Business context and reporting period
Icahn Enterprises L.P. (IEP) filed this unaudited joint Form 10-Q with Icahn Enterprises Holdings L.P. for the quarter and six months ended June 30, 2019. IEP is a diversified holding company with Investment, Energy, Automotive, Food Packaging, Metals, Real Estate, Home Fashion and Mining businesses. Holdings owns substantially all operating assets; the two registrants’ results are substantially the same. Amounts below are in millions, except per-unit data.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $2,588 | $2,819 | $4,888 | $5,183 |
| Net loss from continuing operations | $(573) | Net income $410 | $(1,237) | Net income $777 |
| Net loss attributable to IEP | $(498) | Net income $302 | $(892) | Net income $434 |
| Loss per IEP LP unit | $(2.49) | Income $1.66 | $(4.51) | Income $2.41 |
| Cash distributions declared per LP unit | $2.00 | $1.75 | $4.00 | $3.50 |
- Investment results drove the reversal: Net loss from investment activities was $637 in Q2 and $1,311 for the first half, versus gains of $410 and $842 in the comparable 2018 periods. Investment Funds returned (3.1)% in Q2 and (8.8)% year to date, compared with 4.9% and 10.5% returns in 2018. First-half short positions lost $1,784, including approximately $1.7 billion from broad-market hedges; long positions gained $880.
- Operating segments were mixed: Energy’s Q2 gross margin rose to $201 from $136, with gross margin at 12% versus 7%; first-half gross margin was $384 versus $288. Automotive Q2 revenue increased 1%, but gross margin fell 9% to $214 and margin rate declined to 29% from 32%. Metals revenue declined 28% in Q2 and gross margin rate fell to 2% from 6%. Food Packaging and Home Fashion reported weaker sales; Mining sales increased with iron ore pricing and volumes.
- Cash flow: Six-month operating cash use was $1,812, versus $477 in 2018; investing activities provided $247, compared with $404 used; financing activities provided $971, compared with $56. The operating cash use reflects, among other items, Investment segment trading and securities-related cash flows. Cash, including restricted and affiliated-partnership cash, was $4,672 at period end versus $5,338 at year-end 2018. Of June cash, $133 was held at affiliated partnerships and $531 was restricted, primarily for derivative margin.
- Balance sheet and debt: Total assets were $24,348 and total liabilities $12,902 at June 30. Debt was $8,658, up from $7,326 at December 31, 2018; IEP Holding Company debt was $6,755, including $1,251 of 6.250% notes due 2026 issued in Q2. Holding Company cash was approximately $3.3 billion. Subsidiaries had $601 of additional borrowing availability under certain revolving facilities. Reported consolidated cash is not all freely available to the Holding Company.
Changes, outlook, risks and unusual items
- Compared with 2018, the first-half result shifted from profit to loss, chiefly reflecting investment losses and Holding Company investment activity; net sales also declined. Interest expense increased 27% in Q2 and 9% year to date, mainly due to higher Investment segment broker balances and Holding Company debt issuance.
- After quarter-end, IEP used proceeds from the 2026 notes and cash on hand to repay its 6.000% notes due 2020 in full on August 1, 2019. The refinancing extends that maturity but adds longer-dated debt. The notes’ covenants restrict certain distributions, debt incurrence and other actions; IEP reported covenant compliance at June 30.
- IEP completed the sale of Ferrous Resources on August 1, 2019, for stated total consideration of $550, including repaid indebtedness; Mining is no longer an active segment after the sale. A $2.00 per-unit quarterly distribution was declared July 31, payable in cash or additional units at each holder’s election. Future distributions remain subject to quarterly review and restrictions.
- Other notable items include adoption of the new lease standard, which put $654 of operating-lease right-of-use assets and $685 of operating lease liabilities on the June balance sheet; a $24 tax adjustment related to the prior Federal-Mogul sale recorded in discontinued operations; and $902 of unrealized derivative liabilities, versus $36 at year-end.
- Key risks and contingencies: Results are exposed to market movements, short-position and derivative losses, collateral and counterparty demands, and variable investment performance. Energy faces volatile refining margins, crude prices and Renewable Fuel Standard credit costs; RIN costs were $21 in Q2 and $33 for the first half. CVR Refining faces unresolved Clean Air Act allegations for which penalties or costs could not be estimated, and CVR Energy and affiliates face early-stage lawsuits over the CVR Refining call-option exercise. IEP also disclosed potential controlled-group pension liability: ACF plans would be underfunded by approximately $61 if terminated, with an affiliate indemnity that may not be able to fund its obligations. Environmental liabilities were $36. The filing states that two U.S. Attorney inquiries had resulted in no claims or allegations against IEP or Mr. Icahn. Management reported no material change in risk factors and effective disclosure controls; no specific earnings guidance was provided.
Investor verification points
- Review Investment segment positions, hedge exposure, collateral requirements and drivers of the $1,311 first-half investment loss.
- Confirm the post-quarter repayment of the 2020 notes, the resulting debt profile, covenant headroom and cash available at the Holding Company.
- Track Energy refining margins and RIN exposure, and the status and potential financial effects of the environmental matter and CVR Refining lawsuits.
- Assess Automotive restructuring progress and whether service growth can offset parts-market and margin pressure.
- Verify sale proceeds and final accounting for Ferrous Resources, and monitor the distribution’s cash-versus-unit elections and future board decisions.