Icahn Enterprises L.P. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. The filing jointly reports Icahn Enterprises L.P. and Icahn Enterprises Holdings L.P.; their consolidated results are substantially the same. Icahn Enterprises is a diversified holding company with Investment, Energy, Automotive, Food Packaging, Metals, Real Estate, Home Fashion and Mining businesses.
Key financial results
| Metric | Q1 2019 | Q1 2018 / prior date |
|---|---|---|
| Total revenues, including investment activity | $1.855 billion | $2.983 billion |
| Net sales | $2.300 billion | $2.364 billion |
| Net loss from continuing operations | $664 million | Net income of $367 million |
| Net loss attributable to Icahn Enterprises | $394 million | Net income of $98 million from continuing operations |
| Loss per limited partner unit | $2.02 | Income of $0.55 from continuing operations |
| Operating cash flow | $(288) million | $(595) million |
| Cash and cash equivalents | $2.764 billion | $2.656 billion at December 31, 2018 |
| Cash, restricted cash and cash held at affiliated funds | $5.063 billion | $5.338 billion at December 31, 2018 |
| Total debt | $7.392 billion | $7.326 billion at December 31, 2018 |
| Total assets / total equity | $23.824 billion / $11.652 billion | $23.489 billion / $12.980 billion at December 31, 2018 |
Q1 2019 cash flows also included $314 million provided by investing activities and $272 million used in financing activities. Cash and restricted cash decreased by $275 million. Cash held by consolidated affiliated partnerships and restricted cash are not generally available for Icahn Enterprises’ general liquidity needs; restricted cash primarily supports investment-related margin requirements. The filing does not provide a single consolidated operating margin that meaningfully captures the mix of operating businesses and investment activity.
Material changes and segment performance
- Investment results drove the consolidated swing: Investment Funds returned negative 5.8%, versus positive 5.3% in Q1 2018. Investment-segment loss was $588 million, compared with income of $401 million. Losses on short positions, including approximately $1.1 billion from broad-market hedges, outweighed gains on long positions. Consolidated net loss from investment activities was $674 million, versus a $432 million gain a year earlier.
- Energy: Revenue was $1.487 billion and segment income attributable to Icahn Enterprises was $66 million, versus $50 million. Gross margin rose to $183 million from $152 million; gross margin rate increased to 12% from 10%. Lower crude-oil costs and improved fertilizer pricing helped, partly offset by lower petroleum crack spreads and higher RIN costs.
- Automotive: Revenue increased 1% to $697 million, but the segment’s loss attributable to Icahn Enterprises widened to $42 million from $34 million. Gross margin fell to $199 million from $212 million, and margin rate declined to 29% from 31%, reflecting lower vendor support and other unfavorable margin adjustments. Management described an ongoing multi-year transformation and continued evaluation of strategic alternatives for the aftermarket parts business.
- Other operations: Metals revenue fell 21% and gross margin rate declined to 1% from 7%, amid lower volumes and prices, including pressure related to the China trade dispute. Mining revenue rose to $36 million from $20 million, with the segment moving to $5 million of attributable income from a $4 million loss.
- Portfolio and ownership changes: CVR Energy acquired the remaining CVR Refining common units on January 29, 2019 for $241 million, excluding payment to Icahn Enterprises for its directly held units. Icahn Enterprises’ equity declined to $5.839 billion from $6.560 billion, reflecting the quarterly loss, distributions and other subsidiary-equity changes.
Liquidity, debt and distributions
Holding Company cash and cash equivalents were approximately $2.1 billion, against $5.505 billion of Holding Company senior unsecured notes. The notes are fixed-rate obligations, including $1.702 billion due in 2020; the filing states the company was in covenant compliance and could incur approximately $1.2 billion of additional indebtedness under the note covenants. Subsidiaries had $609 million of reported revolving-credit availability and were also in covenant compliance.
Consolidated debt increased modestly from year-end. The balance sheet also showed $722 million of unrealized derivative losses, compared with $36 million at December 31, 2018. In addition, the quarter-end accrued-expenses balance includes a $391 million payable for the declared $2.00-per-unit distribution. Unitholders could elect cash or additional units; Mr. Icahn and affiliates elected units. A further $2.00-per-unit distribution was declared April 30, 2019, payable in cash or units, subject to the stated election process and applicable restrictions.
On May 2, 2019, Icahn Enterprises announced its intention to enter an open-market sale agreement allowing it to sell up to $400 million of depositary units, with proceeds intended for potential acquisitions and general partnership purposes. The filing also expected a $54 million dividend from CVR Energy to Icahn Enterprises in Q2 2019.
Outlook, risks and unusual items
- No quantified consolidated earnings or revenue guidance is provided. Management cautions that investment results depend on market conditions and portfolio exposures, and that past Investment Funds’ performance is not indicative of future results.
- The planned sale of Ferrous Resources for stated consideration of $550 million was expected to close in the second half of 2019; the business was classified as held for sale. Completion and proceeds remain subject to transaction terms and closing.
- Investment exposure was net short by 43% of Investment Funds’ net asset value at quarter-end: 82% long exposure and 125% short exposure. The filing describes significant market, counterparty, liquidity and collateral risks. A 10% adverse change in the fair value of securities owned, securities sold short and derivatives was estimated to reduce their fair values by approximately $713 million, $45 million and $1.4 billion, respectively.
- Energy results remain exposed to refining margins, crude and product prices, volatile renewable fuel credit (RIN) costs, and regulatory requirements. Q1 RFS-related expense was $13 million, versus a $23 million benefit in Q1 2018.
- CVR Refining faces Clean Air Act allegations concerning its Coffeyville refinery; the company could not reasonably estimate potential penalties or other costs. Former CVR Refining unitholders also filed nine call-option lawsuits seeking damages and other remedies; the cases were at an early stage, and CVR Energy said it considered them without merit.
- Icahn Enterprises may be jointly liable for certain pension obligations of entities in the Icahn controlled group. ACF pension plans were estimated to be underfunded by approximately $61 million if voluntarily terminated. Starfire has provided an indemnity, but the filing cautions it may not be able to fund its obligations.
- Management identified no material change in reported risk factors and concluded disclosure controls were effective. The company adopted lease accounting Topic 842 on January 1, 2019, recording $678 million of operating-lease right-of-use assets and $708 million of related liabilities at March 31, 2019.
Most important facts for investors to verify
- Whether Investment Funds’ short-market hedges and derivative exposures continue to drive material earnings volatility, and the related collateral and liquidity requirements.
- Whether operating performance and margins improve at Automotive and Metals, and progress against Automotive’s transformation plan.
- The status, terms and closing of the Ferrous Resources sale, and the resulting net cash proceeds.
- Developments in the refinery environmental matter and CVR Refining call-option litigation, including any estimable financial exposure.
- Cash availability at the Holding Company versus cash held in funds or restricted for margin, upcoming note maturities, and the funding mix for distributions and any proposed unit sales.