Icahn Enterprises L.P. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited. Icahn Enterprises is a diversified holding company with Investment, Energy, Automotive, Food Packaging, Metals, Real Estate, Home Fashion and Pharma businesses. Icahn Enterprises Holdings owns substantially all operating assets and liabilities, so the registrants’ consolidated results are substantially the same.
Financial performance and position
| Metric | Q1 2021 | Q1 2020 / prior period |
|---|---|---|
| Total reported revenues | $3.384 billion | $(60) million |
| Net sales | $2.218 billion | $1.860 billion |
| Net income (loss) | $599 million | $(2.306) billion |
| Net income (loss) attributable to Icahn Enterprises | $162 million | $(1.384) billion |
| Basic / diluted income (loss) per LP unit | $0.66 / $0.65 | $(6.34) / $(6.34) |
| Net cash used in operating activities | $(551) million | $(1.373) billion |
| Cash and cash equivalents at March 31 | $1.942 billion | $1.679 billion at Dec. 31, 2020 |
| Total debt at March 31 | $8.056 billion | $8.059 billion at Dec. 31, 2020 |
The swing in reported revenue and earnings largely reflects Investment segment fair-value performance: net gains from investment activities were $1.006 billion versus a $2.128 billion loss in Q1 2020. The Investment Funds returned 9.2%, compared with a 17.6% loss in the prior-year quarter; gains on long positions were partly offset by losses on short positions. Earnings attributable to Icahn Enterprises exclude $437 million attributable to non-controlling interests.
Operating cash flow was negative despite positive net income, reflecting investment and securities-related cash flows. Investing activities provided $116 million and financing activities provided $214 million; cash, cash equivalents and restricted cash decreased by $215 million in the quarter. Cash held at consolidated affiliated partnerships and restricted cash totaled $1.134 billion, but much of this is not generally available for corporate liquidity: it includes Investment Funds cash and cash pledged for margin requirements.
Total assets were $28.297 billion and total equity was $9.582 billion at March 31, 2021. Investments were $11.480 billion. In addition to debt, the balance sheet included $4.863 billion of securities sold, not yet purchased, at fair value. Consolidated interest expense was $195 million, up from $171 million.
Material changes versus Q1 2020
- Net sales rose 19% to $2.218 billion, while the reversal in investment results drove the much larger improvement in total reported revenues and net income.
- Energy segment sales increased 29% to $1.463 billion, primarily on higher petroleum volumes and more favorable pricing. Its gross margin remained negative at $116 million, compared with negative $120 million; gross margin was negative 8% of sales versus negative 11%.
- Automotive revenue decreased 6% to $598 million, including lower aftermarket-parts sales and higher service revenue. Gross margin increased to $173 million, or 29% of revenue, from $160 million, or 25%, partly reflecting store closures and a greater mix of higher-margin services.
- Metals revenue increased 40% to $121 million, principally from higher pricing; gross margin was 7% versus 1%. Home Fashion sales declined 18% to $41 million, with margin easing to 17% from 18%, amid continued pressure on its hospitality business.
- Pharma contributed $30 million of revenue and $8 million of net income in Q1 2021; it was acquired in December 2020, so the prior-year comparison is not comparable. Supply revenue included a $13 million one-time sale to one customer.
Liquidity, debt and capital allocation
Holding Company cash was approximately $1.1 billion and Holding Company debt approximately $5.8 billion at March 31. The company issued $750 million of 4.375% senior unsecured notes due 2029 in January and used the proceeds primarily to redeem $750 million of 6.25% notes due 2022. In April, it issued a further $455 million of 5.25% notes due 2027 to redeem the remaining 2022 notes. Management reported compliance with debt covenants; the filing states that the Holding Company was not permitted to incur additional indebtedness under the note covenants at March 31, other than qualifying refinancing debt.
Operating subsidiaries had $586 million of additional availability under specified revolving credit facilities at March 31. The Holding Company’s liquidity also depends on subsidiary distributions and transfers, which may be limited by subsidiary cash needs, debt covenants or law. The company sold 3.1 million depositary units through its at-the-market program in Q1 for $184 million gross proceeds, with up to $216 million of additional proceeds available under the program at quarter-end.
Icahn Enterprises declared a $2.00-per-unit quarterly distribution in February, with unitholders electing cash or additional units. The distribution was made in April; $27 million was paid in cash to electing holders. A further $2.00-per-unit distribution was declared in May for payment around June 30, also with a cash-or-units election. Future distributions remain subject to quarterly board review and are not assured.
Management outlook, risks and unusual items
- Outlook: No consolidated earnings or revenue guidance is provided. Management said economic conditions that persisted through much of 2020 improved in 2021 as restrictions eased and businesses resumed operations. It cautioned that investment results depend on future market conditions and exposures and that past performance is not indicative of future results. Planned 2021 capital expenditures were not materially changed from the prior annual report.
- Energy and RFS exposure: Q1 RFS compliance expense was $178 million, versus $19 million a year earlier; the recorded RFS obligation rose to $342 million from $214 million at year-end. RIN prices and future compliance costs are volatile. A renewable-diesel conversion project is planned, but its benefit depends on regulatory and market conditions.
- Investment and market risk: The Investment Funds had net short notional exposure of 19% of net asset value. Management estimated that a 10% adverse fair-value move would negatively affect securities owned, securities sold short and derivatives by approximately $1.093 billion, $486 million and $1.070 billion, respectively, before the effect of non-controlling interests. Margin collateral and counterparty exposures are also relevant.
- Legal and environmental contingencies: Environmental liabilities were $36 million. CVR Refining disputes Clean Air Act and related claims, with negotiations and litigation ongoing; the company could not determine the outcome or potential financial impact. Separate CVR call-option lawsuits and related insurance coverage litigation are also unresolved.
- Pension exposure: Because of common ownership within the Icahn controlled group, the partnership may be liable for certain pension obligations of affiliates. Viskase and ACF plans would be underfunded by approximately $122 million if voluntarily terminated. Starfire has provided an indemnity, but the filing cautions it may not be able to fund its obligations.
- Governance and personnel: Management announced that Aris Kekedjian would succeed Keith Cozza as CEO in May 2021. CFO SungHwan Cho was departing after a transition period, and a successor search was underway.
- Other stated risks: The filing highlights COVID-19 effects, refined-product demand and pricing, automotive and other operating-sector conditions, and the risk that changes in investment values or asset transactions could affect the company’s ability to remain outside Investment Company Act registration requirements.
Important facts for investors to verify
- How much of reported earnings came from realized versus unrealized investment gains, and whether investment performance persists.
- Availability of corporate cash versus restricted or Investment Funds cash, and the ability of subsidiaries to upstream funds.
- Refinery margins, RIN costs and obligations, and progress, cost and expected benefits of renewable-diesel projects.
- Terms and compliance with Holding Company debt covenants, upcoming maturities, and the effect of the 2021 refinancing.
- Outcomes and potential exposure from environmental, call-option, insurance and controlled-group pension matters.
- Distribution funding and unit dilution: the February distribution included unit elections, and the ATM program issued units during the quarter.