Unassociated Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


 
FORM 10-Q
 

 
(Mark One)
 
  
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period ended March 31, 2009
 
OR

¨
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Transition Period From ______ to _______

Commission File Number 1-9516



ICAHN ENTERPRISES L.P.
(Exact Name of Registrant as Specified in Its Charter)
 

 
Delaware
 
13-3398766
     
(State or Other Jurisdiction
of Incorporation or Organization)
 
(IRS Employer
Identification No.)
 
767 Fifth Avenue, Suite 4700
New York, NY 10153
(Address of Principal Executive Offices) (Zip Code)
(212) 702-4300
(Registrant’s 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 ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ¨ NO ¨
 
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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check One).
Large Accelerated Filer  Yes ¨ NO ¨
Accelerated Filer  x
Non-accelerated Filer  Yes ¨ NO ¨
Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ NO x
As of May 1, 2009, there were 74,775,597 depositary units and 13,127,179 preferred units outstanding.

 
 

 

INDEX

PART I. FINANCIAL INFORMATION

 
   
Consolidated Balance Sheets – March 31, 2009 (unaudited) and December 31, 2008
1
Consolidated Statements of Operations – Three Months Ended March 31, 2009 and 2008 (unaudited)
2
Consolidated Statement of Changes in Equity and Comprehensive Income – Three Months Ended
 
March 31, 2009 (unaudited)
3
Consolidated Statements of Cash Flows – Three Months Ended March 31, 2009 and 2008 (unaudited)
4
   
Notes to Consolidated Financial Statements
 
   
1. Description of Business and Basis of Presentation
6
2. Operating Units
8
3. Discontinued Operations and Assets Held for Sale
12
4. Related Party Transactions
12
5. Investments and Related Matters
14
6. Fair Value Measurements
16
7. Financial Instruments
18
8. Inventories, Net
23
9. Goodwill and Intangible Assets
24
10. Property, Plant and Equipment, Net
25
11. Equity Attributable to Non-Controlling Interests
25
12. Debt
26
13. Compensation Arrangements
29
14. Pensions, Other Postemployment Benefits and Employee Benefit Plans
30
15. Preferred Limited Partner Units
30
16. Earnings Per LP Unit
30
17. Segment Reporting
31
18. Income Taxes
33
19. Commitments and Contingencies
33
20. Subsequent Events
35
   
Reports of Independent Registered Public Accounting Firms
36
   
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
38
1. Overview
38
2. Results of Operations
38
3. Liquidity and Capital Resources
38
4. Critical Accounting Policies and Estimates
38
5. Forward-Looking Statements
38
   
Item 3.  Quantitative and Qualitative Disclosures About Market Risk
55
   
Item 4.  Controls and Procedures
55
   
PART II.  OTHER INFORMATION
   
Item 1.     Legal Proceedings
56
   
Item 1A.  Risk Factors
56
   
Item 6.     Exhibits
56
   
                 Signature
57

 
 

 

Part I.  Financial Information

Item 1.  Financial Statements

ICAHN ENTERPRISES L.P. AND SUBSIDIARIES

  CONSOLIDATED BALANCE SHEETS
 (In millions, except unit amounts)

   
March 31, 2009
   
December 31, 2008
 
   
(Unaudited)
       
ASSETS
           
Investment Management:
           
Cash and cash equivalents
  $ 2     $ 5  
Cash held at consolidated affiliated partnerships and restricted cash
    2,815       3,862  
Securities owned, at fair value
    3,677       4,261  
Due from brokers
    101       54  
Other assets
    133       182  
      6,728       8,364  
Automotive:
               
Cash and cash equivalents
    664       888  
Accounts receivable, net
    983       939  
Inventories, net
    888       894  
Property, plant and equipment, net
    1,821       1,911  
Goodwill and intangible assets
    1,958       1,994  
Other assets
    549       596  
      6,863       7,222  
Metals, Real Estate and Home Fashion:
               
Cash and cash equivalents
    337       350  
Other assets
    1,375       1,426  
      1,712       1,776  
Holding Company:
               
Cash and cash equivalents
    1,077       1,369  
Restricted cash
    14       35  
Other assets
    44       49  
      1,135       1,453  
Total Assets
  $ 16,438     $ 18,815  
                 
LIABILITIES AND EQUITY
               
Liabilities:
               
Investment Management:
               
Accounts payable, accrued expenses and other liabilities
  $ 877     $ 1,106  
Securities sold, not yet purchased, at fair value
    991       2,273  
Due to brokers
    73       713  
      1,941       4,092  
Automotive:
               
Accounts payable, accrued expenses and other liabilities
    1,914       2,068  
Debt
    2,572       2,576  
Postemployment benefit liability
    1,285       1,302  
      5,771       5,946  
Metals, Real Estate and Home Fashion:
               
Accounts payable, accrued expenses and other liabilities
    139       156  
Debt
    125       126  
      264       282  
Holding Company:
               
Accounts payable, accrued expenses and other liabilities
    142       154  
Debt
    1,869       1,869  
Preferred limited partner units
    131       130  
      2,142       2,153  
Total Liabilities
    10,118       12,473  
                 
Equity:
               
Equity attributable to Icahn Enterprises:
               
Limited partners
               
Depositary units: 92,400,000 authorized; issued 75,912,797 at March 31, 2009 and December 31, 2008; outstanding 74,775,597 at March 31, 2009 and December 31, 2008
    2,498       2,582  
General partner
    (174 )     (172 )
Treasury units at cost
    (12 )     (12 )
Equity attributable to Icahn Enterprises
    2,312       2,398  
Equity attributable to non-controlling interests
    4,008       3,944  
Total Equity
    6,320       6,342  
Total Liabilities and Equity
  $ 16,438     $ 18,815  

See notes to consolidated financial statements.

 
1

 

ICAHN ENTERPRISES L.P. AND SUBSIDIARIES

  CONSOLIDATED STATEMENTS OF OPERATIONS
 (In millions, except per unit amounts)

   
Three Months Ended March 31,
 
   
2009
     
20081
 
   
(Unaudited)
 
               
Revenues:
             
Investment Management
  $ 334     $ 14  
Automotive
    1,254       653  
Metals
    77       303  
Real Estate
    22       24  
Home Fashion
    85       115  
Holding Company
    (6 )     21  
Total revenues
    1,766       1,130  
                 
Expenses:
               
Investment Management
    29       15  
Automotive
    1,349       660  
Metals
    114       276  
Real Estate
    16       21  
Home Fashion
    103       138  
Holding Company
    38       41  
Total  expenses
    1,649       1,151  
                 
Income (loss) from continuing operations before income tax expense
    117       (21 )
Income tax benefit (expense)
    10       (20 )
Income (loss) from continuing operations
    127       (41 )
Income from discontinued operations
    -       489  
Net income
    127       448  
Less: net (income) loss attributable to non-controlling interests
    (126 )     5  
Net income attributable to Icahn Enterprises
  $ 1     $ 453  
                 
Net income (loss) attributable to Icahn Enterprises from:
               
Continuing operations
  $ 1     $ (36 )
Discontinued operations
    -       489  
    $ 1     $ 453  
Net income (loss) attributable to Icahn Enterprises allocable to:
               
Limited partners
  $ 1     $ 485  
General partner
    -       (32 )
    $ 1     $ 453  
Basic and diluted income (loss) per LP unit:
               
Income (loss) from continuing operations
  $ 0.01     $ (0.26 )
Income from discontinued operations
    0.00       7.14  
    $ 0.01     $ 6.88  
Weighted average LP units outstanding
    75       70  
Cash distributions declared per LP unit
  $ 0.25     $ 0.25  
 

1Automotive segment results are for the period March 1, 2008 through March 31, 2008.

See notes to consolidated financial statements.

 
2

 

ICAHN ENTERPRISES L.P. AND SUBSIDIARIES

  CONSOLIDATED STATEMENT OF CHANGES
 IN EQUITY AND COMPREHENSIVE INCOME
 Three Months Ended March 31, 2009
(Unaudited) (In millions)

   
Equity Attributable to Icahn Enterprises
             
   
General
   
Limited
   
Held in Treasury
   
Total
   
Non-
       
   
Partner's Equity
(Deficit)
   
Partners' Equity -
Depositary Units
   
Amount
   
Units
   
Partners'
Equity
   
Controlling
Interests
   
Total
Equity
 
Balance, December 31, 2008
  $ (172 )   $ 2,582     $ (12 )     1     $ 2,398     $ 3,944     $ 6,342  
Comprehensive income:
                                                       
Net income
    -       1       -       -       1       126       127  
Net unrealized losses on available-for-sale securities
    -       (5 )     -       -       (5 )     -       (5 )
Translation adjustments and other
    (2 )     (62 )     -       -       (64 )     (21 )     (85 )
Comprehensive income
    (2 )     (66 )     -       -       (68 )     105       37  
Partnership distributions
    -       (19 )     -       -       (19 )     -       (19 )
Investment Management distributions
    -       -       -       -       -       (47 )     (47 )
Investment Management contributions
    -       -                               8       8  
Change in subsidiary equity and other
    -       1       -       -       1       (2 )     (1 )
Balance, March 31, 2009
  $ (174 )   $ 2,498     $ (12 )     1     $ 2,312     $ 4,008     $ 6,320  

Accumulated Other Comprehensive Loss attributable to Icahn Enterprises was $639 and $570 at March 31, 2009 and December 31, 2008, respectively.

See notes to consolidated financial statements.

 
3

 

ICAHN ENTERPRISES L.P. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2009 and 2008
(Unaudited) (In millions)
 
   
Three Months Ended March 31,
 
   
2009
     
2008 1
 
Cash Flows from operating activities:
             
Net income
  $ 127     $ 448  
Income (loss) from continuing operations:
               
Investment Management
  $ 305     $ (1 )
Adjustments to reconcile net income (loss) from continuing operations to net cash used in operating activities:
               
Investment (gains) losses
    (189 )     396  
Purchases of securities
    (304 )     (1,977 )
Proceeds from sales of securities
    807       1,497  
Purchases to cover securities sold, not yet purchased
    (1,141 )     (116 )
Proceeds from securities sold, not yet purchased
    129       263  
Net premiums (paid) received on derivative contracts
    8       28  
Changes in operating assets and liabilities
    233       (259 )
Net cash used in continuing operations
    (152 )     (169 )
Automotive, Holding Company and other
    (178 )     (40 )
Adjustments to reconcile net loss from continuing operations to net cash used in operating activities:
               
Depreciation and amortization
    96       39  
Investment gains
    (4 )     (2 )
Deferred income tax (expense) benefit
    (17 )     1  
Impairment loss on long-lived assets
    15       -  
Other, net
    44       3  
Changes in operating assets and liabilities
    (144 )     (38 )
Net cash used in continuing operations
    (188 )     (37 )
Net cash used in continuing operations
    (340 )     (206 )
Net cash used in discontinued operations
    (1 )     (3 )
Net cash used in operating activities
    (341 )     (209 )
Cash flows from investing activities
               
Capital expenditures
    (51 )     (34 )
Purchases of marketable equity and debt securities
    -       (1 )
Proceeds from sales of marketable equity and debt securities
    -       63  
Net change in restricted cash relating to 1031 exchange transactions
    -       (1,168 )
Net proceeds from the sale and disposition of long-lived assets
    -       15  
Acquisitions of businesses, net of cash acquired
    -       795  
Other
    1       (2 )
Net cash used in investing activities from continuing operations
    (50 )     (332 )
Net cash provided by investing activities from discontinued operations
    -       1,199  
Net cash (used in) provided by investing activities
    (50 )     867  

See notes to consolidated financial statements.

 
4

 

ICAHN ENTERPRISES L.P. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS –(continued)
Three Months Ended March 31, 2009 and 2008
(Unaudited) (In millions)
 
   
Three Months Ended March 31,
 
   
2009
     
20081
 
Cash flows from financing activities:
             
Investment Management:
             
Capital subscriptions received in advance
    -       4  
Capital distributions to non-controlling interests
    (109 )     (220 )
Capital contributions by non-controlling interests
    8       368  
Net cash (used in) provided by financing activities from continuing operations
    (101 )     152  
Automotive, Holding Company and other:
               
Equity:
               
Partnership distributions
    (19 )     (1 )
Proceeds from borrowings
    2       -  
Repayments of borrowings
    (9 )     (8 )
Other
    (9 )     6  
Net cash used in financing activities from continuing operations
    (35 )     (3 )
Net cash (used in) provided by financing activities from continuing operations
    (136 )     149  
Net cash used in financing activities from discontinued operations
    -       (255 )
Net cash used in financing activities
    (136 )     (106 )
Effect of exchange rate changes on cash
    (5 )     5  
Net (decrease) increase in cash and cash equivalents
    (532 )     557  
Net increase in cash of assets held for sale
    -       69  
Cash and cash equivalents, beginning of period
    2,612       2,113  
Cash and cash equivalents, end of period
  $ 2,080     $ 2,739  
Supplemental information:
               
Cash payments for interest
  $ 87     $ 53  
Net cash payments (refunds) for income taxes
  $ (15 )   $ 9  
Net realized losses on securities available for sale
  $ (5 )   $ (8 )
Redemptions payable to non-controlling interests
  $ 107     $ 1  


1Automotive segment results are for the period March 1, 2008 through March 31, 2008.

See notes to consolidated financial statements.

 
5

 
 
1. Description of Business and Basis of Presentation
 
General

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”), our sole general partner, 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 March 31, 2009, affiliates of Mr. Icahn owned 68,740,822 of our depositary units and 11,360,173 of our preferred units, which represented approximately 91.9% 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 2, “Operating Units,” and Note 17, “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, 2008 (“fiscal 2008”). 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 period amounts have been reclassified in order to conform to the current period 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 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 entity’s 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. 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”).
 
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. The results of our Real Estate and Home Fashion segments are seasonal. The results of our Automotive segment are moderately seasonal.

 
6

 
 
Adoption of New Accounting Pronouncements

SFAS No. 160. In December 2007, the FASB issued Statement of Financial Accounting Standards (“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 company’s equity; non-controlling interests will be presented within the statement of changes in equity and comprehensive income as a separate equity component. 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; earnings per LP unit be reported after the adjustment for non-controlling interest in net income (loss); 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. We adopted SFAS No. 160 as of January 1, 2009 with the presentation and disclosure requirements as discussed above reflected in our consolidated financial statements.

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 entity’s 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 adopted SFAS No. 161 on a prospective basis as of January 1, 2009.  The adoption of SFAS No. 161 did not affect our financial condition, results of operations or cash flows.  See Note 7, “Financial Instruments,” for additional information.
 
Recently Issued Accounting Pronouncements
 
FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (“FSP 115-2 and 124-2”). On April 9, 2009, the FASB issued FSP FAS 115-2 and 124-2 which is intended to make the guidance more operational and improve the presentation and disclosure of other-than-temporary impairments (“OTTI”) on debt and equity securities in the financial statements. FSP 115-2 and 124-2 applies to debt securities and requires that the total OTTI be presented in the statement of income with an offset for the amount of impairment that is recognized in other comprehensive income, which amount represents the noncredit component. Noncredit component losses are to be recorded in other comprehensive income if an investor can assess that (a) it does not have the intent to sell or (b) it is not more likely than not that it will have to sell the security prior to its anticipated recovery. FSP 115-2 and 124-2 is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. FSP 115-2 and 124-2 will be applied prospectively with a cumulative effect transition adjustment as of the beginning of the period in which it is adopted. An entity early adopting FSP 115-2 and 124-2 must also early adopt FSP 157-4 (as defined below). We are currently evaluating the impact of FSP 115-2 and 124-2 on our consolidated financial statements.
 
FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (“FSP 157-4”). On April 9, 2009, the FASB issued FSP 157-4 which provides additional guidance on determining whether a market for a financial asset is not active and a transaction is not distressed for fair value measurements under SFAS No. 157, Fair Value Measurements. FSP 157-4 will be applied prospectively and retrospective application will not be permitted. FSP 157-4 will be effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. An entity early adopting FSP 157-4 must also early adopt FSP 115-2 and 124-2.  We are currently evaluating the impact of FSP 157-4 on our consolidated financial statements.
 
FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (“FSP 107-1 and APB 28-1”). On April 9, 2009, the FASB issued FSP FAS 107-1 and APB 28-1 which will amend SFAS No. 107, Disclosures about Fair Value of Financial Instruments. FSP 107-1 and APB 28-1 will require an entity to provide disclosures about the fair value of financial instruments in interim financial information. FSP 107-1 and APB 28-1 would apply to all financial instruments within the scope of SFAS No. 107 and will require entities to disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments, in both interim financial statements as well as annual financial statements. FSP 107-1 and APB 28-1 will be effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. An entity may early adopt FSP 107-1 and APB 28-1only if it also elects to early adopt FSP 157-4 and FSP 115-2 and 124-2. Since FSP 107-1 and APB-28-1 will require disclosures about fair values in interim periods, the adoption of FSP FAS 107-1 and APB 28-1 will not have any impact on our consolidated financial statements.

 
7

 
 
Filing Status of Subsidiary
 
Federal-Mogul Corporation (“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.
 
2. Operating Units
 
a. Investment Management

Icahn Onshore LP (the “Onshore GP”) and Icahn Offshore LP (the “Offshore GP” and, together with the Onshore GP, the “General Partners”) act as general partner of Icahn Partners LP (the “Onshore Fund”) and the Offshore Master Funds (as defined herein), respectively.  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 a fund formed as a Cayman Islands exempted limited partnership that invests in the Offshore Master Funds. This fund, together with other funds that also 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, 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 Icahn Capital Management LP (the “Services”) and, in consideration of providing the Services, the General Partners will receive special profits interest allocations from the Investment Funds. 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 of fee-paying capital account, the Target Special Profits Interest Amount) except that amounts are only allocated to the General Partners in respect of special profits interest allocations if there is sufficient net profits in the Investment Funds to cover such amounts.  The General Partners may also receive incentive allocations, generally 25% of the net profits generated by fee-paying investors in the Investment Funds, and 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 have been recovered). 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 qualified investors on the basis of exemptions from the registration requirements of the federal securities laws and are not publicly available.

Our Investment Management segment’s revenues are 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 Emerging Issues Task Force (“EITF”) Topic D-96, Accounting for Management Fees Based on a Formula, 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 or redemptions prior to the conclusion of the Private Funds’ fiscal year.

As of March 31, 2009, the full Target Special Profits Interest Amount was $91 million, which includes a carryforward Target Special Profits Interest Amount of $70 million from December 31, 2008, a Target Special Profits Interest Amount for the first quarter of the fiscal year ending December 31, 2009 (“fiscal 2009”), and a hypothetical return on the full Target Special Profits Interest Amount from the Investment Funds. Of the full Target Special Profits Interest Amount as of March 31, 2009, $87 million was accrued as a special profits interest allocation for the first quarter of fiscal 2009 and $4 million will be carried forward to the extent that there are sufficient  net profits in the Investment Funds during the investment period to cover such amounts. This compares with a special profits interest allocation accrual for the first quarter of fiscal 2008 of $5 million.

 
8

 
 
b. Automotive

We conduct our Automotive segment through our majority ownership in Federal-Mogul.  Federal-Mogul is a leading global supplier of technology and innovation in vehicle and industrial products for fuel economy, alternative energies, environment and safety systems. Federal-Mogul serves the world’s foremost original equipment manufacturers (“OEM”) of automotive, light commercial, heavy-duty, industrial, agricultural, aerospace, marine, rail, and off-road vehicles, as well as the worldwide aftermarket. During the first quarter of fiscal 2009, Federal-Mogul consolidated its product groups and eliminated the Automotive Products group. As of March 31, 2009, Federal-Mogul is organized into four product groups: Powertrain Energy, Powertrain Sealing and Bearings, Vehicle Safety and Protection, and Global Aftermarket.

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 Associates Limited Partnership, or Thornwood, and, indirectly, by 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. 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.
 
Federal-Mogul believes that its sales are well-balanced between OEM and aftermarket, as well as domestic and international markets. Federal-Mogul’s customers include the world’s 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-Mogul’s international operations are primarily related to currency fluctuations, changes in local economic and political conditions and changes in laws and regulations.

Accounts Receivable, net

Federal-Mogul’s subsidiaries in Brazil, France, Germany, India, Italy and Spain are parties to accounts receivable factoring arrangements. Gross accounts receivable factored under these facilities were $205 million and $222 million as of March 31, 2009 and December 31, 2008, respectively. Of those gross amounts, $185 million and $209 million, respectively, were factored without recourse and treated as sales under SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (“SFAS No. 140”). Under terms of these factoring arrangements, Federal-Mogul is not obligated to draw cash immediately upon the factoring of accounts receivable. Thus, as of March 31, 2009 and December 31, 2008, Federal-Mogul had outstanding factored amounts of $14 million and $8 million, respectively, for which cash had not yet been drawn. Expenses associated with receivables factored or discounted are recorded in the consolidated statements of operations within “Expenses-Automotive.”
 
Restructuring Expenses
 
Federal-Mogul’s 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-Mogul’s businesses and to relocate manufacturing operations to lower cost markets. These activities generally fall into one of the following categories:
 
 
1.
Closure of Facilities and Relocation of Production — in connection with Federal-Mogul’s 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.

 
9

 

An unprecedented downturn in the global automotive industry and global financial markets led Federal-Mogul to announce, in September 2008 and December 2008, certain restructuring actions, 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-Mogul’s global workforce by approximately 8,600 positions. Federal-Mogul continues to solidify certain components of this plan, and will announce those components as plans are finalized. For the three months ended March 31, 2009, Federal-Mogul has recorded $38 million in restructuring charges associated with Restructuring 2009 and other restructuring programs, and expects to incur additional restructuring charges up to $18 million through the fiscal year ending December 31, 2010. 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 over the next several years through cash generated from its ongoing operations or through cash available under its debt agreements, 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 December 31, 2008, the accrued liability balance relating to restructuring programs was $113 million. For the three months ended March 31, 2009, Federal-Mogul incurred $38 million of restructuring charges and paid $21 million of restructuring charges. Restructuring charges are included in expenses within our consolidated statements of operations. As of March 31, 2009, the accrued liability balance was $126 million, which is included in accounts payable, accrued expenses and other liabilities in our consolidated balance sheet.

Total cumulative restructuring charges through March 31, 2009 were $170 million. We report cumulative restructuring charges for Federal-Mogul effective March 1, 2008, the date on which Federal-Mogul became under common control with us.
 
c. Metals
 
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 each of the three months ended March 31, 2009 and 2008, PSC Metals’ had four customers who accounted for approximately 30% and 37% of net sales, respectively.
 
See Note 9, “Goodwill and Intangible Assets,” for disclosures concerning our Metals segment’s impairment charges related to its goodwill and indefinite lived intangibles.
 
d. Real Estate

Our Real Estate segment consists of rental real estate, property development and associated resort activities.

As of March 31, 2009 and December 31, 2008, we owned 31 rental real estate properties. 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 335 and 870 units of residential housing, respectively. Both developments operate golf and resort operations as well.

Our Real Estate operations compares the carrying value of its real estate portfolio, which includes commercial property for rent and residential property for current and future development, to its estimated realizable value to determine if its carrying costs will be recovered. In cases where our Real Estate operations do not expect to recover its carrying cost, an impairment charge is recorded as an expense and a reduction in the carrying cost of the asset. In developing assumptions as to estimated realizable value, our Real Estate operations consider current and future house prices, construction and carrying costs and sales absorptions for its residential inventory and current and future rental rates for its commercial properties.

 
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For the three months ended March 31, 2009 and 2008, our Real Estate operations recorded no impairment charges.
 
As of March 31, 2009 and December 31, 2008, $93 million and $94 million, respectively, of the net investment in financing leases and net real estate leased to others, which is included in other assets, was pledged to collateralize the payment of nonrecourse mortgages payable.
 
e. Home Fashion

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.
 
A relatively small number of customers have historically accounted for a significant portion of WPI’s net sales. For three months ended March 31, 2009 and 2008 net sales to two customers amounted to 33% and 30%, respectively, of total net sales.
 
Restructuring and Impairment Expenses

To improve WPI’s competitive position, WPI management intends to continue to 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 majority of its U.S. warehousing and distribution operations, which WPI consolidated into its Wagram, NC facility. In April 2009, as part of its ongoing restructuring activities, WPI announced the closure of certain of its manufacturing facilities located in the United States.  In the future, the vast majority of the products currently manufactured or fabricated in these facilities will be sourced from plants located outside of the United States.  As of March 31, 2009, $158 million of WPI’s assets are located outside of the United States, primarily in Bahrain.

WPI incurred restructuring costs of $4 million and $7 million for the three months ended March 31, 2009 and 2008, respectively. Included in restructuring expenses are cash charges associated with the ongoing costs of closed plants, employee severance, benefits and related costs and transition expenses. Restructuring charges are included in expenses within our consolidated statements of operations. The amount of accrued restructuring costs at December 31, 2008 was $1 million. WPI paid $4 million of restructuring charges for the three months ended March 31, 2009. As of March 31, 2009, the accrued liability balance was $1 million, which is included in accounts payable, accrued expenses and other liabilities in our consolidated balance sheet.

Total cumulative restructuring charges from August 8, 2005 (acquisition date) through March 31, 2009 were $62 million.

WPI incurred non-cash impairment charges that were primarily related to plants that will close of $2 million for the three months ended March 31, 2009. In recording the impairment charges related to its plants, WPI compared estimated net realizable values of property, plant and equipment to their current carrying values. Impairment charges are included in expenses within our consolidated statements of operations.

WPI anticipates that restructuring charges will continue to be incurred throughout fiscal 2009. WPI anticipates incurring restructuring costs and impairment charges in fiscal 2009 relating to the current restructuring plan between $20 million and $24 million primarily related to the continuing costs of its closed facilities, employee severance, benefits and related costs, transition expenses and impairment charges. Restructuring costs could be affected by, among other things, WPI’s decision to accelerate or delay its restructuring efforts. As a result, actual costs incurred could vary materially from these anticipated amounts.

 
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3. Discontinued Operations and Assets Held for Sale
 
Gaming
 
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 $476 million, after taxes. The sale of ACEP included the Stratosphere and three other Nevada gaming properties, which represented all of our remaining gaming operations.
 
Home Fashion  — Retail Stores
 
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, it has reported the retail outlet stores business as discontinued operations for all periods presented. As a result of the sale, WPI incurred charges related to the termination of the leases relating to its retail outlet stores facilities. As of March 31, 2009 and December 31, 2008, the accrued lease termination liability balance was $3 million each, which is included in accounts payable, accrued expenses and other liabilities in our consolidated balance sheets.
 
Real Estate
 
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 did not change during the three months ended March 31, 2009.
 
Results of Discontinued Operations
 
The financial position and results of operations for our former Gaming and certain portions of the Home Fashion and Real Estate segments described above are presented as other assets 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.
 
Results from discontinued operations for the three months ended March 31, 2009 were not material.  Results from discontinued operations for the three months ended March 31, 2008 included a gain on sale of discontinued operations of $476 million, net of income taxes of approximately $260 million, recorded on the sale of ACEP. With respect to the taxes recorded on the sale of ACEP, $103 million was recorded as a deferred tax liability pursuant to a Code 1031 Exchange transaction completed during the third quarter of fiscal 2008.
 
4. Related Party Transactions

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 partner’s capital account.

 
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a. Investment Management

Until August 8, 2007, Icahn Management LP (“Icahn Management”) elected to defer most of the management fees from the Offshore Funds and such amounts remain invested in the Offshore Funds. At March 31, 2009, 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 $100 million. The deferred management fee payable increased by $7 million for the three months ended March 31, 2009.  The change in deferred management fee payable for the three months ended March 31, 2008 was not material.

Effective January 1, 2008, Icahn Capital LP (“Icahn Capital”) 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 administrative and investment services.  Prior to January 1, 2008, Icahn & Co. LLC paid for such services.  Under a separate expense-sharing agreement, Icahn Capital charged Icahn Affiliates $0.4 million and $0.3 million for such services for the three months ended March 31, 2009 and 2008, respectively.  As of March 31, 2009, accounts payable, accrued expenses and other liabilities in the consolidated balance sheet included $1.4 million to be applied to Icahn Capital’s charges to Icahn Affiliates for services to be provided to them.

Carl C. Icahn, along with his affiliates, make investments in the Private Funds (other than the amounts invested by Icahn Enterprises and its affiliates). These investments are not subject to special profits interest allocations or incentive allocations. As of March 31, 2009 and December 31, 2008, the total fair value of these investments was approximately $1.2 billion and $1.1 billion, respectively.
 
b. Metals

For the three months ended March 31, 2008, PSC Metals sold material to Alliance Castings aggregating $3 million.  Such amounts were not material for the three months ended March 31, 2009.  Mr. Icahn is a major shareholder of Alliance Castings.
 
c. Administrative Services - Holding Company

For each of three months ended March 31, 2009 and 2008, we paid an affiliate approximately $1 million for the non-exclusive use of office space.
 
For each of the three months ended March 31, 2009 and 2008, the Holding Company provided certain professional services to an Icahn affiliate for which we charged $0.6 million and $0.5 million respectively.  As of March 31, 2009, accounts payable, accrued expenses and other liabilities in the consolidated balance sheet included $2.2 million to be applied to the Holding Company’s charges to the affiliate for services to be provided to it.

 
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5. Investments and Related Matters
 
a. Investment Management
 
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 millions of dollars):
 
   
March 31, 2009
   
December 31, 2008
 
   
Amortized Cost
   
Carrying Value
   
Amortized Cost
   
Carrying Value
 
Securities Owned, at fair value:
                       
Common stock
  $ 4,397     $ 2,340     $ 5,112     $ 2,826  
Convertible preferred stock
    31       5       30       9  
Call options
    16       22       41       41  
Corporate debt
    1,900       1,310       1,830       1,385  
Total Securities Owned, at fair value
  $ 6,344     $ 3,677     $ 7,013     $ 4,261  
                                 
Securities Sold, Not Yet Purchased, at fair value:
                               
Common stock
  $ 1,266     $ 988     $ 2,821     $ 2,273  
Corporate debt
    3       3       -       -  
Total Securities Sold, Not Yet Purchased, at fair value
  $ 1,269     $ 991     $ 2,821     $ 2,273  
                                 
Unrealized Gains on Derivative Contracts, at fair value1
  $ 90     $ 76     $ 74     $ 79  
                                 
Unrealized Losses on Dervivative Contracts, at fair value2
  $ 118     $ 525     $ 95     $ 440  
 

1Amounts are included in other assets in our consolidated financial statements.
 
2Amounts 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 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 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 Investment Management revenues 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 APB 18. The Private Funds applied the fair value option pursuant to SFAS No. 159 to such investments through March 31, 2009 (in millions of dollars):

   
Private Funds
         
Gains (Losses)
 
   
Stock Ownership
   
Fair Value
   
Three Months Ended March 31,
 
Investment
 
Percentage
   
March 31, 2009
   
2009
   
2008
 
Adventrx Pharmaceuticals Inc.
    3.83 %   $ 0.6     $ 0.3     $ 0.3  
Blockbuster Inc.
    7.75 %     9.6       (6.6 )     (9.3 )
WCI Communities Inc.
    0.00 %     -       -       (2.1 )
            $ 10.2     $ (6.3 )   $ (11.1 )
 
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 filers and their consolidated financial statements are available at www.sec.gov.
 
Investments in Variable Interest Entities
 
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.

 
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The consolidated VIEs consist of the Offshore Fund and each of the Offshore Master Funds. The Offshore GP sponsored the formation of and manages each of these VIEs and, in some cases, has an investment therein.   In evaluating whether the Offshore GP is the primary beneficiary of such VIEs, the Offshore GP has considered the nature and extent of its involvement with such VIEs and whether it absorbs the majority of losses among other variable interest holders.  In most cases, the Offshore GP was deemed to be the primary beneficiary of such VIEs because it would absorb the majority of expected losses among other variable interest holders and its close association with such VIEs, including the ability to direct the business activities of such VIEs.
 
The following table presents information regarding interests in VIEs for which the Offshore GP holds a variable interest as of March 31, 2009 (in millions of dollars):

   
Offshore GP
   
Offshore GP
 
   
is the Primary Beneficiary
   
is not the Primary Beneficiary
 
         
Offshore GP's
   
Pledged
         
Offshore GP's
 
   
Net Assets
   
Interests2
   
Collateral1
   
Net Assets
   
Interests2
 
Offshore Fund and Offshore Master Funds
  $ 2,313     $ 5     $ 830     $ 545     $ 0.1  

Includes collateral pledged in connection with securities sold, not yet purchased, derivative contracts and collateral held for securities loaned.
Amount represents Offshore GP's maximum exposure to loss and are included in the Offshore GP's net assets.
 
b. Automotive, Metals, Home Fashion and Holding Company
 
Investments included within other assets on the consolidated balance sheets for Automotive, Metals, Home Fashion and Holding Company consist of the following (in millions of dollars):

   
March 31, 2009
   
December 31, 2008
 
   
 
 
Carrying
   
 
 
Carrying
 
   
Amortized Cost
 
Value
   
Amortized Cost
 
Value
 
                         
Marketable equity and debt securities - available for sale
  $ 26     $ 13     $ 26     $ 19  
                                 
Equity method investments and other
    221       221       235       235  
Total  investments
  $ 247     $ 234     $ 261     $ 254  
 
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.

 
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The Holding Company previously had applied the fair value option pursuant to SFAS No. 159 to its investments in ImClone Systems Incorporated and Lear Corporation.  The Holding Company held no positions with respect to these investments as of March 31, 2009.  For the three months ended March 31, 2008, the Holding Company recorded $4 million of unrealized losses with respect to these investments.  Such amounts are included in “Revenues-Holding Company” in the consolidated statements of operations.
 
Investments in Non-Consolidated Affiliates

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-Mogul’s direct ownership in such affiliates ranges from approximately 1% to 50%. The aggregate investment in these affiliates approximates $210 million and $221 million at March 31, 2009 and December 31, 2008, respectively, and is included in our consolidated balance sheets as a component of other assets.  These investments are accounted for under the equity method pursuant to APB 18.

Equity in the earnings of non-consolidated affiliates amounted to approximately $1 million and $3 million for three months ended March 31, 2009 and the period March 1, 2008 through March 31, 2008, respectively.  For the three months ended March 31, 2009, these entities generated sales of approximately $89 million, net income of approximately $3 million and at March 31, 2009 had total net assets of approximately $401 million. Distributed dividends to Federal-Mogul from non-consolidated affiliates were not material for the three months ended March 31, 2009.
 
6. Fair Value Measurements
 
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. Fair value is determined using comparable market transactions and other valuation methodologies, adjusted as appropriate for liquidity, credit, market and/or other risk factors.
 
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s 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.

 
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The following table summarizes the valuation of our investments by the above SFAS No. 157 fair value hierarchy levels as of March 31, 2009 (in millions of dollars).
 
Investment Management

   
Level 1
   
Level 2
   
Level 3
   
Total
 
Assets
                       
Securities owned
  $ 2,340     $ 1,314     $ 23     $ 3,677  
Unrealized gains on derivative contracts1
    -       76       -       76  
    $ 2,340     $  1,390     $  23     $  3,753  
Liabilities
                               
Securities sold, not yet purchased
  $ 988     $ 3     $ -     $ 991  
Unrealized losses on derivative contracts2
    16       509       -       525  
    $ 1,004     $  512     $  -     $  1,516  

The changes in investments measured at fair value for which the Investment Management operations has used Level 3 input to determine fair value are as follows (in millions of dollars):

Balance at December 31, 2008
  $ 56  
         
Realized and unrealized (losses), net
    (33 )
         
Purchases, net
    -  
         
Balance at March 31, 2009
  $ 23  
         
Unrealized (losses) included in earnings
       
    related to investments still held at reporting date
  $ (33 )

Total realized and unrealized gains and losses recorded for Level 3 investments are reported in “Revenues — Investment Management” in the consolidated statements of operations.

 
17

 

Automotive, Holding Company and Other

   
Level 1
   
Level 2
   
Total
 
Assets1
                 
Available for sale investments:
                 
   Marketable equity and debt securities
  $ 13     $ -     $ 13  
                         
Unrealized gains on derivative contracts
    -       1       1  
                         
    $ 13     $ 1     $ 14  
                         
Liabilities2
                       
Derivative financial instruments
  $ -     $ 95     $ 95  
Unrealized losses on derivative contracts
    -       5       5  
    $ -     $ 100     $ 100  
 

1Amounts are classified within other assets in our consolidated balance sheets.
 
2Amounts are classified within accounts payable, accrued expenses and other liabilities in our consolidated balance sheets.
 
7. Financial Instruments

Certain derivative contracts executed by the Private Funds and our Automotive operations with the same counterparty are reported on a net-by counterparty basis where a legal right of offset exists under an enforceable netting agreement. Values for the derivative financial instruments, principally swaps, forwards, over-the-counter options and other conditional and exchange contracts are reported on a net-by-counterparty basis. As a result, the net exposure to counterparties is reported as either an asset or a liability in our consolidated balance sheets.
 
a. Investment Management and Holding Company

The Private Funds currently maintain cash deposits and cash equivalents with major financial institutions. Certain account balances may not be covered by the Federal Deposit Insurance Corporation, while other accounts may exceed federally insured limits. The Onshore Fund and the Offshore Master Funds have prime broker arrangements in place with multiple prime brokers as well as a custodian bank. 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’ investments include 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 enter into derivative contracts, including swap contracts, futures contracts and option contracts with the objective of capital appreciation or as economic hedges against other securities or the market as a whole. The Private Funds also enter into foreign currency derivative contracts to economically hedge against foreign currency exchange rate risks on all or a portion of their non-U.S. dollar denominated investments.
 
18

 
 
The Private Funds and the Holding Company have entered into various types of swap contracts with other counterparties. These agreements provide that they 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, they 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. They are also required to pay to the counterparty a floating interest rate equal to the product of the notional amount multiplied by an agreed-upon rate, and they receive interest on any cash collateral that they 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 holder’s 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. The Private Funds did not have any written put options at each of March 31, 2009 and December 31, 2008.
 
Certain terms of the Private Funds’ contracts with derivative counterparties, which are standard and customary to such contracts, contain certain triggering events that would give the counterparties the right to terminate the derivative instruments. In such events, the counterparties to the derivative instruments could request immediate payment on derivative instruments in net liability positions.  The aggregate fair value of all derivative instruments with credit-risk-related contingent features that are in a liability position on March 31, 2009 is $525 million.
 
At March 31, 2009, the Private Funds had approximately $1 billion posted as collateral for derivative positions, including those derivative instruments with credit-risk-related contingent features; these amounts are included in cash held at consolidated affiliated partnerships and restricted cash within our consolidated balance sheet.

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 entity’s 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 March 31, 2009 and December 31, 2008, the Private Funds have entered into such credit default swaps with a maximum notional amount of approximately $476 million and $604 million, respectively, with terms ranging from three months to eight years. We estimate that our potential exposure related to these credit default swaps approximates 22.9% of such notional amounts.

 
19

 

The following table presents the notional amount, fair value, underlying referenced credit obligation type and credit ratings for derivative contracts in which the Private Funds are assuming risk as of March 31, 2009 (in millions of dollars).
 
Credit Derivative Type by
 
Notional
   
Fair
 
 Underlying
 Derivative Risk Exposure
 
Amount
   
Value
 
 Reference Obligation
                 
Single name credit default swaps
              
Investment grade risk exposure
    40       -  
 Corporate Credit
Below investment grade risk exposure
    196       (121 )
 Corporate Credit
                     
Index credit default swaps
                  
Investment grade risk exposure
    240       (80 )
 Commercial Mortgage-Backed  Securities
                    
    $ 476     $ (201 )  

The following table presents the fair values of the Private Funds’ derivative and balance sheet locations within the consolidated balance sheets (in millions of dollars):
   
Asset Derivatives1
   
Liability Derivatives2
 
Derivatives not designated as hedging
 
March 31,
   
December 31,
   
March 31,
   
December 31,
 
  instruments under SFAS No. 133
 
2009
   
2008
   
2009
   
2008
 
                         
       Interest rate contracts
  $ -     $ 20     $ -     $ 18  
       Foreign exchange contracts
    -       8       2       -  
       Equity contracts
    -       -       31       17  
       Credit contracts
    214       176       630       530  
            Sub-total
    214       204       663     $ 565  
            Netting across contract types3
    (138 )     (125 )     (138 )     (125 )
               Total4
  $ 76     $ 79     $ 525     $ 440  

___________________
1Asset derivatives are located within other assets in our consolidated balance sheets.
2Liability derivatives are located within accounts payable, accrued expenses and other liabilities in our consolidated balance sheets.
3Represents the netting of receivables balances with payable balances for the same counterparty across contract types pursuant to netting agreements.
4Excludes netting of cash collateral received and posted.  The total collateral posted at March 31, 2009 is approximately $1 billion across all counterparties.
 
The following table presents the effects of the Private Funds’ derivative instruments on the statement of operations for the three months ended March 31, 2009 (in millions of dollars):
 
Derivatives not designated as hedging
 
Amount of Gain (Loss)
 
  instruments under SFAS No. 133
   
Recognized in Income5
 
       
Interest rate contracts
  $ 48  
Foreign exchange contracts
    1  
Equity contracts
    (14 )
Credit contracts
    74  
    $ 109  
 
___________________
5Gains (loss) recognized on the Private Funds’ derivatives are classified as part of “Revenues-Investment Management” in our consolidated statements of operations.
 
b. Automotive

Federal-Mogul manufactures and sells its products in North America, South America, Asia, Europe and Africa. As a result, Federal-Mogul’s financial results 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. Federal-Mogul's operating results are primarily exposed to changes in exchange rates between the U.S. dollar and European currencies.

 
20

 

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.  Federal-Mogul had notional values of approximately $3 million and $5 million of foreign currency hedge contracts outstanding at March 31, 2009 and December 31, 2008, respectively, of which all mature in less than one year and substantially all were designated as hedging instruments for accounting purposes. Unrealized net gains of $1 million each were recorded in accumulated other comprehensive loss as of March 31, 2009 and December 31, 2008. No hedge ineffectiveness was recognized during the three months ended March 31, 2009.

During fiscal 2008, Federal-Mogul entered into a series of five-year interest rate swap agreements with a total notional value of $1,190 million to hedge the variability of interest payments associated with its variable-rate term loans. Through these swap agreements, Federal-Mogul has fixed its base interest and premium rate at a combined average interest rate of approximately 5.37% on the hedged principal amount of $1,190 million. As of March 31, 2009 and December 31, 2008, unrealized net losses of $65 million and $67 million, respectively, were recorded in accumulated other comprehensive loss as a result of these hedges.  As of March 31, 2009, losses of $26 million are expected to be reclassified from accumulated other comprehensive loss to consolidated statement of operations within the next 12 months.  No hedge ineffectiveness was recognized for the three months ended March 31, 2009.

These interest rate swaps reduce Federal-Mogul’s overall interest rate risk. However, due to the remaining outstanding borrowings on Federal-Mogul’s debt agreements that continue to have variable interest rates, management believes that interest rate risk to Federal-Mogul could be material if there are significant adverse changes in interest rates.

Federal-Mogul’s 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-Mogul’s commodity price forward contract activity is to manage the volatility associated with these 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 15 months in the future.

Federal-Mogul had 292 and 364 commodity price hedge contracts outstanding with a combined notional value of $64 million and $91 million at March 31, 2009 and December 31, 2008, respectively, of which substantially all mature within one year. Of these outstanding contracts, 241 and 346 commodity price hedge contracts with a combined notional value of $50 million and $83 million at March 31, 2009 and December 31, 2008, respectively, were designated as hedging instruments for accounting purposes. Unrealized net losses of $19 million and $33 million were recorded in accumulated other comprehensive loss as of March 31, 2009 and December, 31, 2008, respectively. Unrealized net gains of $1 million were recognized in “Revenues-Automotive” during the three months ended March 31, 2009 associated with designated hedge ineffectiveness. Realized and unrealized net losses of $2 million and $3 million, respectively, were recognized in “Expenses-Automotive” and “Revenues-Automotive,” respectively, during the three months ended March 31, 2009 associated with undesignated commodity price hedge contracts.

For derivatives designated as cash flow hedges, changes in the time value are excluded from the assessment of hedge effectiveness. Unrealized gains and losses associated with ineffective hedges, determined using the hypothetical derivative method, are recognized in “Revenues-Automotive.”  Derivative gains and losses included in accumulated other comprehensive loss for effective hedges are reclassified into operations upon recognition of the hedged transaction. Derivative gains and losses associated with undesignated hedges are recognized in “Revenues-Automotive” for outstanding hedges and “Expenses-Automotive” upon hedge maturity. Federal-Mogul’s undesignated hedges are primarily commodity hedges and such hedges have become undesignated mainly due to forecasted volume declines.

Financial instruments, which potentially subject Federal-Mogul to concentrations of credit risk, consist primarily of accounts receivable and cash investments. Federal-Mogul's 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-Mogul's credit evaluation process and the geographical dispersion of sales transactions help to mitigate credit risk concentration. No individual customer accounted for more than 6% of Federal-Moguls sales during the three months ended March 31, 2009. Federal-Mogul requires placement of cash in financial institutions evaluated as highly creditworthy.

 
21

 
 
The following table presents the fair values and balance sheet locations of Federal-Mogul’s derivative instruments (in millions of dollars):
 
   
Asset Derivatives4
   
Liability Derivatives4
 
Derivatives Designated as Cash Flow  
 
March 31,
   
December 31,
   
March 31,
   
December 31,
 
  Hedging instruments Under SFAS No. 133
 
2009
   
2008
   
2009
   
2008
 
                         
Interest rate swap contracts
  $ -     $ -     $ (65 )   $ (67 )
                                 
Commodity contracts
    -       -       (21 )     (37 )
                                 
Foreign exchange contracts
    1       1       -       -  
    $ 1     $ 1     $ (86 )   $ (104 )
                                 
Derivatives not Designated as Hedging
                               
  Instruments under SFAS No. 133
                               
                                 
Commodity contracts
  $ -     $ -     $ (9 )   $ (7 )
                                 
    $ -     $ -     $ (9 )   $ (7 )
 
4 Federal-Mogul’s asset derivatives and liability derivatives are classified within accounts payable, accrued expenses and other liabilities on the consolidated balance sheets.

The following tables present the effect of Federal-Mogul’s derivative instruments on the consolidated statement of operations for the three months ended March 31, 2009 (in millions of dollars):
 
               
Location of Gain
 
Amount of Gain
 
               
(Loss) Recognized
 
Recognized
 
   
Amount of
     
Amount of
 
in Income on
 
in Income on
 
   
Gain (Loss)
     
Gain (Loss)
 
Deriviatives
 
Derivatives
 
   
Recognized in
 
Location of Gain
 
Reclassified
 
(Ineffective Portion
 
(Ineffective Portion
 
   
OCI on
 
(Loss) Reclassified 
 
from AOCI into
 
and Amount
 
and Amount
 
Derivatives Designated as
 
Derivatives
 
from AOCI into
 
Income
 
Excluded from 
 
Excluded from
 
Hedging Instruments
 
(Effective
 
Income (Effective
 
(Effective
 
Effectiveness
 
Effectiveness
 
Under SFAS No. 133
 
Portion)
 
Portion)
 
Portion)
 
Testing)
 
Testing
 
                                                                                                         
Interest rate swap contracts
  $ (7 )
Expenses-Automotive
  $ (9 )     $ -  
                             
Commodity contracts
    6  
Expenses-Automotive
    (8 )
Revenues-Automotive
    1  
                             
Foreign exchange contracts
    1  
Expenses-Automotive
    1         -  

       
Amount of Loss
 
Derivatives Not Designated
 
Location of Loss
 
Recognized in
 
as Hedging Instruments
 
Recognized in
 
Income on
 
Under SFAS No. 133
 
Income on Derivatives
 
Derivatives
 
           
Commodity contracts
 
 Expenses-Automotive
  $ (2 )
             
Commodity contracts
 
 Revenues-Automotive
    (3 )
        $ (5 )

 
22

 
 
8. Inventories, Net
 
Our consolidated inventories, net consists of the following (in millions of dollars):
 
  
 
March 31,
   
December 31,
 
  
 
2009
   
2008
 
Raw materials:
 
   
     
Automotive
  $ 164     $ 166  
Home Fashion
   
   13
       12  
         177        178  
Work in process:
               
Automotive
      124       125  
Home Fashion
       29        33  
         153        158  
Finished Goods:
               
Automotive
      600       603  
Home Fashion
       69        87  
         669        690  
Metals:
               
Ferrous
      16       27  
Non-ferrous
      4       5  
Secondary
       33        35  
         53        67  
Total Inventories, net
  $  1,052     $ 1,093  
 
Home Fashion and Metals inventories are included in other assets in the accompanying consolidated balance sheets.

 
23

 
 
9. Goodwill and Intangible Assets
 
Goodwill and other intangible assets consist of the following (in millions of dollars):
 
       
March 31, 2009
   
December 31, 2008
 
       
Gross
         
Net
   
Gross
         
Net
 
   
Amortization
 
Carrying
   
Accumulated
   
Carrying
   
Carrying
   
Accumulated
   
Carrying
 
Description
 
Periods
 
Amount
   
Amortization
   
Value
   
Amount
   
Amortization
   
Value
 
Definite-lived intangible assets:
                                       
Automotive
 
1 - 22 years
  $ 639     $ (88 )   $ 551     $ 640     $ (76 )   $ 564  
Metals
 
5 -15 years
    11       (3 )     8       11       (2 )     9  
        $ 650     $ (91 )   $ 559     $ 651     $ (78 )   $ 573  
                                                     
Goodwill:
                                                   
Automotive