LSB Industries, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. LSB manufactures and sells chemicals for agricultural, industrial, and mining markets. Results are seasonal, particularly for agricultural products.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $74.0 million | $75.5 million | $262.4 million | $291.2 million |
| Gross profit (loss) | $(1.1) million | $(9.7) million | $20.5 million | $17.3 million |
| Operating loss | $(9.0) million | $(19.2) million | $(5.3) million | $(7.8) million |
| Net loss | $(20.4) million | $(30.8) million | $(40.2) million | $(35.7) million |
| Net loss attributable to common stockholders | $(29.9) million | $(39.1) million | $(67.8) million | $(60.0) million |
| Basic and diluted loss per common share | $(1.06) | $(1.39) | $(2.41) | $(2.14) |
Q3 gross margin was negative 1.4%, versus negative 12.9% a year earlier. For the nine-month period, gross margin was 7.8%, versus 5.9%. The filing attributes the Q3 improvement partly to lower production costs, higher industrial and mining volumes, and the absence of the prior-year $7.2 million of turnaround expense. Nine-month gross profit also included a $5.7 million vendor-settlement recovery.
- Q3 sales mix and pressures: Agricultural sales fell 10% to $32.0 million, mainly from lower prices; industrial and mining sales rose 5% to $42.0 million. Agricultural average selling prices declined year over year by 22% for UAN, 18% for HDAN, and 26% for ammonia.
- Nine-month sales: Down 10% overall. Agricultural sales declined 11%, and industrial and mining sales declined 9%. Lower agricultural prices and pandemic-related weakness in industrial and mining markets contributed to the decline.
- Interest and taxes: Net interest expense was $12.6 million in Q3 and $38.5 million for the nine months. The nine-month tax benefit was $3.0 million, compared with $5.8 million in 2019; management cited valuation allowances as a factor.
Cash, debt, and liquidity
- At September 30, cash and cash equivalents were $42.1 million, up from $22.8 million at year-end 2019. Current assets were $138.0 million and current liabilities were $98.1 million.
- Nine-month operating cash flow was $24.7 million, compared with $41.0 million in 2019. Capital expenditures were $22.2 million; investing cash outflow was $20.2 million. Financing provided $14.8 million.
- Total debt, including current maturities and net of discounts and issuance costs, was $485.9 million, versus $459.0 million at December 31, 2019. This includes $435 million of 9.625% senior secured notes due May 2023.
- The $65 million borrowing-base revolver was undrawn, with approximately $36.3 million available. Management reported $78.4 million of combined cash and borrowing capacity and believes available resources and operating cash flow can meet anticipated needs for the next 12 months. No revolver covenant trigger had occurred at quarter-end.
- Redeemable Series E preferred stock had a $262.3 million carrying value and $268.7 million liquidation preference. It carries a 14% cumulative dividend, with scheduled rate increases beginning in April 2021; accrued dividends and accretion materially reduce earnings attributable to common shareholders.
Material changes, outlook, and risks
- In August, a subsidiary entered a $30 million secured financing arrangement at 8.75%, due 2025, using part of the proceeds to repay a separate note. The financing is with an affiliate of LSB Funding and is secured by an ammonia storage tank and guaranteed by LSB.
- In October 2020, after quarter-end, the company announced a nitric acid supply agreement for 70,000–100,000 tons annually, with sales expected to begin in Q1 2021. The initial term runs through 2027, subject to renewal provisions. A carbon dioxide sales arrangement is expected to begin in Q4 2021.
- Management expects 2020 capital expenditures of $25–$30 million, including $5–$10 million for margin-enhancement projects. It expects $0.9–$1.1 million of environmental project spending in Q4 2020.
- Management described continued nitrogen-market oversupply and pandemic-related uncertainty, while noting gradual improvement in some industrial and mining demand. Lower natural-gas costs supported margins, but fertilizer prices, imports, transport costs, weather, and plant reliability remain significant variables. The next major turnarounds are planned for Cherokee and Pryor in Q3 2021 and El Dorado in Q3 2022.
- Contingencies: A court judgment in the Global Industrial/Leidos matter awarded Global approximately $7.4 million plus $1.3 million prejudgment interest and a property lien. LSB recorded related amounts, filed notice of intent to appeal, and obtained a stay pending appeal. The separate West Fertilizer litigation continues; no reserve was recorded and the possible loss range was not estimable. Environmental obligations and permitting risks are also disclosed; accrued environmental liabilities were $183,000.
- The company received a $10 million PPP loan and used substantially all proceeds for potentially forgivable costs; forgiveness had not been confirmed in this filing. Management estimated 2020 valuation allowances of approximately $7.0 million for federal and $3.7 million for state deferred tax assets. No material changes to previously disclosed risk factors were reported.
Investor verification priorities
- Verify whether the nitric acid and carbon dioxide agreements start as planned and deliver expected volumes and economics.
- Track fertilizer pricing, natural-gas and freight costs, product volumes, plant reliability, and the timing and cost of planned turnarounds.
- Assess debt-service capacity and refinancing risk, especially the 9.625% notes due 2023, alongside related-party financing and Series E preferred dividends and redemption terms.
- Follow the Global Industrial/Leidos appeal and remaining West Fertilizer claims, including potential financial exposure and insurance coverage.
- Check PPP loan forgiveness, tax-asset valuation allowances, revolver availability, and actual capital and environmental spending against management’s expectations.