LSB Industries, Inc. — 2011 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2011. This is an annual filing, not a standalone fourth-quarter report; the filing also presents unaudited fourth-quarter data. LSB manufactures HVAC equipment and nitrogen-based chemicals through its Climate Control and Chemical businesses.
Financial performance
| Metric | 2011 | 2010 |
|---|---|---|
| Net sales | $805.3 million | $609.9 million |
| Gross profit / gross margin | $223.0 million / 27.7% | $138.6 million / 22.7% |
| Operating income / operating margin | $136.4 million / 16.9% | $55.9 million / 9.2% |
| Income from continuing operations | $84.0 million | $29.7 million |
| Net income | $83.8 million | $29.6 million |
| Net income per common share | $3.80 basic; $3.58 diluted | $1.38 basic; $1.32 diluted |
| Cash from continuing operating activities | $90.0 million | $44.2 million |
| Capital expenditures | $44.2 million | $34.5 million |
| Cash and short-term investments at year-end | $134.9 million | $76.9 million |
| Total debt, including current portion | $79.5 million | $95.4 million |
| Total assets / stockholders’ equity | $502.0 million / $293.3 million | $388.0 million / $179.4 million |
Calculated current ratios were approximately 3.4 at year-end 2011 and 2.7 at year-end 2010. The $50 million revolving credit facility was undrawn, with approximately $48.6 million available subject to eligible collateral and letters of credit. Debt reduction includes conversion of the remaining $26.9 million of 5.5% debentures into common shares; the company issued 979,160 shares in the conversions.
Fourth-quarter results and material changes
- Fourth-quarter 2011 net sales were $215.4 million, gross profit $62.8 million, income from continuing operations $28.0 million, and basic/diluted EPS $1.26/$1.19. In fourth-quarter 2010, these were $172.2 million, $45.8 million, $18.1 million, and $0.85/$0.79, respectively.
- Full-year sales rose about 32%, and operating income more than doubled. Chemical drove most of the increase: sales rose 45.8% to $511.9 million and operating income rose to $116.5 million from $31.9 million.
- Chemical performance benefited from increased fertilizer volumes and prices, the Pryor facility’s first full year of production, and higher UAN and ammonia margins as selling prices strengthened while natural gas prices averaged lower than in 2010. An $8.6 million business-interruption insurance recovery reduced 2011 cost of sales.
- Climate Control sales rose 12.4% to $281.6 million, led by hydronic fan coils, but operating income fell 7.3% to $32.8 million. Gross margin declined to 31.3% from 34.5%, reflecting higher material/component costs and product mix; warranty, health insurance, freight, and commission costs also increased.
- Operating cash flow increased, while receivables rose $13.5 million, principally due to higher Chemical sales. Year-end cash increased to $124.9 million, and debt declined to $79.5 million.
Outlook, risks, contingencies, and unusual items
- Management expected modest 2012 growth in the construction sectors served and low-to-moderate near-term Climate Control sales growth. Chemical management anticipated positive fertilizer fundamentals, slight industrial/mining market growth, and demand sufficient to support strong plant utilization, subject to economic, crop-price, and weather conditions.
- Management planned $11.7 million of committed 2012 capital expenditures plus $43.7 million of additional planned spending, subject to approval and conditions. Estimated 2012 chemical-plant turnaround costs were $9.5–$10.5 million; environmental compliance expenses were forecast at $3.5–$4.5 million.
- The Pryor facility had recurring reliability and operating issues. Following a January–February 2012 improvement outage, production was reported at about 600 tons per day, versus a permitted level of 700 tons per day; management said the facility had not sustained more than 500 tons per day in 2011. Outage-related project maintenance and operating costs of approximately $3.7 million were expensed.
- At El Dorado, EPA/DOJ enforcement over alleged wastewater-permit violations was pending; $124,000 was accrued. The company estimated its wastewater-pipeline capital contribution at about $4.0 million and expected completion by mid-2014. Potential groundwater remediation costs were not reasonably estimable.
- EPA review of nitric-acid-plant compliance under the Clean Air Act could require significant, presently unquantified capital improvements and penalties; $100,000 was accrued. Environmental liabilities for the cited permit, air, and former Hallowell matters totaled $329,000, but these accruals do not quantify potential future capital costs.
- The Jayhawk Group litigation sought up to $12 million plus punitive damages; the case had been tried and a decision was pending. No liability was accrued, and the insurer was funding defense costs above the deductible subject to a reservation of rights.
- The $72.2 million secured term loan matured in March 2016 and required a $56.3 million balloon payment; it was secured by El Dorado and Cherokee assets. The working-capital revolver matured April 13, 2012, and an extension was under negotiation at filing. Both facilities had financial covenants and cross-default provisions; the company reported compliance at year-end.
- Other key exposures include volatile ammonia, natural gas, copper, and steel prices; agricultural seasonality and weather; customer concentration (six Chemical customers represented about 57% of Chemical sales); and dependence on a few significant customers. The company reported no cash dividends on common stock in many years and did not anticipate them in the near term.
- Ernst & Young issued an unqualified opinion on the financial statements and internal controls; management also concluded disclosure controls and internal control over financial reporting were effective.
Most important facts for investors to verify
- How much of 2011 Chemical earnings and cash generation is repeatable without the $8.6 million insurance recovery, and whether UAN/ammonia margins remain favorable.
- Whether Pryor sustains higher production after the improvement project, and the remaining reliability, maintenance, and capital requirements.
- The outcome and potential cost of EPA/DOJ wastewater and Clean Air Act matters, including the pipeline schedule and any required plant retrofits.
- Completion and terms of the revolver extension, covenant headroom, and the company’s plan for the 2016 term-loan balloon payment.
- Whether planned 2012 capital expenditures, turnarounds, and environmental spending remain within management’s estimates and internally generated funding capacity.
- Customer concentration, agricultural-market exposure, and the impact of fertilizer pricing, weather, feedstock costs, and construction activity on earnings.