LSB Industries, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. LSB manufactures and sells nitrogen-based chemicals and fertilizer products for agricultural, industrial, and mining markets. Amounts below are in U.S. dollars; financial statement amounts are unaudited.
Financial performance and liquidity
- Q2 revenue and margins: Net sales were $121.5 million, up 18% year over year. Gross profit was $19.7 million, versus $3.1 million, and gross margin improved to 16.2% from 3.0%. Operating income was $11.3 million, compared with an operating loss of $5.9 million.
- Q2 earnings: Net income was $6.6 million, versus a $27.5 million net loss. However, after preferred dividends and accretion, the loss attributable to common stockholders was $1.5 million, or $0.05 per share, versus a $35.0 million loss, or $1.27 per share. The 2019 quarter included a $5.7 million income-tax benefit, largely from enacted state tax law changes.
- First half: Sales were $215.7 million, up 6%; gross profit was $27.0 million versus $13.2 million; and operating income was $11.4 million versus an operating loss of $4.0 million. Net loss narrowed to $4.9 million from $33.1 million, while loss attributable to common stockholders was $20.9 million versus $48.6 million.
- Drivers: Q2 agricultural sales rose 25%, with higher HDAN and ammonia volumes and stronger ammonia and UAN prices. Plant on-stream rates improved at El Dorado and Pryor versus Q2 2018. First-half industrial and mining adjusted gross margin weakened, primarily reflecting lower Tampa ammonia benchmark pricing.
- Cash flow: First-half operating cash flow was $20.3 million, down from $33.3 million. Capital expenditures were $12.9 million, and investing cash outflow was $12.8 million. Financing provided $24.5 million; cash increased $31.9 million to $58.0 million, with financing proceeds contributing to the increase.
- Debt and liquidity: Long-term debt, including current maturities and net of discounts and issuance costs, was $456.8 million, versus $425.2 million at year-end. This includes $435 million principal of 9.625% senior secured notes due May 2023. The working-capital revolver was undrawn, with approximately $47.4 million available; no covenant trigger had occurred. Management said cash, revolver availability, and operating cash flow should cover anticipated liquidity needs for the next 12 months.
- Preferred stock: Series E redeemable preferred stock had a $218.0 million carrying value and $227 million liquidation preference at quarter-end. It accrues cumulative dividends at 14%; accumulated Series E dividends were approximately $87.1 million. Preferred dividends and accretion materially reduce earnings attributable to common shareholders.
Changes, outlook, and notable items
- Q2 improvement reflected better plant availability, higher agricultural volumes and prices, lower natural-gas costs, reduced depreciation and turnaround costs, and improved fixed-cost absorption. Q2 2018 results included a $6.0 million debt-extinguishment loss and $2.0 million of accelerated depreciation associated with El Dorado equipment issues.
- Management expected year-over-year improvement in second-half 2019 results, supported by higher production rates, while noting weather and market uncertainty. A 30-day Pryor turnaround was scheduled to begin in mid-September; El Dorado planned to complete remaining turnaround work in Q3.
- Planned 2019 reliability and maintenance capital spending was approximately $35 million, including about $22 million in the second half. The company also planned approximately $20 million of margin-enhancement projects over 12–18 months. Management estimated procurement initiatives could reduce annualized expenses and capital spending by $3–$5 million over 12–24 months. These are plans and estimates, not guaranteed outcomes.
- Market risks include weather-related planting delays and flooding, fertilizer supply and import competition, commodity prices, natural-gas and freight costs, and seasonal demand. Agriculture was about 60% of Q2 sales; industrial about 30%; mining about 10%. The filing cautions that interim results are seasonal and not necessarily indicative of full-year results.
- Environmental and legal exposures remain relevant. Environmental liabilities accrued were $183,000, but additional remediation costs for certain matters could not be reasonably estimated. Litigation related to the 2013 West Fertilizer explosion continued; no reserve was recorded and a possible loss range was not estimable. The Wilson securities settlement was principally funded by insurers; an additional settlement amount was accrued with a corresponding insurance receivable.
- Natural-gas purchase commitments covered approximately 8.9 million MMBtus through December 2019, with fixed costs of about $21.0 million. Adoption of lease accounting increased reported assets and liabilities; this accounting presentation change did not require a cumulative-effect adjustment.
Important facts for investors to verify
- Whether improved plant reliability and production rates persist, and the operational and financial impact of the scheduled 2019 turnarounds.
- Whether management’s second-half improvement outlook and planned capital projects are achieved, and how they are funded.
- Cash generation relative to substantial debt service, the 9.625% notes, and cumulative Series E preferred dividends and redemption obligations.
- How weather, crop acreage and yields, fertilizer prices and imports, natural-gas costs, and freight affect volumes and margins.
- Developments in environmental matters and outstanding litigation, including exposures for which the company says losses cannot currently be estimated.