LSB Industries, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2013; comparisons are with the same periods in 2012. LSB manufactures nitrogen-based chemicals and HVAC products through its Chemical and Climate Control businesses. Amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $177.4 | $182.4 | $530.3 | $581.9 |
| Gross profit | $48.9 | $33.2 | $113.0 | $143.4 |
| Gross margin | 27.6% | 18.2% | 21.3% | 24.6% |
| Operating income | $23.1 | $11.9 | $35.1 | $77.3 |
| Operating margin | 13.0% | 6.5% | 6.6% | 13.3% |
| Net income | $10.3 | $6.7 | $17.6 | $47.0 |
| Diluted EPS | $0.43 | $0.28 | $0.75 | $2.00 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $45.3 | $73.4 |
- Q3: Sales declined 2.8%, but gross profit and operating income rose substantially. Chemical segment operating income increased to $17.7 million from $7.5 million; Climate Control increased to $8.5 million from $6.9 million.
- Nine months: Sales declined 8.9% and operating income fell 54.5%. Chemical sales fell 18.7% and segment operating income fell 69.8%; Climate Control sales grew 9.7% and operating income grew 21.9%.
- Cash flow and investment: Nine-month operating cash flow was $45.3 million. Investing activities used $378.6 million, including $280.0 million placed in restricted cash and investments and $113.7 million of PP&E expenditures; financing provided $375.1 million. Cash and equivalents ended at $139.7 million.
- Liquidity and debt: Cash plus noncurrent restricted cash and investments totaled $419.7 million. Total debt was $467.5 million, up from $72.4 million at December 31, 2012; stockholders’ equity was $374.3 million. The $100 million revolving facility was undrawn, with approximately $63.3 million available at quarter-end.
Material changes and unusual items
- Production interruptions at Cherokee, El Dorado and Pryor materially weighed on nine-month Chemical results. Management estimated their cumulative adverse effect on first-nine-month operating income at $61–$74 million, net of $18.4 million in recognized business-interruption recoveries.
- Q3 results included a $4.6 million precious-metals recovery and $4.2 million of insurance recoveries recognized as a reduction to cost of sales. A change in estimate recognized approximately $2.6 million of business-interruption recovery, increasing Q3 net income by $1.6 million, or $0.07 per share.
- In August, LSB issued $425 million of 7.75% senior secured notes due 2019 and used approximately $67.2 million of proceeds to repay its secured term loan. The payoff generated a $1.3 million debt-extinguishment loss. Nine-month net interest expense rose to $6.7 million from $3.8 million.
- After quarter-end, on October 23, 2013, LSB settled the El Dorado insurance claims for $113 million in total, including $60 million already received and $53 million expected within 30 days. The company stated that approximately $76 million would be recognized as income when realized, including the previously deferred gain.
Outlook, risks and contingencies
- LSB was proceeding with major Chemical Business projects: an ammonia plant at El Dorado estimated at $250–$300 million, and a replacement nitric acid plant and concentrator estimated at approximately $120 million. The ammonia project was expected to take 24–36 months; the replacement nitric acid facilities were expected to begin production during 2015. Permits remained subject to review and approval.
- Management expected continued negative operating-income effects at El Dorado until the replacement facilities are operating, estimated at $1–$3 million monthly. Pryor experienced intermittent production problems; an unplanned maintenance procedure began in October, with completion expected in November 2013.
- Management expected moderate short-term Climate Control sales growth, while noting soft residential conditions and construction markets still below pre-recession levels. Chemical results remain sensitive to fertilizer prices, natural-gas and ammonia costs, weather, demand, and facility uptime.
- Environmental and regulatory exposure includes an ongoing EPA/DOJ proposed settlement involving nitric-acid plant emissions, expected pollution-control equipment costs of $2–$3 million for each of six plants, and a proposed $725,000 civil penalty. Environmental compliance costs and potential remediation were not fully determinable.
- LSB and its subsidiary had received inquiries related to the West Fertilizer explosion but had not been named in the lawsuits as of the filing; the company stated it did not believe its product was stored at the site at the time. No liability had been established.
- Debt covenants restrict dividends, additional debt and other transactions. Management forecast compliance with financial covenants for the next twelve months. The company reported no material change to risk factors except potential new chemical-facility security requirements and risks from possible changes in Russian ammonium-nitrate imports.
Important facts for investors to verify
- Whether the El Dorado insurance settlement’s remaining proceeds were received and the expected recovery recognized, and whether any insurer reservation-of-rights issues remained.
- Whether Chemical facility reliability improved after the reported downtime and Pryor maintenance, and how actual production compared with expectations.
- Final permits, project budgets, timing and financing for the El Dorado ammonia, nitric-acid and concentrator projects, including any cost overruns.
- Available revolver borrowing capacity, covenant headroom, and the impact of the new notes’ interest costs on liquidity and cash flow.
- Developments in EPA/DOJ and other environmental matters, the West Fertilizer inquiry, and possible ammonium-nitrate import or security-rule changes.