LSB Industries, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; financial statements are unaudited. LSB manufactures and sells agricultural, industrial and mining chemicals from facilities in Arkansas, Alabama, Oklahoma and Texas.
Financial results and position
| Metric | Q1 2019 | Q1 2018 / prior balance |
|---|---|---|
| Net sales | $94.2 million | $100.5 million |
| Gross profit / margin | $7.3 million / 7.8% | $10.1 million / 10.0% |
| Operating income | $0.1 million | $1.9 million |
| Net loss | $11.5 million | $5.6 million |
| Loss attributable to common stockholders / per share | $19.4 million / $0.69 | $13.6 million / $0.49 |
| Net cash from operating activities | $7.1 million | $1.2 million |
| Capital expenditures | $7.1 million | $6.2 million |
| Cash and cash equivalents | $21.7 million | $26.0 million at Dec. 31, 2018 |
| Total debt, including current portion, net | $425.2 million | $425.2 million at Dec. 31, 2018 |
| Series E redeemable preferred carrying value | $209.9 million; $219 million liquidation preference | $202.2 million carrying value at Dec. 31, 2018 |
Operating cash flow exceeded the net loss, aided by depreciation and amortization and working-capital movements, including accrued interest. Cash declined $4.3 million during the quarter after investing and financing outflows. The company reported $40.1 million of revolver availability and no springing financial-covenant trigger as of March 31. Current assets were $141.5 million and current liabilities $105.7 million.
Changes versus the prior-year quarter
- Sales fell 6%, with agricultural revenue down 10% and industrial and mining revenue down 2%. Agricultural volume declined 24%, mainly amid weather-related planting delays and flooding; higher fertilizer selling prices partly offset the volume decline.
- Industrial and mining adjusted gross profit by market declined 24%, while agricultural adjusted gross profit rose 37%. Overall gross profit fell 27%; reported gross margin contracted 2.2 percentage points.
- Management attributed gross-profit pressure in part to about $1.0 million of higher freight costs to move product into storage and $0.9 million of higher natural-gas costs. SG&A decreased $1.1 million, primarily from lower compensation costs.
- Net interest expense rose 18% to $11.0 million, primarily reflecting the 9.625% senior secured notes issued in 2018. The prior-year period included a $0.9 million non-operating gain; Q1 2019 recorded $0.2 million of non-operating expense, primarily reflecting the preferred-stock embedded derivative’s fair-value change.
Outlook, commentary and risks
- Management said adverse Midwest weather, Mississippi-region flooding and saturated fields delayed planting and fertilizer application; challenging weather continued into Q2. Higher agricultural product prices versus a year earlier were offset by high supply-chain inventories expected to challenge near-term pricing. Management expected the fertilizer-price improvement seen from late 2017 through Q1 2019 to continue through the rest of 2019.
- For the remainder of 2019, planned capital spending is $23–$28 million, for approximately $30–$35 million for the year, mainly for reliability and maintenance. A new El Dorado sulfuric acid converter is planned for Q4 at an estimated $7.5 million. Management believes cash, revolver availability and operating cash flow will cover anticipated liquidity needs for the next 12 months.
- Management expects procurement and logistics initiatives to reduce expenses and capital spending by $3–$5 million on an annualized basis over the next 12–24 months. It also highlighted efforts to improve plant reliability, safety, product distribution, sales margins and capital structure; results are not assured.
- El Dorado and Pryor turnarounds are scheduled for Q3 2019. Management’s 2019 ammonia-plant on-stream-rate targets are 95% at Cherokee, 95% at El Dorado and 90% at Pryor.
- Natural gas averaged $2.91 per MMBtu, versus $2.79 a year earlier. Exposure includes volatile fertilizer and chemical prices, natural-gas and freight costs, weather and seasonality, plant downtime, and variable-rate debt. The company does not generally use commodity derivatives to manage these risks.
- Environmental matters include ongoing wastewater-permit and groundwater matters; accrued environmental liabilities were $183,000. Estimated environmental project expenses are $3.4–$3.8 million for the remainder of 2019. The company cannot currently estimate potential additional remediation costs at El Dorado.
- Litigation includes continuing claims related to the 2013 West Fertilizer explosion, for which the company said it could not estimate a possible loss range. The approximately $18.5 million Wilson securities-litigation settlement was paid by insurers in March 2019, subject to a court settlement hearing scheduled for June 28, 2019. The Global Industrial dispute also remains pending; approximately $3.5 million of disputed invoices are included in accounts payable.
- LSB adopted ASC 842 lease accounting on January 1, 2019, adding $15.9 million of right-of-use assets and associated lease liabilities at adoption. Management estimated 2019 valuation allowances of approximately $8.3 million for federal and $3.8 million for state deferred tax assets.
Important facts for investors to verify
- Whether delayed planting and continued poor weather affect Q2 sales volumes, inventory levels and fertilizer pricing.
- Progress on plant reliability and scheduled 2019 turnarounds, including whether on-stream-rate targets are achieved.
- Liquidity and debt-service capacity, including the June 2019 secured-note balloon payment, revolver availability and the cost of the 9.625% notes.
- Series E preferred economics: 14% cumulative dividends, approximately $79.6 million of accumulated dividends, and a $219 million liquidation preference; verify the effect on common-stock value and future cash obligations.
- Outcomes and potential costs of the West Fertilizer and Global Industrial litigation, environmental matters, and the Wilson settlement’s final court approval.
- Actual 2019 capital spending, environmental costs, tax valuation allowances and delivery of the projected procurement savings.