Icahn Enterprises L.P. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Unaudited consolidated results; dollar amounts are in millions unless stated otherwise. Icahn Enterprises is a diversified holding company with Investment, Energy, Automotive, Food Packaging, Metals, Real Estate and Home Fashion businesses. Icahn Enterprises Holdings owns substantially all operating assets and liabilities, so its results are substantially similar.
Financial results and liquidity
- Q2 revenue: $2,709, versus $2,196 a year earlier. Net sales fell 49% to $1,325 from $2,588; the increase in reported total revenue principally reflects a $1,235 investment-activity gain, compared with a $637 loss in Q2 2019.
- Q2 earnings: Net income attributable to Icahn Enterprises was $299, versus a $498 loss. Basic and diluted earnings were $1.36 per LP unit, versus a $2.49 loss. Results were heavily influenced by volatile investment gains and losses.
- First-half results: Revenue was $2,649, down from $4,051. Net loss attributable to Icahn Enterprises was $1,085, compared with an $892 loss; loss per LP unit was $4.97 versus $4.51.
- Operating performance: Energy gross margin was $30 in Q2 versus $201 a year earlier; first-half gross margin was negative $88 versus $384. Energy gross margin as a percentage of net sales was 4% in Q2 and negative 5% for the first half, compared with 12% in both prior-year periods. Automotive gross margin was $153 in Q2 versus $214, with gross margin rate of 26% versus 29%.
- Cash flow: For the first half, operating cash flow was negative $1,138, investing cash flow negative $506 and financing cash flow negative $532. Cash, cash equivalents and restricted cash ended at $2,771, down from $4,945 at the start of the period.
- Balance sheet and debt: Total assets were $24,706 and total liabilities $14,441 at June 30. Debt was $8,162, comprising $5,813 at the Holding Company and $2,349 at operating segments. Cash and cash equivalents were $1,855; the additional $916 of cash held at affiliated partnerships and restricted cash was not all available for general liquidity. Total equity was $10,265.
- Distributions: Two quarterly distributions of $2.00 per unit were declared during the first half. Aggregate cash distributions were $452; holders could elect additional units instead. A further $2.00 distribution was declared August 4, 2020.
Material changes versus the prior comparable period
- COVID-19, government responses and market volatility weighed on operating businesses and investment valuations. Management cited weaker refined-product demand, reduced refinery utilization, lower Automotive sales and accelerated store closures, lower forecasts across segments, and inventory write-downs.
- Investment results swung sharply: the Investment segment reported $1,048 of income in Q2 versus a $295 loss in Q2 2019, but a $754 first-half loss versus an $883 loss. Fund returns were positive 11.7% in Q2 but negative 7.9% for the first half.
- Energy sales fell 60% in Q2 and 43% for the first half. Drivers included lower volumes and pricing, refinery maintenance and reduced utilization. A $58 inventory write-down was recorded in Q1.
- Automotive revenue from net sales and other operations declined 21% in Q2 and 15% for the first half, reflecting pandemic impacts and planned transformation-related store closures. Its multi-year restructuring and business transformation continued.
- Holding Company debt declined to $5,813 from $6,297 following January refinancing. The partnership issued additional 2024 and 2027 notes and repaid $1,350 of 2022 notes. CVR Energy also issued $1,000 of notes and used part of the proceeds to redeem subsidiary debt.
- Interest expense rose 15% in Q2 and 19% for the first half, primarily due to higher Investment-segment broker balances and new Energy debt.
Outlook, risks and unusual items
- Management expected economic conditions to continue affecting the businesses through at least the remainder of 2020; the duration and financial impact were uncertain and could be significant. The filing provides no consolidated earnings guidance.
- Energy reduced planned 2020 capital expenditures by approximately 30%, deferring most growth projects and reducing maintenance spending to critical or required work. Further revisions remained possible.
- CVR Energy reduced its Q1 2020 dividend and did not declare a Q2 dividend, citing oil-market uncertainty, cash conservation and balance-sheet protection. Future subsidiary distributions were subject to reassessment.
- Investment risks include market and derivative volatility, short-position and counterparty exposure, and portfolio concentration. The top five Investment-segment holdings represented approximately 72% of assets under management at June 30; Caesars was the largest holding. The funds sold their entire Hertz investment in Q2 and their Caesars investment in July 2020.
- At June 30, the Investment Funds had net short notional exposure of 48% of net asset value. Management estimated that a 10% adverse change in fair value would negatively affect securities owned by about $868, securities sold short by $182, and derivatives by about $1.5 billion; non-controlling interests would offset part of the impact to Icahn Enterprises.
- Notable contingencies include a Clean Air Act-related demand for penalties at CVR Refining’s Coffeyville refinery and a securities lawsuit alleging violations related to CVR Refining’s call option. Outcomes and potential financial effects were not reasonably estimable. Environmental liabilities were $38.
- Controlled-group pension exposure includes approximately $84 of ACF plan underfunding if the plans were voluntarily terminated. Starfire has agreed to indemnify the partnership for certain liabilities, but its ability to fund that indemnity is not assured.
- Management said disclosure controls were not effective because of an existing material weakness in internal control over financial reporting. A remediation plan was operating, but the weakness was not yet considered remediated; management expected completion before year-end 2020.
Key facts investors should verify
- How much of Q2’s $1,235 investment gain was realized versus unrealized, and how sustainable investment performance may be.
- Available, unrestricted liquidity at the Holding Company, including the distinction between its $1.1 billion cash balance and cash held by affiliated funds or subject to restrictions.
- Debt maturities, covenant headroom and the effect of subsidiary restrictions on cash transfers to the Holding Company.
- Whether Energy and Automotive recover from pandemic-related demand and operating disruptions, and the effect of lower capital spending and restructuring actions.
- Developments in the disclosed legal, environmental and pension matters, as well as progress in remediating the material weakness.
- Cash-versus-unit elections and the funding implications of distributions, including the August 2020 distribution declared after quarter-end.