LSB Industries, Inc. — FY 2016 Form 10-K
Reporting period: Year ended December 31, 2016. The filing also reports unaudited fourth-quarter results. Following the July 1 sale of its Climate Control Business, LSB’s continuing operations comprise its nitrogen chemicals business, serving agricultural, industrial and mining markets.
Financial performance
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Net sales from continuing operations | $374.6 million | $437.7 million |
| Gross profit (loss) | $(49.3) million; (13.2)% margin | $20.0 million; 4.6% margin |
| Operating income (loss) | $(90.2) million | $(71.2) million |
| Continuing-operations income (loss) | $(88.1) million | $(46.1) million |
| Net income (loss) | $112.2 million | $(34.8) million |
| Net cash used by continuing operations | $(22.2) million | $(5.1) million |
| Cash and cash equivalents at year-end | $60.0 million | $127.2 million |
| Total debt, including current portion, net | $420.2 million | $520.4 million |
FY 2016 net income included $200.3 million of after-tax discontinued-operations income, largely reflecting the $282.0 million pretax gain on the Climate Control sale; continuing operations remained loss-making. Common-stockholder earnings were $64.8 million, or $2.54 per share, after preferred dividends and accretion. Interest expense rose to $30.9 million from $7.4 million, partly because capitalized interest declined after the El Dorado expansion entered service. The company recorded an $8.7 million debt-extinguishment loss.
Continuing-operations sales declined 14.4%. Agricultural product sales fell 20.8%, with average selling prices down 28%–34% across HDAN, UAN and ammonia, partly offset by higher volumes. Industrial and mining sales also declined. Gross profit deteriorated by $69.4 million, reflecting lower prices and sales, higher depreciation, start-up costs and unplanned downtime, and a $12.1 million property-tax consulting charge; lower natural-gas costs partly offset these pressures.
Fourth-quarter 2016 continuing sales were $85.4 million, gross loss was $8.9 million, and continuing-operations loss was $25.2 million. Net loss was $21.5 million, including $3.7 million income from discontinued operations.
Liquidity, capital structure and material developments
- Cash fell by $67.2 million during 2016. Continuing investing activities provided $153.3 million, including $356.7 million net proceeds from the Climate Control sale, offset principally by $212.5 million of PP&E expenditures. Continuing financing activities used $193.6 million.
- Sale proceeds funded an approximately $80 million redemption of Series E preferred stock and approximately $107 million of note redemptions, including accrued interest. Remaining senior secured notes totaled $375 million, bear interest at 8.5%, and mature in 2019. Series E preferred stock had a $161.8 million aggregate liquidation preference at year-end and a 14% cumulative dividend rate.
- The January 2017 working-capital revolver provides up to $50 million, with $40.5 million available at January 31, 2017 and no borrowings then outstanding. Its covenant is triggered if borrowing availability falls to specified low levels. Management expected cash, revolver availability and operating cash to cover anticipated needs for the next 12 months.
- Management forecast 2017 capital expenditures of $30–$35 million and environmental project costs of $3.5–$4.5 million. It identified $6 million of annual SG&A savings and approximately $6 million of plant-cost reductions beginning in 2017. Potential additional net proceeds from planned non-core asset sales were estimated at $15–$20 million.
Outlook, commentary and risks
- Management expected El Dorado ammonia-plant on-stream rates to improve to approximately 95% in 2017; the plant averaged 64% since starting up in 2016 and reached 73% in Q4. Cherokee and Pryor 2016 rates, excluding turnarounds, were 96% and 86%; management targeted 90%–95% at Pryor in 2017.
- Management cited pressure on nitrogen prices from added North American capacity, with roughly 5 million tons of annual ammonia capacity expected to be added by the end of 2017. It also noted uncertainty from crop economics, weather, natural-gas prices and demand, and expected no significant near-term mining-business rebound.
- The company began exploring strategic alternatives, potentially including a sale, merger or transaction involving some or all assets, and retained Morgan Stanley as financial advisor. No transaction was assured.
- El Dorado’s new nitric-acid plant had warranty-related problems. The company obtained an ADEQ order permitting bypass of a failed nitrous-oxide abatement system through April 2018 while a replacement vessel is completed; management expected warranty coverage for the costs.
- Key risks include leverage and the 2019 debt and preferred-stock obligations, volatile fertilizer and feedstock prices, customer concentration (six customers represented about 39% of 2016 sales), facility reliability, environmental compliance, and litigation. West, Texas explosion-related claims remain pending, with no loss range estimable; a separate BAE supply-contract claim alleged approximately $18 million, and a remaining Global subcontractor lien claim was approximately $5 million.
Most important facts for investors to verify
- Whether the turnaround in plant reliability and 2017 cost reductions are achieved, and how these affect continuing gross margin and cash generation.
- Liquidity headroom, revolver availability and covenant status, plus the ability to refinance or repay 2019 senior notes and meet Series E redemption and dividend obligations.
- Actual proceeds and timing from planned non-core asset sales, and any outcome of the strategic-alternatives process.
- Final repair and compliance status of the El Dorado nitric-acid abatement system, and the outcome or financial exposure from material litigation and environmental matters.
- Whether added nitrogen capacity, agricultural market conditions and reduced coal demand materially affect product prices, volumes and margins.