LSB Industries, Inc. — 2014 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2014; it is not a standalone quarterly filing. LSB manufactures nitrogen-based chemicals for agricultural, industrial and mining markets, and HVAC products through its Climate Control business.
Financial results and liquidity
| Metric | 2014 | 2013 |
|---|---|---|
| Net sales | $732.5 million | $679.3 million |
| Gross profit / margin | $153.4 million / 20.9% | $143.6 million / 21.1% |
| Operating income / margin | $53.4 million / 7.3% | $105.3 million / 15.5% |
| Net income | $19.6 million | $55.0 million |
| Diluted earnings per common share | $0.83 | $2.33 |
| Cash from continuing operations | $66.7 million | $54.1 million |
| Capital expenditures for property, plant and equipment | $219.8 million | $157.4 million |
At December 31, 2014, cash, cash equivalents and short-term investments were $201.3 million; an additional $71.0 million of noncurrent restricted cash and investments was designated for capital projects. Total debt, including current maturities, was $457.3 million, chiefly $425.0 million of 7.75% secured notes due 2019. The $100 million revolver was undrawn, with approximately $71.1 million available under borrowing-base limits. Debt-to-equity was 1.1.
Fourth-quarter snapshot: Net sales were $181.3 million versus $149.0 million in Q4 2013; gross profit was $31.4 million versus $30.6 million. Income from continuing operations was $0.7 million versus $37.5 million, and diluted EPS was $0.03 versus $1.58. The prior-year quarter included a $66.0 million property-insurance recovery.
Material changes versus prior year
- Consolidated sales rose 7.8%, primarily as Chemical sales increased 19.5% to $454.9 million on higher production and sales volumes. Chemical gross profit increased to $66.6 million from $46.2 million, but reported operating income fell to $51.3 million from $87.8 million, reflecting substantially lower insurance recoveries.
- 2014 Chemical results included $28.0 million of property and business-interruption insurance recoveries, compared with $94.6 million in 2013; 2013 also included a $4.5 million precious-metals recovery. Excluding these items, management reported Chemical operating income of $23.3 million in 2014 versus an adjusted operating loss of $11.3 million in 2013.
- Climate Control sales declined 6.9% to $265.4 million, gross profit fell 11.3% to $82.4 million, and operating income declined 28.7% to $21.7 million. The loss of Carrier heat-pump contracts was a major factor.
- Interest expense rose to $21.6 million from $14.0 million, largely following the 2013 issuance of the $425 million notes. Capitalized interest increased to $14.1 million from $4.0 million.
Outlook, management commentary and risks
- Management expected 2015 capital additions of $283 million to $346 million, including $225 million to $260 million for El Dorado expansion projects. The ammonia plant was expected to be completed in late 2015 and operational in early 2016; the new nitric acid plant and concentrator were scheduled to begin production in Q3 2015. Timing, costs and expected returns are subject to project risks.
- The El Dorado ammonia plant is intended to reduce purchased-ammonia exposure and improve production economics. Management expected the El Dorado projects to be completed by the end of 2015, while noting that estimates could change.
- Management expected moderate Climate Control sales growth in 2015, citing forecast construction growth, new product introductions and higher LSB-branded sales. 2014 bookings were $278.4 million and year-end backlog was $64.9 million, up from $39.7 million. January 2015 orders were approximately $24.8 million and backlog approximately $71.7 million.
- The Orica ammonium-nitrate supply agreement was set to end on or after April 9, 2015. LSB reported contracts covering about 60% of the prior annual 240,000-ton commitment and was seeking buyers for the remaining volume. Orica had paid for uncollected volumes, contributing $15 million in 2014.
- Chemical performance remains exposed to fertilizer prices and planted acreage, natural-gas and ammonia costs, weather, imports and production outages. Several facilities experienced downtime or maintenance issues in 2014. New U.S. nitrogen capacity and the potential increase in Russian ammonium-nitrate imports could pressure prices.
- Other notable risks include environmental and safety compliance, pending litigation concerning the 2013 West, Texas fertilizer explosion, customer concentration, project financing and execution, substantial debt, ERP implementation and cybersecurity. Seven Chemical customers represented about 30% of Chemical sales and 19% of consolidated sales in 2014.
- The company reported effective disclosure controls and effective internal control over financial reporting at year-end; the ERP rollout was continuing. The auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether El Dorado expansion projects met cost, schedule and commissioning expectations, and whether the ammonia plant delivered the projected feedstock savings and capacity.
- How much of the former Orica volume was replaced after the agreement ended, and the resulting realized pricing, margins and customer concentration.
- Normalized earnings and cash generation excluding insurance recoveries and other unusual items; confirm the timing and nature of the 2014 recoveries.
- Capital-spending funding, additional secured borrowing, revolver availability and covenant headroom as projects proceed.
- Developments in the West, Texas litigation and environmental matters, including any material change in estimated exposure or insurance coverage.
- Progress and control impacts from the ERP implementation, and any subsequent changes to financial reporting controls.