LSB Industries, Inc. - Q1 2008 10-Q Summary
Business Context and Reporting Period
This report covers the quarterly period ended March 31, 2008. LSB Industries, Inc. is a manufacturing, marketing, and engineering company operating primarily through two segments: the Climate Control Business (geothermal and water source heat pumps) and the Chemical Business (industrial and agricultural chemical products). The company is an accelerated filer incorporated in Delaware.
Key Financial Metrics
| Metric (in thousands) | Q1 2008 | Q1 2007 |
|---|---|---|
| Net Sales | $160,455 | $147,385 |
| Gross Profit | $37,757 | $32,052 |
| Operating Income | $19,332 | $13,523 |
| Net Income | $10,907 | $10,819 |
| Net Income Applicable to Common Stock | $10,601 | $5,631 |
| Diluted EPS | $0.46 | $0.28 |
| Cash and Cash Equivalents | $42,486 | $761 (End of Q1 2007) |
| Long-Term Debt | $120,895 | $121,064 |
| Stockholders' Equity | $102,608 | $94,283 |
Liquidity: The company holds $42.5 million in cash and has an undrawn $50 million Working Capital Revolver Loan with approximately $49.3 million available. Debt: Total long-term debt includes $60 million in 5.5% Convertible Senior Subordinated Notes due 2012 and a $50 million Secured Term Loan due 2012.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 8.9% to $160.5 million, driven primarily by a 23.9% increase in Chemical Business sales ($91.3 million) due to higher selling prices for agricultural and industrial products. Climate Control sales decreased 7.0% to $66.3 million due to lower shipment volumes compared to a strong Q1 2007.
- Profitability: Operating income rose 43% to $19.3 million. The Chemical segment operating income increased 57% to $12.1 million. Climate Control operating income increased 9.6% to $9.3 million despite lower sales, aided by a $2.4 million gain on copper futures contracts.
- Tax Provision: Income tax provision increased significantly to $6.7 million from $0.3 million in Q1 2007. The 2007 provision was minimal due to valuation allowances on Net Operating Loss (NOL) carryforwards, which were largely utilized or deemed realizable in 2008.
- Cash Flow: Net cash used by operating activities was $7.3 million, compared to $8.1 million in Q1 2007. This was driven by increases in accounts receivable ($12.4 million) and inventories ($5.7 million) to support seasonal demand.
Guidance, Outlook, Risks, and Unusual Items
- Outlook: Management expects material costs (copper, steel, aluminum, natural gas) to rise. While order levels for Climate Control are up 24%, there is uncertainty regarding the impact of credit market contraction on commercial construction. The Chemical Business anticipates continued strong demand for nitrogen fertilizers.
- Capital Expenditures: Committed capital expenditures for the remainder of 2008 are approximately $12.2 million, including $4.6 million for air emissions abatement at the El Dorado facility.
- SEC Inquiry (Wells Notice): In April 2008, the company received a Wells Notice from the SEC regarding a 2004 change in inventory accounting (LIFO to FIFO). The SEC staff preliminarily decided to recommend a civil enforcement action for alleged violations of Section 13 of the 1934 Act. The company intends to defend the action.
- Legal Developments: The Arkansas Supreme Court affirmed a $9.8 million jury verdict (totaling ~$11 million with interest) in favor of the company against Ingersoll-Rand regarding a 2004 plant fire. The defendants have petitioned for rehearing.
- Unusual Items: Q1 2008 included $0.5 million in litigation settlement income (environmental cost recovery and Section 16(b) claim). Q1 2007 included a $4.9 million charge related to the settlement of preferred stock dividends in arrears.
Investor Verification Checklist
- SEC Enforcement Action: Verify the status of the SEC Wells Notice regarding the 2004 inventory accounting restatement and potential civil penalties.
- Commodity Hedging: Assess the sustainability of the $2.4 million gain on copper futures contracts and the company's ability to pass through rising raw material costs to customers.
- Debt Covenants: Confirm continued compliance with financial covenants on the $50 million Secured Term Loan and Working Capital Revolver, particularly given the cross-default provisions.
- Environmental Liabilities: Monitor the resolution of the El Dorado Facility groundwater and air emission compliance issues, including the $4.6 million committed for abatement.
- Legal Settlements: Track the final collection of the ~$11 million judgment against Ingersoll-Rand and the outcome of the University of Kansas lawsuit regarding Series 2 Preferred stock.