Icahn Enterprises L.P. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Unaudited consolidated results cover a diversified holding company with Investment, Energy, Automotive, Food Packaging, Metals, Real Estate and Home Fashion businesses. Icahn Enterprises Holdings reports substantially the same financial results. Unless stated otherwise, amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $1.764 billion | $2.484 billion | $4.950 billion | $7.371 billion |
| Reported revenues, including investment results | $722 million | $2.320 billion | $3.371 billion | $6.371 billion |
| Net loss | $1.400 billion | $373 million | $2.842 billion | $1.634 billion |
| Net loss attributable to Icahn Enterprises | $714 million | $49 million | $1.799 billion | $941 million |
| Loss per LP unit | $3.14 | $0.24 | $8.12 | $4.68 |
Reported revenues include substantial investment losses, so they should not be read as conventional sales revenue. Net loss from investment activities was $1.259 billion in Q3 and $2.152 billion for the first nine months, versus losses of $657 million and $1.968 billion, respectively, in 2019. Interest expense was $171 million in Q3 and $517 million year to date, up from $153 million and $443 million.
Cash flow, balance sheet and liquidity
- For the first nine months, operating cash flow was positive $724 million, versus negative $1.868 billion in 2019. Investing cash flow was negative $551 million and financing cash flow negative $568 million. Operating cash flow included significant investment-trading and derivative adjustments.
- At September 30, cash and cash equivalents were $1.862 billion; cash held at consolidated affiliated partnerships and restricted cash totaled a further $2.687 billion. Much of the latter is not available for general liquidity. Total assets were $22.824 billion, total liabilities $13.951 billion and total equity $8.873 billion.
- Debt was $8.146 billion, compared with $8.192 billion at year-end 2019. Holding Company debt was $5.812 billion, and management reported approximately $1.1 billion of Holding Company cash. Subsidiary debt totaled $2.334 billion.
- Subsidiaries had $591 million of additional availability under revolving credit facilities. Management said the partnership and subsidiaries had sufficient available liquidity for anticipated requirements for at least the next 12 months, while emphasizing uncertainty in the economic outlook.
- Quarterly distributions remained $2.00 per unit; three distributions totaling $6.00 per unit were declared in the first nine months. Aggregate cash distributions were $483 million, with eligible holders able to elect cash or additional units. A further $2.00 distribution was declared in November.
Material changes and segment results
- Investment: Investment Funds returned negative 11.8% in Q3 and negative 18.8% year to date, compared with negative 7.4% and negative 15.6% in 2019. Q3 losses reflected short positions, including broad-market hedges, and losses in an energy holding; year-to-date results included substantial losses in long positions, partly offset by gains on credit default swaps. The Funds reported 70% long and 62% short notional exposure at quarter-end.
- Energy: Segment sales fell 38% in Q3 and 41% year to date. Gross margin was negative $35 million in Q3 and negative $123 million year to date, versus positive $182 million and $565 million in 2019. Lower fuel demand, unfavorable pricing and crack spreads, refinery maintenance, and RIN costs weighed on results. A $58 million inventory write-down was recorded in Q1.
- Automotive: Net sales and other operating revenue declined 11% in Q3 and 14% year to date. Lower volumes reflected pandemic effects and store closures under the multi-year restructuring and transformation plan. Gross margin rates were 29% versus 28% in Q3, but 27% versus 29% year to date.
- Other businesses: Food Packaging sales increased 7% in Q3 and 6% year to date. Metals sales were nearly flat in Q3 but down 25% year to date. Home Fashion gross margin rates improved to 21% from 16% in Q3 and to 21% from 14% year to date. Real Estate reported $8 million of attributable income in Q3, versus $4 million.
- The Mining segment was sold in August 2019; prior-year comparisons include its results and a $252 million disposal gain, which did not recur in 2020. Net sales overall also reflect the absence of that segment.
Outlook, risks and unusual items
- Management expected COVID-19 and related economic conditions to affect the businesses through at least the remainder of 2020; the duration and severity of effects on operations, liquidity and financial condition remained uncertain. Energy reduced planned 2020 capital expenditures by approximately 10%.
- In January, the Holding Company issued additional notes and used proceeds and cash on hand to redeem $1.35 billion of 5.875% notes due 2022. CVR Energy issued $1 billion of notes and used part of the proceeds to redeem subsidiary debt. Holding Company debt declined, while Energy segment debt increased.
- In October, Viskase issued 50 million shares to Icahn Enterprises for $100 million, raising Icahn Enterprises’ ownership to approximately 89%. Viskase also refinanced its term loan and established a new $30 million revolving facility.
- Key risks include investment-market volatility and concentration, commodity prices and weak fuel demand, RIN costs, automotive-industry conditions, and limits on moving subsidiary cash to the Holding Company. The five largest Investment Funds holdings represented approximately 48% of segment assets under management; Herbalife was the largest at $957 million.
- Contingencies include an EPA/Kansas environmental enforcement matter involving CVR Refining, a securities lawsuit concerning CVR Refining’s call-option exercise, and environmental liabilities of $38 million. The filing also describes potential controlled-group pension exposure: ACF plans were estimated to be underfunded by approximately $80 million if terminated; an Icahn affiliate indemnity may not be able to meet its obligations.
- Disclosure controls were deemed ineffective because of a previously reported 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.
Investor verification priorities
- Review the Investment Funds’ holdings, concentration and derivatives exposure, and distinguish unrealized valuation changes from cash realized results.
- Assess how much reported cash is unrestricted and available to the Holding Company, and confirm subsidiary distribution capacity, debt covenants and upcoming maturities.
- Track fuel demand, refining margins, RIN obligations and CVR Energy’s dividend decisions, alongside Automotive restructuring progress and operating trends.
- Check subsequent results against management’s liquidity outlook, the declared distribution, and the planned remediation of the material weakness.
- Monitor the CVR Refining litigation and environmental matter, pension exposure and the adequacy of the related indemnity.