exceed the amount recognized in the consolidated balance sheets. At September 30, 2008 and December 31, 2007, the maximum payout amounts relating to written put options were $134.1 million and $461.4 million, respectively. As of September 30, 2008 and December 31, 2007, the carrying amounts of the
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liability under written put options recorded within securities sold, not yet purchased, at fair value were $0.3 million and $8.5 million, respectively.
FIN 45 requires the disclosure of information about obligations under certain guarantee arrangements. FIN 45 defines guarantees as contracts that contingently require the guarantor to make payments to the guaranteed party based on another entitys failure to perform under an agreement as well as indirect guarantees of the indebtedness of others.
The Private Funds have entered into certain derivative contracts, in the form of credit default swaps, that meet the accounting definition of a guarantee under FIN 45, whereby the occurrence of a credit event with respect to the issuer of the underlying financial instrument may obligate the Private Funds to make a payment to the swap counterparties. As of September 30, 2008 and December 31, 2007, the Private Funds have entered into such credit default swaps with a maximum notional amount of approximately $356.0 million and $252.0 million, respectively, with terms ranging from one to five years. We estimate that our potential exposure related to these credit default swaps approximates 10% of such notional amounts.
Federal-Mogul manufactures and sells its products in North America, South America, Asia, Europe and Africa. As a result, our Automotive segment could be significantly affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets in which Federal-Mogul manufactures and sells its products. Operating results of our Automotive segment are primarily exposed to changes in exchange rates between the U.S. dollar and European currencies.
Federal-Mogul generally tries to use natural hedges within its foreign currency activities, including the matching of revenues and costs, to minimize foreign currency risk. Where natural hedges are not in place, Federal-Mogul considers managing certain aspects of its foreign currency activities and larger transactions through the use of foreign currency options or forward contracts. Principal currencies hedged have historically included the euro, British pound, Japanese yen and Canadian dollar. The effect of changes in the estimated fair value of these hedges and the underlying exposures are recognized in earnings each period. These hedges were highly effective and their impact on earnings was not significant during the period March 1, 2008 through September 30, 2008. Federal-Mogul had a notional value of approximately $5 million of foreign currency hedge contracts outstanding at September 30, 2008 that were designated as hedging instruments for accounting purposes.
As of September 30, 2008, Federal-Mogul was party to a series of five-year interest rate swap agreements with a total notional value of $1,150 million to hedge the variability of interest payments associated with its variable rate term loans under the Exit Facilities. Through these swap agreements, Federal-Mogul has fixed its base interest and premium rate at a combined average interest rate of approximately 5.4% on the hedged notional value of $1,150 million. Since the interest rate swaps hedge the variability of interest payments on variable rate debt with the same terms, they qualify for cash flow hedge accounting treatment. As of September 30, 2008, Federal-Mogul recorded unrealized net gains of $11.2 million to other comprehensive income as a result of these hedges. Hedge ineffectiveness, determined using the hypothetical derivative method, was not material for the three months ended September 30, 2008 and the period March 1, 2008 through September 30, 2008.
These interest rate swaps reduce Federal-Moguls overall interest rate risk. However, due to the remaining outstanding borrowings on Federal-Moguls Exit Facilities and other borrowing facilities that continue to have variable interest rates, we believe that interest rate risk to our Automotive segment could be material if there are significant adverse changes in interest rates.
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Our Automotive segments production processes are dependent upon the supply of certain raw materials that are exposed to price fluctuations on the open market. The primary purpose of Federal-Moguls commodity price forward contract activity is to manage the volatility associated with forecasted purchases. Federal-Mogul monitors its commodity price risk exposures regularly to maximize the overall effectiveness of its commodity forward contracts. Principal raw materials hedged include natural gas, copper, nickel, lead, high-grade aluminum and aluminum alloy. Forward contracts are used to mitigate commodity price risk associated with raw materials, generally related to purchases forecast for up to 18 months in the future.
Federal-Mogul had 253 commodity price hedge contracts outstanding with a combined notional value of $119 million at September 30, 2008 that were designated as hedging instruments for accounting purposes. As such, unrealized net losses of $5.6 million were recorded to other comprehensive income as of September 30, 2008. Hedge ineffectiveness, determined using the hypothetical derivative method, was not material for the three months ended September 30, 2008 and the period March 1, 2008 through September 30, 2008.
For derivatives designated either as fair value or cash flow hedges, changes in the time value are excluded from the assessment of hedge effectiveness. Hedge ineffectiveness, determined in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133), did not have a material effect on our Automotive segment for the period March 1, 2008 through September 30, 2008. No fair value hedges or cash flow hedges were re-designated or discontinued during the three months ended September 30, 2008 and the period March 1, 2008 through September 30, 2008.
Financial instruments, which potentially subject our Automotive segment operations to concentrations of credit risk, consist primarily of accounts receivable and cash investments. Federal-Moguls customer base includes virtually every significant global light and commercial vehicle manufacturer and a large number of distributors and installers of automotive aftermarket parts. Federal-Moguls credit evaluation process and the geographical dispersion of sales transactions help to mitigate credit risk concentration. Federal-Mogul requires placement of cash in financial institutions evaluated as highly creditworthy.
Automotive Inventories. Prior to revaluation, inventories at our Automotive segment were stated at the lower of cost or market. In connection with revaluation, inventory balances were adjusted in accordance with SFAS No. 141, resulting in an increase to inventory balances. The additional increase resulting from our acquisition impacted cost of goods sold as the related inventory was sold. During the period March 1, 2008 through September 30, 2008, the Automotive segment recognized $47.0 million in additional cost of goods sold, reducing gross margin by the same amount, due to this adjustment to inventory. Cost is determined using the first-in-first-out method. The cost of manufactured goods includes material, labor and factory overhead. Federal-Mogul maintains reserves for estimated excess, slow-moving and obsolete inventory as well as inventory whose carrying value is in excess of net realizable value.
Metals Inventories. Inventories at our Metals segment are stated at the lower of cost or market. Cost is determined using the average cost method. The production and accounting process utilized by the Metals segment to record recycled metals inventory quantities relies on significant estimates.
Home Fashion Inventories. Inventories at our Home Fashion segment are stated at the lower of cost or market. Cost is determined using the first-in-first-out method. The cost of manufactured goods includes material, labor and factory overhead. WPI maintains reserves for estimated excess, slow-moving and obsolete
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inventory as well as inventory whose carrying value is in excess of net realizable value. A portion of WPIs inventories serves as collateral under West Point Home Inc.s unused senior secured revolving credit facility.
Our consolidated inventories, net consisted of the following (in $000s):
September 30, 2008 |
December 31, 2007 |
|||||||
Raw materials: |
||||||||
Automotive | $ | 207,597 | $ | | ||||
Home Fashion | 13,290 | 14,427 | ||||||
220,887 | 14,427 | |||||||
Work in process: |
||||||||
Automotive | 167,818 | | ||||||
Home Fashion | 31,966 | 46,483 | ||||||
199,784 | 46,483 | |||||||
Finished Goods: |
||||||||
Automotive | 658,553 | | ||||||
Home Fashion | 111,698 | 133,031 | ||||||
770,251 | 133,031 | |||||||
Metals: |
||||||||
Ferrous | 26,931 | 39,078 | ||||||
Non-ferrous | 10,219 | 9,658 | ||||||
Secondary | 23,827 | 23,546 | ||||||
60,977 | 72,282 | |||||||
Total Inventories, net | $ | 1,251,899 | $ | 266,223 |
Home Fashion and Metals inventories are included in other assets in the accompanying consolidated balance sheets.
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At September 30, 2008 and December 31, 2007, goodwill and other intangible assets consist of the following (in $000s):
September 30, 2008 | December 31, 2007 | |||||||||||||||||||||||||||
Description | Amortization Periods |
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Value |
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Value |
|||||||||||||||||||||
Definite lived intangible assets: |
||||||||||||||||||||||||||||
Automotive | 1 - 22 years | $ | 639,400 | $ | (56,700 | ) | $ | 582,700 | $ | | $ | | $ | | ||||||||||||||
Metals | 5 -15 years | 11,068 | (2,019 | ) | 9,049 | 6,968 | (1,002 | ) | 5,966 | |||||||||||||||||||
$ | 650,468 | $ | (58,719 | ) | $ | 591,749 | $ | 6,968 | $ | (1,002 | ) | $ | 5,966 | |||||||||||||||
Goodwill: |
||||||||||||||||||||||||||||
Automotive | $ | 1,005,631 | $ | | ||||||||||||||||||||||||
Metals | 10,507 | 15,367 | ||||||||||||||||||||||||||
1,016,138 | 15,367 | |||||||||||||||||||||||||||
Indefinite lived intangible assets: |
||||||||||||||||||||||||||||
Automotive | 484,010 | | ||||||||||||||||||||||||||
Metals | 3,146 | 46 | ||||||||||||||||||||||||||
Home Fashion | 18,200 | 18,200 | ||||||||||||||||||||||||||
505,356 | 18,246 | |||||||||||||||||||||||||||
$ | 1,521,494 | $ | 33,613 |
Goodwill and intangible assets for our Home Fashion and Metals segments are included in other assets in the accompanying consolidated balance sheets.
As of December 31, 2007, Federal-Mogul adjusted its net carrying amount of intangible assets based upon preliminary valuations as a result of applying fresh-start reporting. Included in these adjustments were the elimination of Predecessor goodwill and the establishment of Successor goodwill. Successor goodwill was determined as the excess of reorganization value over amounts attributable to specific tangible and intangible assets, including developed technology and customer relationships.
Federal-Mogul received valuation estimates for intangible assets other than goodwill during the quarter ended June 30, 2008 that were more detailed and comprehensive than those used for its initial application of fresh-start reporting. Based upon the revised valuation estimates, Federal-Mogul, during the quarter ended June 30, 2008, recorded adjustments to the initially recorded fresh-start reporting amounts. During the quarter ended September 30, 2008, Federal-Mogul has continued to review these revised valuation estimates and the underlying data and basis for estimating value. As this review continues, adjustments are recorded to the amounts assigned to identifiable intangible assets and to goodwill.
Federal-Mogul has preliminarily assigned $115.0 million to technology, including value for patented and unpatented proprietary know-how and expertise as embodied in the processes, specifications and testing of products. The value assigned is based on the relief-from-royalty method which applies a fair royalty rate for the technology group to forecasted revenue. Royalty rates were determined based on discussions with Federal-Moguls management and a review of royalty data for similar or comparable technologies. The preliminary amortization periods between 10 and 14 years are based on the expected useful lives of the products or product families for which the technology relate.
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Aftermarket products are sold to a wide range of wholesalers, retailers and installers as replacement parts for vehicles in current production and for older vehicles. For its aftermarket customers, Federal-Mogul generally establishes product line arrangements that encompass all products offered within a particular product line. These are typically open-ended arrangements that are subject to termination by either Federal-Mogul or the customer at any time. The generation of repeat business from any one aftermarket customer depends upon numerous factors, including but not limited to the speed and accuracy of order fulfillment, the availability of a full range of product, brand recognition, and market responsive pricing adjustments. Predictable recurring revenue is generally not heavily based upon prior relationship experience. As such, distinguishing revenue between that which is attributable to customer relationships as opposed to revenue attributable to recognized customer brands is more difficult.
Federal-Mogul, during the quarter ended June 30, 2008, completed its analysis of its various Aftermarket revenue streams and bifurcated those streams between revenues associated with brand recognition and revenues associated with customer relationships. Valuation estimates for brand names and customer relationships were then determined based upon the estimated revenue streams. As a result of the latest valuation estimates, Federal-Mogul recorded $484.0 million for its trademarks and brand names. Value was assigned to each trademark or brand name based on its earnings potential or relief from costs associated with licensing the trademark or brand name. As Federal-Mogul expects to continue using each trademark or brand name indefinitely with respect to the related product lines, the trademarks or brand names have been assigned indefinite lives and will be tested annually for impairment.
Based upon the latest valuation estimates, Federal-Mogul has assigned $519.2 million to its customer relationships, of which $62.0 million relates to original equipment (OE) customer relationships and $457.2 million relates to aftermarket customer relationships. The values assigned to customer relationships are based on the propensity of these customers to continue to generate predictable future recurring revenue and income. The value was based on the present value of the future earnings attributable to the intangible assets after recognition of required returns to other contributory assets. The preliminary amortization periods of between 1 and 16 years are based on the expected cash flows and historical attrition rates, as determined within each of the separate product groups.
The values assigned to identifiable intangible assets based upon the latest valuations represent Federal-Moguls best estimates of fair value based upon internal and external valuations. If these values were to be considered final, Federal-Moguls ongoing amortization expense for its definite-lived intangible assets for each of the following years would be as follows (in millions of dollars):
2008 | $ | 75.6 | ||
2009 | 48.9 | |||
2010 | 48.9 | |||
2011 | 47.2 | |||
2012 | 47.2 | |||
Thereafter | 371.6 | |||
$ | 639.4 |
For the three months ended September 30, 2008 and the period March 1, 2008 through September 30, 2008, Federal-Mogul has recorded amortization expense of $21.4 million and $45.6 million, respectively, associated with definite-lived intangible assets. To the extent the estimates of fair value for definite-lived intangible assets change, the cumulative recorded amortization expense will be adjusted to reflect such changes in underlying asset values.
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Property, plant and equipment consists of the following (in $000s):
September 30, 2008 |
December 31, 2007 |
|||||||
Land | $ | 314,793 | $ | 52,299 | ||||
Buildings and improvements | 498,564 | 139,673 | ||||||
Machinery, equipment and furniture | 1,562,148 | 223,104 | ||||||
Assets leased to others | 590,791 | 128,186 | ||||||
Construction in progress | 333,142 | 101,700 | ||||||
3,299,438 | 644,962 | |||||||
Less accumulated depreciation and amortization | (309,072 | ) | (111,835 | ) | ||||
Property, plant and equipment, net | $ | 2,990,366 | $ | 533,127 |
Depreciation and amortization expense from continuing operations related to property, plant and equipment for the three and nine months ended September 30, 2008 were $104.9 million and $224.8 million, respectively, and for the three and nine months ended September 30, 2007, $5.9 million and $23.0 million, respectively.
Except for the Automotive segment, property, plant and equipment is included in other assets in the accompanying consolidated balance sheets.
Non-controlling interests consist of the following (in $000s):
September 30, 2008 |
December 31, 2007 |
|||||||
Investment Management | $ | 5,816,251 | $ | 6,594,014 | ||||
Automotive | 1,084,847 | | ||||||
Holding Company and other | 118,518 | 140,549 | ||||||
Total non-controlling interests | $ | 7,019,616 | $ | 6,734,563 |
The Investment Management segment consolidates those entities in which it (i) has an investment of more than 50% and have control over significant operating, financial and investing decisions of the entity, (ii) has a controlling general partner interest pursuant to EITF Issue No. 04-05, Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights (EITF 04-05), or (iii) is the primary beneficiary of a VIE pursuant to FIN 46R. The Investment Funds and the Offshore Fund are consolidated into our financial statements even though we have only a minority interest in the equity and income of these funds. As a result, our consolidated financial statements reflect the assets, liabilities, revenues, expenses and cash flows of these funds on a gross basis, rather than reflecting only the value of our investments in such funds. As of September 30, 2008, the net asset value of the Investment Management segment on our consolidated balance sheet was approximately $6.4 billion, while the net asset value of our investments in these consolidated funds was approximately $633 million. The majority ownership interests in these funds, which represent the portion of the consolidated Private Funds net assets and net income attributable to the limited partners and shareholders in the consolidated Private Funds for the periods presented, are reflected as non-controlling interests in the consolidated financial statements.
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Debt consists of the following (in $000s):
September 30, 2008 |
December 31, 2007 |
|||||||
Senior unsecured variable rate convertible notes due 2013 Icahn Enterprises | $ | 600,000 | $ | 600,000 | ||||
Senior unsecured 7.125% notes due 2013 Icahn Enterprises | 974,371 | 973,387 | ||||||
Senior unsecured 8.125% notes due 2012 Icahn Enterprises | 351,812 | 351,570 | ||||||
Senior secured 7.85% notes due 2012 ACEP | | 215,000 | ||||||
Exit facilities Federal-Mogul | 2,791,521 | | ||||||
Borrowings under credit facility ACEP | | 40,000 | ||||||
Mortgages payable | 80,097 | 104,030 | ||||||
Other | 124,406 | 14,796 | ||||||
Total debt | 4,922,207 | 2,298,783 | ||||||
Less debt related to assets held for sale | | (257,330 | ) | |||||
$ | 4,922,207 | $ | 2,041,453 |
In April 2007, we issued an aggregate of $600.0 million of variable rate senior convertible notes due 2013 (the variable rate notes). The variable rate notes were sold in a private placement pursuant to Section 4(2) of the Securities Act of 1933, as amended (the Securities Act), and issued pursuant to an indenture dated as of April 5, 2007, by and among us, as issuer, Icahn Enterprises Finance Corp. (Icahn Enterprises Finance), as co-issuer, and Wilmington Trust Company, as trustee. Icahn Enterprises Finance, our wholly owned subsidiary, was formed solely for the purpose of serving as a co-issuer of our debt securities in order to facilitate offerings of the debt securities. Other than Icahn Enterprises Holdings, no other subsidiaries guarantee payment on the variable rate notes. The variable rate notes bear interest at a rate of three-month LIBOR minus 125 basis points, but the all-in-rate can be no less than 4.0% nor more than 5.5%, and are convertible into our depositary units at a conversion price of $132.595 per depositary unit per $1,000 principal amount, subject to adjustments in certain circumstances. Pursuant to the indenture governing the variable rate notes, on October 5, 2008, the conversion price was adjusted downward to $105.00 per depositary unit per $1,000 principal amount. As of September 30, 2008, the interest rate was 4.0%. The interest on the variable rate notes is payable quarterly on each January 15, April 15, July 15 and October 15. The variable rate notes mature on August 15, 2013, assuming they have not been converted to depositary units before their maturity date.
In the event that we declare a cash distribution in any calendar quarter with respect to our depositary units in an amount in excess of $0.10 per depositary unit (as adjusted for splits, reverse splits and/or stock dividends), the indenture governing the variable rate notes requires that we simultaneously make such distribution to holders of the variable rate notes in accordance with a formula set forth in the indenture. On September 5, 2008, we paid cash distributions aggregating $6.7 million to holders of our variable rate notes in respect to our distributions payment to our depositary unitholders. Such amounts have been classified as interest expense.
On February 7, 2005, we issued $480.0 million aggregate principal amount of 7.125% senior unsecured notes due 2013 (the 7.125% notes), priced at 100% of principal amount. The 7.125% notes were issued pursuant to an indenture dated February 7, 2005 among us, as issuer, Icahn Enterprises Finance, as co-issuer,
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Icahn Enterprises Holdings, as guarantor, and Wilmington Trust Company, as trustee (referred to herein as the 2005 Indenture). Other than Icahn Enterprises Holdings, no other subsidiaries guarantee payment on the notes.
On January 16, 2007, we issued an additional $500.0 million aggregate principal amount of 7.125% notes (the additional 7.125% notes and, together with the 7.125% notes, the notes), priced at 98.4% of par, or at a discount of 1.6%, pursuant to the 2005 Indenture. The notes have a fixed annual interest rate of 7.125%, which is paid every six months on February 15 and August 15, and will mature on February 15, 2013.
As described below, the 2005 Indenture restricts the ability of Icahn Enterprises and Icahn Enterprises Holdings, subject to certain exceptions, to, among other things: incur additional debt; pay dividends or make distributions; repurchase units; create liens; and enter into transactions with affiliates.
On May 12, 2004, Icahn Enterprises and Icahn Enterprises Finance co-issued senior unsecured 8.125% notes due 2012 (8.125% notes) in the aggregate principal amount of $353.0 million. The 8.125% notes were issued pursuant to an indenture, dated as of May 12, 2004, among Icahn Enterprises, Icahn Enterprises Finance, Icahn Enterprises Holdings, as guarantor, and Wilmington Trust Company, as trustee. The 8.125% notes were priced at 99.266% of principal amount and have a fixed annual interest rate of 8.125%, which is paid every six months on June 1 and December 1. The 8.125% notes will mature on June 1, 2012. Other than Icahn Enterprises Holdings, no other subsidiaries guarantee payment on the notes.
As described below, the indenture governing the 8.125% notes restricts the ability of Icahn Enterprises and Icahn Enterprises Holdings, subject to certain exceptions, to, among other, things: incur additional debt; pay dividends or make distributions; repurchase units; create liens and enter into transactions with affiliates.
The 2005 Indenture governing our senior unsecured 7.125% notes and the indenture governing our senior unsecured 8.125% notes restrict the payment of cash distributions, the purchase of equity interests or the purchase, redemption, defeasance or acquisition of debt subordinated to the senior unsecured notes. The indentures also restrict the incurrence of debt or the issuance of disqualified stock, as defined in the indentures, with certain exceptions. In addition, the indentures governing our senior unsecured notes require that on each quarterly determination date that we and the guarantor of the notes (currently only Icahn Enterprises Holdings) maintain certain minimum financial ratios, as defined in the applicable indenture. The indentures also restrict the creation of liens, mergers, consolidations and sales of substantially all of our assets, and transactions with affiliates.
As of September 30, 2008 and December 31, 2007, we are in compliance with all covenants, including maintaining certain minimum financial ratios, as defined in the applicable indentures. Additionally, as of September 30, 2008, based on certain minimum financial ratios, we and Icahn Enterprises Holdings could not incur additional indebtedness.
On August 21, 2006, we and Icahn Enterprises Finance as the borrowers, and certain of our subsidiaries, as guarantors, entered into a credit agreement with Bear Stearns Corporate Lending Inc., as administrative agent, and certain other lender parties. Under the credit agreement, we are permitted to borrow up to $150.0 million, including a $50.0 million sub-limit that may be used for letters of credit. Borrowings under the agreement, which are based on our credit rating, bear interest at LIBOR plus 1.0% to 2.0%. We pay an unused line fee of 0.25% to 0.5%. As of September 30, 2008, there were no borrowings under the facility.
Obligations under the credit agreement are guaranteed and secured by liens on substantially all of the assets of certain of our indirect wholly owned holding company subsidiaries. The credit agreement has a term
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of four years and all amounts are due and payable on August 21, 2010. The credit agreement includes covenants that, among other things, restrict the creation of liens and certain dispositions of property by holding company subsidiaries that are guarantors. Obligations under the credit agreement are immediately due and payable upon the occurrence of certain events of default.
On the Effective Date, Federal-Mogul entered into a Term Loan and Revolving Credit Agreement (the Exit Facilities) with Citicorp U.S.A. Inc. as Administrative Agent, JPMorgan Chase Bank, N.A. as Syndication Agent and certain lenders. The Exit Facilities include a $540 million revolving credit facility (which is subject to a borrowing base and can be increased under certain circumstances and subject to certain conditions) and a $2,960 million term loan credit facility divided into a $1,960 million tranche B loan and a $1,000 million tranche C loan. Federal-Mogul borrowed $878 million under the term loan facility on the Effective Date and the remaining $2,082 million of term loans, which were available for up to 60 days after the Effective Date, have been fully drawn.
The obligations under the revolving credit facility mature six years after the Effective Date and bear interest for the six months at LIBOR plus 1.75% or at the alternate base rate (ABR, defined as the greater of Citibank, N.A.s announced prime rate or 0.50% over the Federal Funds Rate) plus 0.75%, and thereafter will be adjusted in accordance with a pricing grid based on availability under the revolving credit facility. Interest rates on the pricing grid range from LIBOR plus 1.50% to LIBOR plus 2.00% and ABR plus 0.50% to ABR plus 1.00%. The tranche B term loans mature seven years after the Effective Date and the tranche C term loans mature eight years after the Effective Date. In addition, the tranche C term loans are subject to a pre-payment premium should Federal-Mogul choose to prepay the loans prior to December 27, 2011. All Exit Facilities term loans bear interest at LIBOR plus 1.9375% or at ABR plus 0.9375% at Federal-Moguls election.
As of September 30, 2008, Federal-Mogul was party to a series of five-year interest rate swap agreements with a total notional value of $1,150 million to hedge the variability of interest payments associated with its variable rate term loans under the Exit Facilities. Through these swap agreements, Federal-Mogul has fixed its base interest and premium rate at a combined average interest rate of approximately 5.4% on the notional value of $1,150 million.
The obligations of Federal-Mogul under the Exit Facilities are guaranteed by substantially all of its domestic subsidiaries and certain foreign subsidiaries of Federal-Mogul, and are secured by substantially all personal property and certain real property of Federal-Mogul and such guarantors, subject to certain limitations. The liens granted to secure these obligations and certain cash management and hedging obligations have first priority.
The Exit Facilities contain certain affirmative and negative covenants and events of default, including, subject to certain exceptions, restrictions on incurring additional indebtedness, mandatory prepayment provisions associated with specified asset sales and dispositions, and limitations on (i) investments; (ii) certain acquisitions, mergers or consolidations; (iii) sale and leaseback transactions; (iv) certain transactions with affiliates; and (v) dividends and other payments in respect of capital stock. At September 30, 2008, Federal-Mogul was in compliance with all debt covenants under the Exit Facilities.
As described in Note 4, Discontinued Operations and Assets Held for Sale, on February 20, 2008, American Entertainment Properties Corp (AEP), sold all of the issued and outstanding membership interests of ACEP. Pursuant to the terms of the agreement, AEP repaid the principal and ACEP repaid the interest, prepayment penalty or premiums due on ACEPs 7.85% senior secured notes due 2012 and ACEPs senior secured credit facility.
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Mortgages payable, all of which are non-recourse to us, bear interest at rates between 4.97% and 7.99% and have maturities between July 1, 2009 and July 1, 2016.
In September 2008, we repaid a $20 million mortgage on a net leased property, which we refinanced in October 2008 for $44.2 million.