LSB Industries, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018; financial statements are unaudited. LSB manufactures and sells chemicals for agricultural, industrial, and mining markets from facilities in Arkansas, Alabama, Oklahoma, and Texas.
Financial performance and liquidity
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $103.2 | $122.9 | $203.6 | $246.2 |
| Gross profit / margin | $3.1 / 3.0% | $11.3 / 9.2% | $13.2 / 6.5% | $23.0 / 9.3% |
| Operating income (loss) | $(5.9) | $(0.3) | $(4.0) | $2.0 |
| Net loss | $(27.5) | $(7.0) | $(33.1) | $(13.0) |
| Net loss attributable to common stockholders | $(35.0) | $(14.5) | $(48.6) | $(27.7) |
| Basic and diluted loss per share | $(1.27) | $(0.53) | $(1.77) | $(1.02) |
| Net interest expense | $11.7 | $9.3 | $21.0 | $18.7 |
- Revenue and comparability: Reported sales fell 16% in Q2 and 17% for the first half. Adoption of ASC 606 reduced reported 2018 sales by $17.3 million in Q2 and $33.4 million for the half by excluding certain sales where LSB acts as agent; the corresponding gross-profit impact was $0.2 million and $0.3 million, respectively. Prior periods were not restated. On a comparable ASC 605 basis, 2018 sales would have been $120.5 million for Q2 and $237.0 million for the half.
- Cash flow: First-half continuing operating cash flow was $33.3 million, up from $22.9 million. Investing used $10.4 million, including $15.4 million of property and equipment expenditures; financing used $9.4 million. Cash increased $13.6 million to $47.2 million.
- Debt and liquidity: June 30 reported debt carrying value was $416.4 million, including current maturities and net of unamortized discount and issuance costs. Cash was $47.2 million. The $50 million asset-based revolver was undrawn, with approximately $34.3 million available; no springing covenant trigger had occurred. Current assets were $143.9 million and current liabilities $88.0 million.
- Preferred stock: Series E redeemable preferred carrying value was $187.4 million, with a $198 million liquidation preference and a 14% annual dividend rate. The filing reports approximately $58.4 million of accumulated Series E dividends.
Changes versus prior period
- Gross profit declined $8.3 million in Q2 and $9.8 million for the first half. Management attributed the deterioration chiefly to lower plant on-stream rates, lost fixed-cost absorption, repair and turnaround costs, purchased ammonia for downstream production, and a $2.9 million precious-metals recovery included in Q2 2017 results.
- Q2 agricultural sales were broadly flat, as higher average prices were offset by lower volumes. Agricultural prices rose year over year: UAN 16%, HDAN 11%, and ammonia 5%. First-half agricultural sales declined 8%, mainly on lower volumes amid planting delays, transportation constraints, and plant reliability issues.
- Q2 industrial sales declined 38% as reported, substantially reflecting ASC 606; excluding the accounting change, management cited lower industrial ammonia volume and lower benchmark-linked prices. Mining sales rose 20% in Q2 and 25% for the half, largely on higher LDAN volumes.
- First-half SG&A declined $2.1 million to $16.7 million. Interest expense increased, and the company recorded a $6.0 million debt-extinguishment loss.
Outlook, management commentary, and risks
- Refinancing: In April, LSB issued $400 million of 9.625% senior secured notes due 2023 and used most proceeds to repay its $375 million 8.5% notes due 2019. The refinancing extended the principal maturity but increased borrowing costs. Management expects interest expense to be higher than in 2017.
- Operations and plans: Q2 ammonia-plant on-stream rates were 100% at Cherokee, 62% at El Dorado, and 65% at Pryor, versus 87% and 78% at El Dorado and Pryor a year earlier. Management expects average on-stream rates of approximately 94% in the second half, excluding turnaround days. Planned Q3 turnarounds are 35 days at Cherokee and 5 days at El Dorado.
- Costs and capital: Management expects procurement and cost-control initiatives to produce $3 million to $5 million of annualized savings, with benefits expected in the second half. Planned capital expenditures are approximately $15.6 million for the rest of 2018, or $31 million for the full year. Management believes cash, revolver availability, and operating cash flow will fund anticipated needs for the next 12 months.
- Markets: Management expected improving fertilizer prices to continue in the second half of 2018. Agricultural results remain exposed to weather, crop economics, imports, supply-demand changes, and transportation. Industrial demand is tied to end markets and benchmark-linked feedstock pricing; management did not expect a significant near-term increase in mining business.
- Tax and other unusual items: The company established a valuation allowance on part of its deferred tax assets and estimated 2018 allowances of approximately $11 million federal and $5.1 million state. Tax accounting under the Tax Cuts and Jobs Act remained incomplete. Q2 included approximately $2.0 million of accelerated depreciation after a power outage and boiler repairs at El Dorado.
- Contingencies: LSB and its subsidiary remain defendants in litigation related to the 2013 West Fertilizer explosion; no liability reserve was recorded for unresolved claims, and a possible loss range could not be estimated. A remaining Global Industrial claim and lien was approximately $5 million, with no liability established. Environmental liabilities accrued were $183,000; potential additional costs for several permit, groundwater, and remediation matters were not estimable. The company also disclosed permit-related risks at Pryor and El Dorado.
- The filing reports effective disclosure controls as of June 30, 2018. It provides forward-looking statements but no formal revenue or earnings guidance.
Important facts for investors to verify
- Whether plant reliability improves as projected, particularly at El Dorado and Pryor, and whether planned turnarounds affect production and cash generation.
- Whether reported sales trends are assessed on a consistent ASC 606 basis, and how volumes, fertilizer prices, and industrial benchmarks affect margins.
- The cash cost of the 9.625% notes, future interest burden, Series E preferred dividends and redemption exposure, and compliance with debt covenants.
- Whether management realizes the projected cost savings and 2018 capital-spending plan while maintaining adequate liquidity.
- Potential changes to deferred-tax valuation allowances and exposure from West Fertilizer litigation, the Global claim, and environmental permits or remediation.