LSB Industries, Inc. — Q2 2017 Form 10-Q
Business and period: Unaudited results for the quarter and six months ended June 30, 2017. LSB manufactures chemical products for agricultural, industrial and mining markets. The 2016 comparative period includes the Climate Control business as discontinued operations; it was sold on July 1, 2016.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $122.9m | $110.0m | $246.2m | $209.0m |
| Gross profit (loss) | $11.3m | $2.1m | $23.0m | ($4.0m) |
| Gross margin | 9.2% | 1.9% | 9.3% | (1.9%) |
| Operating income (loss) | ($0.3m) | ($8.9m) | $2.0m | ($26.2m) |
| Loss from continuing operations | ($7.0m) | ($7.7m) | ($13.0m) | ($23.5m) |
| Net income (loss) attributable to common stockholders | ($14.5m) | $5.1m | ($27.7m) | ($19.5m) |
| Continuing operating cash flow | — | — | $22.9m | $24.2m |
Per-share results: Q2 continuing-operations loss was $0.53 per basic and diluted share; six-month loss was $1.02 per share. Q2 2016 net income included $22.8m from discontinued operations, including a substantial tax benefit.
Liquidity and debt at June 30: Cash was $67.2m, up from $60.0m at year-end. Total debt, net of discounts and issuance costs, was $411.5m, including $375.0m of 8.5% Senior Secured Notes due August 2019. The revolving facility was undrawn, with approximately $40.8m available. Redeemable Series E preferred stock had a $159.6m carrying value and $173.1m liquidation preference; its annual dividend rate is 14%.
Changes and drivers
- Q2 sales rose 11.7% year over year; six-month sales rose 17.8%. Industrial sales increased strongly, supported by ammonia and nitric acid volumes. Agricultural revenue was pressured by lower selling prices, while mining sales declined.
- Gross profit improved, aided by higher production and sales, lower plant costs and a $2.9m precious-metals recovery recorded as a reduction in cost of sales. Six-month 2016 gross profit was also burdened by a one-time $12.1m property-tax consulting cost.
- Q2 SG&A fell $2.6m to $8.2m. Interest expense increased to $9.3m from $6.4m, chiefly because less interest was capitalized after completion of the El Dorado expansion.
- Q2 operating results included approximately $3.4m of other expense, primarily losses on the sale of natural-gas and other non-core assets. The Zena property sale generated part of $18.8m total net proceeds from non-core asset sales; approximately $3.5m repaid a secured note.
Outlook, risks and unusual matters
- Management expects fertilizer-price pressure from added nitrogen capacity and market uncertainty to continue through the rest of 2017. It expects ammonia-plant on-stream rates of at least 95% at Cherokee and approximately 92% at Pryor and 95% at El Dorado for the remainder of the year. These are expectations, not guaranteed results.
- A Pryor power failure caused 16 days of Q2 downtime; a further July outage prompted the company to advance its planned turnaround, completed July 21 after 17 days. El Dorado also had 12 days of Q2 downtime.
- Planned 2017 capital additions were approximately $30m–$35m, including $16m–$19m in the second half. The company anticipated $5m–$6m in further non-core asset-sale proceeds. Environmental project expenses were expected at $2.0m–$2.3m for the second half.
- The Board ended the sale-process portion of its strategic review after receiving no transaction it considered in shareholders’ best interests; it will continue evaluating other strategic, financial and operating options.
- Key contingencies include continuing litigation related to the West Fertilizer explosion, a BAE supply-contract dispute with an approximately $18m pre-litigation demand, and a remaining Global Industrial claim of approximately $5m. The company says potential loss ranges for several matters cannot be reasonably estimated and has not established reserves for them, apart from unpaid West Fertilizer settlements.
- Environmental exposures include wastewater-permit and disposal uncertainty at Pryor, El Dorado discharge-permit issues, groundwater monitoring, and an ongoing Pryor air-compliance investigation. Accrued environmental liabilities were $154,000; additional costs could not be reliably estimated for certain matters.
- Other factors include fertilizer seasonality and weather, volatile commodity prices, plant reliability, substantial debt and the 2019 notes maturity. The revolver’s financial covenant is springing and was not triggered at June 30. Management identified a possible approximately $7.8m 2017 valuation allowance for state net operating loss carryforwards.
Important facts for investors to verify
- Whether operating reliability and the stated on-stream-rate expectations are achieved after the Pryor turnaround and El Dorado optimization.
- How fertilizer pricing, added industry capacity, weather and agricultural demand affect margins and cash generation in the second half.
- Plans and financing for the $375m Senior Secured Notes due in 2019, and the potential cash or dilution implications of Series E preferred redemption and cumulative dividends.
- Developments, insurance coverage and possible financial exposure in the West Fertilizer, BAE and Global Industrial matters, and environmental permitting and remediation.
- Whether announced cost reductions, capital spending and remaining asset sales meet management’s expectations; the filing reports no formal earnings guidance.