LSB Industries, Inc. — FY2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; filing dated February 26, 2014. LSB operates Chemical and Climate Control businesses, with a smaller Other business. This annual summary includes fourth-quarter information where material.
Financial performance and liquidity
| Metric | 2013 | 2012 |
|---|---|---|
| Net sales | $679.3 million | $759.0 million |
| Gross profit | $143.6 million | $183.7 million |
| Operating income | $105.3 million | $95.7 million |
| Income from continuing operations | $55.1 million | $58.8 million |
| Net income | $55.0 million | $58.6 million |
| Basic / diluted earnings per common share | $2.43 / $2.33 | $2.61 / $2.49 |
| Net cash from continuing operating activities | $54.1 million | $99.5 million |
| Capital expenditures for property, plant and equipment | $157.4 million | $92.6 million |
- Revenue declined approximately 10.5%; gross profit fell 21.9%. Reported operating income increased despite lower sales, principally because it included $94.6 million of 2013 insurance recoveries, compared with $7.3 million of business-interruption recoveries in 2012. The filing reports $66.0 million of property-insurance recoveries in 2013 operating income.
- Chemical sales fell 20.3% to $380.7 million, while Climate Control sales rose 7.1% to $285.0 million. Chemical gross margin declined to 12.1% from 20.4%; Climate Control gross margin improved to 32.6% from 30.4%.
- At year-end, cash and cash equivalents were $143.8 million; noncurrent restricted cash and investments designated mainly for capital projects were $291.0 million. Total long-term debt, including current maturities, was $463.0 million, versus $72.4 million a year earlier; stockholders’ equity was $411.7 million. The reported debt-to-equity ratio was 1.1.
- The company generated $54.1 million from continuing operations but used $389.6 million in continuing investing activities, including substantial capital spending and restricted investments. Financing activities provided $381.5 million.
- LSB issued $425 million of 7.75% senior secured notes due 2019, using $67.2 million to repay its term loan. A $100 million asset-based revolver was undrawn at year-end, with approximately $67 million of net availability based on eligible collateral and letters of credit.
Material changes and unusual items
- Chemical production and sales were disrupted by the 2012 El Dorado nitric-acid plant explosion, 2012 Cherokee ammonia-plant damage, and recurring Pryor mechanical problems. The filing estimates the 2013 adverse operating-income effect from these events, net of $94.6 million of insurance recoveries, at $10 million to $26 million.
- The Pryor facility’s ammonia production was approximately 42% of capacity in 2013 and it suspended production again in January 2014. Management estimated an operating-income impact of approximately $8 million per month, including repair and maintenance costs, until production resumes.
- El Dorado received $113 million to settle its insurance claims in 2013. The Cherokee claim was settled in January 2014 for approximately $43.5 million; management expected approximately $28 million of related income in the first quarter of 2014.
- The Climate Control backlog declined to $39.7 million at December 31, 2013, from $55.5 million a year earlier; 2013 orders were $256.3 million versus sales of $285.0 million. Carrier said it would not renew certain heat-pump contracts effective May 11, 2014; those sales were less than 5% of consolidated sales in each of 2011–2013.
Outlook, investment plans and risks
- Management expected moderate U.S. economic growth and moderate near-term Climate Control sales growth. Its cited construction forecast anticipated 2014 growth in the markets served, but activity was expected to remain below pre-recession levels. Climate Control backlog and order trends warrant monitoring.
- LSB planned substantial capital investment: total committed and planned expenditures were estimated at $511 million to $594 million, including $227 million to $261 million in 2014. The El Dorado ammonia plant was estimated at $250 million to $300 million, with completion expected by year-end 2015; a replacement nitric-acid plant and concentrator were estimated at approximately $120 million and also targeted for 2015.
- Management was implementing multi-year reliability, mechanical-integrity and process-safety improvements at chemical facilities. It reported $3.2 million of program expense in 2013 and expected another $1.8 million in 2014.
- An EPA/DOJ consent decree executed by the company in January 2014 requires emissions-control upgrades at nitric-acid plants; remaining equipment was estimated at $2 million to $3 million per plant. The decree also includes a $725,000 civil penalty and an estimated $150,000 reforestation project.
- LSB and a subsidiary were named defendants in litigation related to the West Fertilizer explosion. The company said no liability had been established at year-end; the ultimate outcome and potential exposure were unclear. A separate Oklahoma environmental investigation concerning Pryor remained ongoing.
- Other key risks include further chemical-plant downtime, volatile ammonia and natural-gas costs, fertilizer pricing and imports, agricultural weather and demand, customer concentration, environmental compliance and remediation, substantial debt and restrictive covenants, and the ability to complete and finance major projects. The company reported no common-stock cash dividends in recent years and did not anticipate them in the near term.
Important facts for investors to verify
- How much of reported 2013 operating income and earnings reflected insurance recoveries, and whether remaining insurance claims are subject to disputes or repayment risk.
- Pryor’s repair progress and restart timing, subsequent operating performance at all chemical facilities, and the expected duration and cost of reliability work.
- Actual project spending, funding sources, construction schedules and expected returns for the El Dorado ammonia and nitric-acid projects.
- Available revolver capacity under collateral tests, compliance with debt covenants, and future interest and debt-service requirements.
- The final financial and operational impact of Carrier’s contract nonrenewal, the West Fertilizer litigation, and environmental investigations and consent-decree obligations.
- Management’s annual forecasts are expectations, not guarantees. The filing reports effective disclosure controls and an unqualified independent audit opinion on the financial statements.