CVR Partners, LP — Q1 2020 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2020. CVR Partners produces and wholesales nitrogen fertilizer, principally ammonia and UAN, from facilities in Coffeyville, Kansas, and East Dubuque, Illinois. Figures below are in U.S. dollars; financial amounts are in millions unless noted.
Financial performance and liquidity
- Revenue: Net sales were $75.1 million, down 18.3% from $91.9 million. Lower pricing reduced revenue by $21.6 million, partly offset by $5.3 million from higher sales volumes. UAN sales were $47.0 million; ammonia sales were $14.1 million.
- Profitability: Operating loss was $5.0 million, versus operating income of $9.4 million. Net loss was $20.7 million, or $0.18 per unit, versus a $6.1 million loss, or $0.05 per unit. Gross profit was approximately $0.4 million (0.5% margin), compared with $16.7 million (18.2%) a year earlier; operating margin was approximately negative 6.6% versus positive 10.3%.
- Cash flow: Operating cash flow was $27.7 million, down from $51.9 million. Capital expenditures were $6.7 million; cash increased by $21.0 million to $58.0 million. Management attributed lower operating cash flow chiefly to weaker earnings and unfavorable working-capital movements.
- Debt and liquidity: Long-term debt carrying value was $633.3 million, including $645.0 million of 9.25% secured notes due 2023 and $2.2 million of 6.50% notes due 2021. Net interest expense was $15.8 million. Cash was $58.0 million, including $36.6 million of customer advances. Reported total liquidity was $82.6 million, including $49.6 million of available asset-based facility capacity, net of cash included in its borrowing base. The Partnership reported compliance with debt covenants.
- Other measures: EBITDA, a non-GAAP measure, was $10.7 million versus $26.0 million. Available Cash for Distribution, also non-GAAP, was negative $5.9 million versus positive $7.8 million.
Material changes and operating drivers
- Weaker ammonia and UAN pricing, attributed to competitive markets, elevated inventories, and increased UAN imports, drove the sales decline. UAN volume fell to 317,000 tons from 335,000; ammonia gross production rose to 201,000 tons from 179,000.
- Ammonia sales volume benefited from deliveries shifted out of late 2019 after excessively wet weather delayed fertilizer application. Lower natural-gas costs partly offset higher production costs and pet-coke prices.
- No distribution was declared for Q1 2020; the Partnership also made no Q1 payment for Q4 2019. It paid $0.40 per unit in distributions during 2019.
- Cash and cash equivalents rose from $37.0 million at December 31, 2019, while accounts receivable declined and deferred revenue increased to $37.6 million from $27.8 million.
Outlook, risks, and unusual items
- Management said COVID-19, economic disruption, feedstock availability and prices, and fertilizer demand could adversely affect results and financial condition. It could not estimate the pandemic’s full impact. Management expected volatility through at least the first half of 2020 and potentially the remainder of the year, while citing continued expected demand for 2020 spring crop inputs.
- Management deferred the Coffeyville turnaround from fall 2020 to summer 2021 and the East Dubuque turnaround from 2021 to 2022, and reduced planned 2020 maintenance spending to critical or required projects. Estimated 2020 capital expenditures were $19–$23 million: $14–$16 million maintenance and $5–$7 million growth.
- Management believed cash, operations, and potential borrowing capacity would cover anticipated needs for at least 12 months, but noted uncertainty around future performance and financing. It also warned that weaker conditions could prompt a goodwill impairment review; no impairment indicator had been identified as of the filing, and any impairment’s amount was unknown.
- On April 22, 2020, the Partnership received notice that its unit price did not meet the NYSE minimum-price standard. It had until January 1, 2021 to regain compliance; delisting could impair unit liquidity, price, and access to capital. Units continued to trade below $1 after the notice.
- On May 6, 2020, the general partner’s board authorized a discretionary program to repurchase up to $10 million of common units; the program does not require purchases. The filing reported no material change in previously disclosed contingencies and said adverse outcomes in proceedings were not expected to materially affect the financial statements.
Important facts for investors to verify
- Whether fertilizer prices, inventories, imports, crop demand, and COVID-19-related market conditions improve or further pressure revenue and margins.
- Cash generation and liquidity, particularly the portion of cash consisting of customer advances and actual availability under the asset-based facility.
- Execution and cost of revised turnaround schedules and the $19–$23 million 2020 capital expenditure estimate.
- Progress toward NYSE minimum-price compliance by January 1, 2021, and whether any unit repurchases occur.
- Any subsequent goodwill impairment assessment, changes in feedstock supply or pricing, or material developments in legal and regulatory matters.