Icahn Enterprises L.P. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Unaudited consolidated results cover a diversified holding company with Investment, Energy, Automotive, Food Packaging, Metals, Real Estate and Home Fashion businesses. Icahn Enterprises Holdings holds substantially all assets and conducts substantially all operations; its results are substantially the same. Unless noted, amounts are in U.S. dollars.
Financial results and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $2.484 billion | $2.815 billion | $7.371 billion | $7.998 billion |
| Total reported revenues, including investment gains/losses | $2.320 billion | $2.569 billion | $6.371 billion | $8.975 billion |
| Net income (loss) attributable to Icahn Enterprises | $(49) million | $118 million | $(941) million | $552 million |
| Continuing-operations income (loss) attributable to Icahn Enterprises | $(49) million | $(45) million | $(917) million | $201 million |
| Basic and diluted income (loss) per LP unit | $(0.24) | $0.64 | $(4.68) | $3.04 |
| Cash distributions declared per LP unit | $2.00 | $1.75 | $6.00 | $5.25 |
Total reported revenues include net investment losses: $657 million in Q3 and $1.968 billion for the nine months. Net sales, which better reflect sales by operating businesses, declined 12% and 8%, respectively. Historical comparisons also reflect businesses sold in 2018 and Mining sold in 2019.
- Cash and liquidity: At September 30, cash and cash equivalents were $3.266 billion; cash held at consolidated affiliated partnerships and restricted cash were another $613 million. Of the latter, $286 million was Investment Funds cash not available for general liquidity and $327 million was restricted, primarily for derivative margin. The Holding Company reported approximately $2.5 billion of cash.
- Cash flow: Nine-month net cash used in operating activities was $1.868 billion, versus $331 million provided in 2018. Investing activities provided $631 million, including proceeds from asset and business sales; financing activities used $137 million. Cash and restricted cash combined fell $1.459 billion to $3.879 billion.
- Debt: Total debt was $7.449 billion, up from $7.326 billion at year-end 2018. Holding Company debt was $5.551 billion. Estimated fair value of long-term debt was approximately $7.7 billion versus $7.4 billion carrying value. The company reported compliance with debt covenants; approximately $923 million of additional Holding Company indebtedness was permitted under its note covenants.
- Margins and segment performance: Energy gross margin was $182 million in Q3 and $565 million for nine months; gross margin as a share of net sales was 11% and 12%, respectively, versus 10% and 9% in 2018. Automotive gross margin was $210 million in Q3 and $623 million for nine months, with margins of 28% and 29%, versus 33% and 32%. Consolidated operating margin is not a useful comparable measure because reported revenue includes investment activity.
Material changes and notable items
- Investment Funds returned negative 7.4% in Q3 and negative 15.6% for the first nine months, compared with negative 6.3% and positive 3.5% in the respective 2018 periods. Management attributed the 2019 year-to-date result mainly to losses on short positions, including broad market hedges.
- Ferrous Resources was sold on August 1, 2019. Icahn Enterprises’ net cash proceeds were $451 million and the Mining segment recorded a pretax gain of $252 million, subject to post-closing adjustments.
- During 2019, the Holding Company issued $1.25 billion of 6.25% notes due 2026 and $500 million of 4.75% notes due 2024; proceeds and cash on hand funded repayment of $1.7 billion of 6.0% notes due 2020 and related costs. A $2 million gain on debt extinguishment was recorded.
- Energy net sales fell, mainly due to lower petroleum pricing, while lower crude costs and RIN costs contributed to improved year-to-date gross margin. Automotive revenue edged up, but margin contracted due partly to reduced vendor support and a shift in parts sales mix. Metals revenue and margin weakened amid lower volumes and market prices.
- Icahn Enterprises issued 15.6 million units in connection with unit distributions during the first nine months, as holders could elect cash or additional units. The company also sold 487,223 units under its at-the-market program for $34 million gross proceeds.
Outlook, risks and contingencies
- The filing provides no specific consolidated earnings or revenue guidance. Management says future Investment segment results depend on market conditions, investment performance and long/short exposures; past performance is not indicative of future results.
- Key operating risks include volatile refining margins, crude and product prices, and Renewable Fuel Standard credit costs; automotive competition and execution of a multi-year transformation plan; cyclical metals prices; and foreign exchange and manufacturing risks in Food Packaging.
- Investment Funds had 108% long and 124% short notional exposure, for net short exposure of 16% of net asset value. A modeled 10% adverse move would reduce fair values of securities owned by about $872 million, securities sold short by $22 million, and derivatives by approximately $1.4 billion; the effect on Icahn Enterprises’ share would be partly offset by non-controlling interests.
- Contingencies include environmental allegations involving CVR Refining’s Coffeyville refinery, for which potential penalties and costs could not be reasonably estimated; nine consolidated lawsuits concerning CVR Energy’s exercise of a CVR Refining call option; and potential controlled-group exposure to ACF pension obligations. ACF plans met minimum funding requirements, but would be underfunded by approximately $64 million upon voluntary termination. Starfire has provided an indemnity, but may not be able to fund it.
- Environmental liabilities were $34 million. The filing says routine litigation and environmental matters are not expected to materially affect consolidated results or condition, but outcomes of specified matters remain uncertain. Management also notes that asset transactions could create a risk of becoming subject to Investment Company Act registration.
- After quarter-end, the board declared a $2.00 per-unit distribution payable in December 2019, with a cash-or-units election. CVR Energy also declared a dividend expected to provide $57 million to Icahn Enterprises in Q4. Management states distributions are reviewed quarterly and are not assured.
Important facts for investors to verify
- Review the source and composition of the $1.968 billion year-to-date investment loss, especially short positions, derivatives, collateral requirements and sensitivity to market moves.
- Assess whether operating-segment cash generation and Holding Company liquidity can support debt service and distributions, considering restrictions on subsidiary cash transfers and the decline in combined cash and restricted cash.
- Track Automotive transformation costs and margin recovery, and Energy exposure to refining spreads, crude prices and RIN requirements.
- Confirm final proceeds and any post-closing adjustments from the Ferrous Resources sale, and monitor the CVR call-option litigation, refinery environmental matter and pension exposure.
- Check the cash-versus-unit elections and resulting dilution for distributions, including the subsequent $2.00-per-unit distribution.