LSB Industries, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015; filed November 9, 2015. LSB manufactures nitrogen-based chemical products and HVAC equipment. Unless noted, amounts below are in millions of dollars.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $157.7 | $171.0 | $534.2 | $551.2 |
| Gross profit | $13.3 | $24.4 | $90.5 | $122.0 |
| Operating income (loss) | $(54.9) | $(1.2) | $(38.1) | $48.4 |
| Net income (loss) | $(33.8) | $(3.8) | $(26.7) | $19.0 |
| Diluted earnings (loss) per share | $(1.48) | $(0.17) | $(1.19) | $0.80 |
- Q3 gross margin was approximately 8.4%, compared with 14.3% a year earlier; nine-month gross margin was approximately 16.9%, versus 22.1%.
- Q3 results included a $39.7 noncash impairment charge on Marcellus Shale natural gas properties, written down to an estimated fair value of $22.5. Management cited weaker forward gas prices, regional price differentials and changes in drilling plans.
- Nine-month continuing operating cash flow was $42.5, compared with $56.9 in 2014. Investing cash outflow was $231.7, including $300.8 of property, plant and equipment expenditures. Financing cash inflow was $26.5. Cash and cash equivalents fell to $24.0 from $186.8 at year-end 2014.
- At September 30, cash and short-term investments totaled $39.0; current assets were $250.2 and current liabilities $182.3. Total debt was $496.4, including $23.8 current portion, versus $457.3 at December 31, 2014. Stockholders’ equity was $411.0, down from $434.0.
- Net interest expense was $0.9 in Q3 and $6.5 for nine months, lower than prior-year periods chiefly because more interest was capitalized on construction projects.
Material changes and segment performance
- Consolidated Q3 sales declined 7.8% year over year. Chemical sales fell 14.9% to $80.6; Climate Control sales rose 2.1% to $75.1.
- Chemical’s Q3 operating loss was $55.0, including the $39.7 impairment. The Pryor plant had 70 days of planned and unplanned downtime, with management estimating a $15.6 adverse operating impact. The expired Orica supply agreement reduced Q3 contribution margin by about $4.7.
- For the first nine months, Chemical sales declined 7.4% to $320.2 and the segment recorded a $31.5 operating loss, compared with $46.8 operating income in 2014. Prior-year results included $28.0 of property and business-interruption insurance recoveries.
- Climate Control Q3 sales increased modestly, but operating income decreased to $7.2 from $8.5; nine-month sales rose 5.3% to $207.1 while operating income declined to $15.5 from $17.4. Residential weakness and product mix pressured margins. Q3 new bookings fell 12% year over year to $65.1; backlog was $71.2 at September 30.
Liquidity, projects, outlook and risks
- Management revised the estimated total cost of the El Dorado expansion to $831–$855, including capitalized interest; $564 had been spent by September 30. The filing cited cost increases, including mechanical and piping labor. It estimated $197–$216 of spending in Q4 2015 and $70–$75 in 2016.
- At September 30, the $100 revolving facility had $13.3 outstanding and $57.6 additional availability, subject to eligible collateral and letters of credit. Outstanding revolver borrowings were $20.6 at October 31. The company reported a 3.2-to-1 fixed-charge coverage ratio at September 30 and forecast covenant compliance for the next 12 months.
- On November 6, after quarter-end, LSB obtained a conditional $260 financing commitment: $50 of 12% senior secured notes and $210 of cumulative redeemable perpetual preferred stock paying a 14% dividend, plus warrants and governance rights. Closing required definitive documentation and customary conditions. Fees include a $5.2 commitment fee and a $5.2 funding fee. Management said the completed financing, with other liquidity sources, was expected to fund the expansion; failure to close or cost overruns could require cuts, delays or other financing.
- The new ammonia plant was expected to begin production early in Q2 2016; the nitric acid plant was expected to begin production in November 2015, while its concentrator had begun production in June. These are management expectations, not guarantees. The company also entered a three-year ammonia sales agreement with Koch, subject to plant completion and minimum purchase requirements.
- Management described pressure on fertilizer prices from imports and weather, lower mining demand amid declining U.S. coal production, and weaker residential geothermal demand. It expected the El Dorado facility’s purchased-ammonia cost disadvantage to persist until the new ammonia plant starts operating.
- Contingencies include continuing West Fertilizer litigation after a confidential settlement with three family groups; a BAE supply-contract suit with a pre-litigation demand exceeding $30; a securities class action seeking unspecified damages; and a disputed Global subcontractor claim reduced to approximately $12 after a reported payment. Potential losses in these matters were not clearly estimable in the filing. Environmental liabilities accrued were $0.452.
Important facts for investors to verify
- Whether the $260 financing commitment closed on the stated terms and timing, and the resulting preferred-stock, warrant, board and voting consequences.
- Whether the El Dorado expansion remains within the revised $831–$855 estimate and reaches the announced completion and production dates.
- Actual liquidity, revolver availability, covenant headroom and cash needs as project payments fall due.
- Whether plant reliability improves at Pryor and whether fertilizer demand, pricing and replacement sales volumes offset the loss of the Orica agreement.
- Developments and potential financial exposure in the West Fertilizer, BAE, securities and Global matters, and in environmental proceedings.