LSB Industries, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing is an annual report, not a standalone fourth-quarter filing; unaudited fourth-quarter results are included below. LSB manufactures nitrogen-based fertilizer, industrial chemicals and mining products at facilities in Arkansas, Alabama and Oklahoma, and operates Covestro’s Baytown, Texas facility.
Financial performance and liquidity
| Metric | 2018 | 2017 |
|---|---|---|
| Net sales | $378.2 million | $427.5 million |
| Gross profit; gross margin | $15.8 million; 4.2% | $5.5 million; 1.3% |
| Operating loss | $23.0 million | $34.1 million |
| Loss from continuing operations | $72.2 million | $30.3 million |
| Net loss attributable to common stockholders; diluted loss per share | $102.7 million; $3.74 | $59.4 million; $2.18 |
| Cash from continuing operations | $17.6 million | $2.3 million |
| Capital expenditures | $37.1 million | $35.4 million |
Fourth-quarter 2018 net sales were $94.7 million, gross profit was $12.4 million, net loss was $13.0 million and loss attributable to common stockholders was $20.7 million. The comparable 2017 quarter reported sales of $88.9 million, gross loss of $10.2 million and net income of $0.9 million, including discontinued operations.
At year-end, cash was $26.0 million, total debt including current maturities was $425.2 million, redeemable preferred stock was $202.2 million (liquidation preference $212.1 million), and stockholders’ equity was $342.2 million. The $50 million borrowing-base revolver had $10.0 million drawn and $37.2 million available. Management stated that cash, revolver availability and operating cash flow were expected to cover liquidity needs for the next 12 months; this is forward-looking, not a guarantee.
Changes versus the prior year
- Reported sales fell 12%, but comparability is materially affected by adoption of ASC 606. On an ASC 605 comparison basis, 2018 sales would have been $443.8 million, rather than $378.2 million; the filing says 2017 industrial-sales figures were not restated.
- Reported gross profit improved by $10.4 million and operating loss narrowed by $11.1 million. Contributors included improved fertilizer prices and plant performance; costs included approximately $9.8 million of turnarounds, consulting expense and lost production. A $4.4 million vendor settlement recovery reduced cost of sales.
- Despite the narrower operating loss, continuing-operations loss increased, reflecting higher interest expense, a $6.0 million debt-extinguishment loss and a $15 million valuation allowance on federal deferred tax assets, among other items.
- Operating cash flow rose to $17.6 million from $2.3 million. Investing cash use increased to $25.7 million, including $37.1 million of capital spending; cash declined from $33.6 million to $26.0 million.
Financing, outlook, risks and unusual items
- In April 2018, LSB issued $400 million of 9.625% senior secured notes due 2023, primarily to refinance $375 million of notes due 2019. Annual interest expense increased to $43.1 million from $37.3 million.
- The Series E preferred holder’s redemption election date was extended from 2019 to October 25, 2023. Its current dividend rate is 14%, with scheduled increases beginning in 2021; accumulated dividends were approximately $72.3 million at year-end. The preferred stock’s redemption and dividend obligations are significant claims senior to common equity.
- Management expected improved fertilizer price levels to continue into 2019. It targeted 2019 ammonia on-stream rates of 95% at Cherokee, 95% at El Dorado and 90% at Pryor. Planned 2019 capital expenditures were approximately $30–$35 million, including a $7.5 million El Dorado sulfuric-acid converter. Procurement initiatives were expected to generate $3–$5 million of annualized savings over 12–24 months. These are targets and expectations, not formal earnings guidance.
- Key operating risks include natural-gas and fertilizer price volatility, seasonality and weather, unplanned plant outages, declining coal-market demand, transportation costs, customer concentration (seven customers represented about 40% of 2018 sales), and environmental, safety and regulatory obligations. The company reported $3.2 million of environmental project expenses in 2018 and expected $3.2–$4.2 million in 2019.
- LSB accrued approximately $18.5 million for the Wilson securities-class-action settlement and recorded an insurance receivable for the amount; the settlement received preliminary court approval in February 2019, with a further hearing scheduled for June 2019. Litigation relating to the 2013 West, Texas fertilizer explosion remained ongoing, and the company said it could not estimate a possible loss range; no reserve was recorded for that matter.
- Other notable items included $5.3 million of severance and accelerated stock compensation following the CEO’s December 2018 departure, approximately $6.0 million of net proceeds from non-core asset sales and a $4.6 million vendor settlement recovery. The company reported no common dividends and did not anticipate near-term common dividends.
Important facts for investors to verify
- Reconcile ASC 606’s $65.7 million reduction in reported 2018 sales and assess underlying volumes, margins and cash economics.
- Monitor plant reliability and execution against 2019 on-stream-rate targets, turnaround schedules and capital spending plans.
- Assess debt-service capacity and refinancing risk ahead of the $400 million notes’ 2023 maturity, alongside the cumulative Series E dividends and redemption terms.
- Track revolver availability, seasonal working-capital needs, and whether projected procurement savings and operating improvements materialize.
- Review the final court disposition and insurance recovery for the Wilson settlement, remaining West, Texas litigation exposure, and environmental permit and remediation developments.
The filing reports unqualified audit opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.