LSB Industries, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; financial statements are unaudited. LSB manufactures nitrogen-based chemicals and HVAC products through its Chemical and Climate Control businesses. Amounts below are in U.S. dollars unless otherwise noted.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Net sales | $165.6 million | $198.8 million |
| Gross profit | $15.0 million; 9.1% margin | $40.8 million; 20.5% margin |
| Operating income (loss) | $(12.2) million | $14.2 million |
| Net income (loss) | $(14.9) million | $6.6 million |
| Net income (loss) attributable to common stockholders | $(24.6) million | $6.3 million |
| Basic and diluted EPS | $(1.08) | $0.28 |
| Cash from continuing operations | $14.1 million | $12.6 million |
| Cash used in continuing investing activities | $(104.8) million | $(31.9) million |
Cash and equivalents were $39.5 million at March 31, down from $127.3 million at year-end 2015. Property, plant and equipment spending was $104.3 million in cash-flow reporting; reported capital additions were $96.1 million, reflecting differences including accrued capital spending. Long-term debt, including its current portion and net of discounts and issuance costs, was $528.5 million, versus $520.4 million at year-end. The $475 million of senior secured notes mature in 2019. Series E redeemable preferred stock had a $186.9 million carrying value and a $219.6 million aggregate liquidation preference.
The revolving credit facility had no borrowings and approximately $69.3 million available at quarter-end. Its fixed-charge coverage ratio was 2.0 to 1; the 1.10-to-1 minimum applies if excess availability falls to the specified threshold. Management said cash, revolver availability, anticipated additional borrowings and operating cash flow should fund expected needs for the remainder of 2016. Cash declined substantially as the company funded expansion spending.
Material changes versus prior year
- Sales fell $33.2 million, or approximately 17%, primarily because Chemical Business sales declined $34.7 million. Chemical sales were $97.0 million, down 26%; Climate Control sales rose 2% to $66.6 million.
- Chemical gross profit shifted from $20.2 million to a $7.0 million loss; segment operating results shifted from $16.7 million of income to a $10.2 million loss. Lower fertilizer prices and volumes, the expired Orica agreement, higher operating costs and a one-time $12.1 million consulting fee contributed. The fee related to reducing assessed property tax values on El Dorado projects; management expects future property-tax savings.
- Climate Control operating income increased 27% to $5.5 million, with gross margin improving to 31.8% from 30.6%, attributed to sales mix/pricing, lower commodity costs and efficiency measures.
- Common-stockholder results include $7.35 million of Series E preferred dividends and $2.24 million of accretion. The company also recorded a $2.5 million non-operating loss from revaluing the Series E embedded derivative.
- Net interest expense declined to $1.35 million from $3.40 million, largely because capitalized interest rose to $10.0 million from $5.6 million during construction; this does not represent a comparable reduction in total interest cost.
Outlook, commentary and risks
- The El Dorado ammonia plant was mechanically complete in February 2016 and was in start-up; production was expected early in Q2, with several months potentially required to reach its 1,150-ton-per-day nameplate rate. The expansion’s estimated total cost was $825–$855 million; $796 million had been spent by March 31, with $29–$59 million expected in Q2.
- Management expects the plant to reduce El Dorado’s purchased-ammonia cost disadvantage. Before start-up, that disadvantage and lower mining-related demand weighed on results. Management reported strong spring fertilizer demand and improved market prices, but noted record world stocks and low grain prices. U.S. coal-sector weakness is depressing demand for mining products.
- The Koch UAN agreement was terminated effective May 31, 2016; a CVR agreement takes effect June 1. Management expects lower distribution fees. The new arrangement gives CVR specified exclusive purchase rights for excess UAN, but is not equivalent to the former take-or-pay arrangement.
- Climate Control first-quarter bookings were $64.6 million, down 3% year over year; quarter-end backlog was $68.0 million versus $68.6 million. April bookings were approximately $22.4 million and April 30 backlog approximately $70.5 million. Management cited operational improvements and plans to consolidate some facilities in the second half of 2016.
- Planned capital additions for the rest of 2016 were $72–$114 million, including the remaining El Dorado expansion costs. Management’s longer-term plans include refinancing the 2019 senior notes and Series E preferred, potentially in late 2016 or 2017, after operating results improve. No formal earnings guidance is provided.
- Series E preferred stock carries a 14% cumulative dividend; approximately $9.6 million of dividends had accumulated at quarter-end. Holder redemption rights begin August 2, 2019. The preferred also has participation rights, and related warrants permit purchase of 4.10 million common shares at $0.10 per share.
- Contingencies include continuing litigation related to the 2013 West, Texas fertilizer explosion, a BAE supply-contract claim with a stated pre-litigation demand of approximately $18 million, a remaining Global subcontractor lien claim of approximately $5 million, and environmental matters. The company said potential losses for several matters could not be reasonably estimated and recorded no reserve for them except specified unpaid settlements or accrued items. Environmental permits, potential remediation, plant reliability, commodity prices, substantial capital needs and 2019 refinancing/redemption obligations are material risks.
- Management stated disclosure controls were effective as of March 31, 2016. The filing reports no off-balance-sheet arrangements and notes that interim results may be affected by agricultural seasonality and maintenance timing.
Important facts for investors to verify
- Whether the El Dorado ammonia plant started on schedule, reached expected production and stayed within the stated project budget.
- Whether operating cash flow, available borrowing and planned financing are sufficient to cover remaining 2016 capital spending and other liquidity needs.
- Whether Chemical margins and volumes recover, including the effect of the new UAN marketing agreement and reduced mining demand.
- The full economic burden of Series E dividends, accretion, participation rights and 2019 redemption obligations, as well as potential warrant dilution.
- Developments in the West explosion litigation, BAE and Global claims, environmental matters and any changes to recorded reserves or estimates.