LSB Industries, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. LSB manufactures chemical products for agricultural, industrial and mining markets. Financial amounts below are in U.S. dollars; millions are used unless otherwise noted.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $127.2 | $74.0 | $366.0 | $262.4 |
| Gross profit (loss) | $17.4 | $(1.1) | $60.5 | $20.5 |
| Operating income (loss) | $5.4 | $(9.0) | $31.4 | $(5.3) |
| Net income (loss) | $(8.9) | $(20.4) | $1.5 | $(40.2) |
| Net loss attributable to common stockholders | $(251.5) | $(29.9) | $(262.0) | $(67.8) |
| Gross margin | 13.7% | (1.4)% | 16.5% | 7.8% |
- Q3 sales increased 72% year over year; nine-month sales rose 39%. Industrial and mining sales growth was especially strong, supported by higher prices, improved demand and increased nitric acid sales.
- Q3 gross profit improved by $18.5 million. Stronger product prices and higher HDAN sales helped, partly offset by higher natural gas costs and Cherokee plant turnaround impacts.
- Q3 basic and diluted loss per common share was $6.39; nine-month loss per share was $6.94. These common-stockholder losses include a $231.8 million noncash deemed dividend from exchanging Series E and F redeemable preferred stock. Excluding that preferred-stock accounting effect, reported net loss was $8.9 million for Q3 and net income was $1.5 million for the nine-month period.
- Nine-month operating cash flow was $65.5 million, investing cash outflow was $25.7 million, and financing cash outflow was $23.2 million. Capital expenditures were $26.1 million.
- At September 30, cash was $32.9 million; current assets were $163.0 million and current liabilities $134.8 million. Debt carrying value, including current maturities, was $469.9 million. The $65 million working-capital revolver was undrawn, with about $48.2 million available; no covenant trigger had occurred.
Material changes and significant transactions
- On September 27, LSB exchanged all Series E and F redeemable preferred stock for approximately 49.1 million common shares. The transaction eliminated the expensive, compounding preferred dividend obligation but gave Eldridge-affiliated LSB Funding majority control. After the October stock dividend, LSB Funding held approximately 60% of outstanding common stock.
- LSB issued approximately 9.1 million shares in an October 8 special stock dividend of 0.30 shares per eligible share. The dividend was accounted for as a stock split; share and per-share information in the filing is retroactively adjusted.
- On October 14, after quarter-end, LSB issued $500 million of 6.250% senior secured notes due 2028. Proceeds funded redemption of the $435 million 9.625% notes due 2023, transaction costs and, if available, general corporate purposes. Redemption was completed October 29. Management said the refinancing reduced the interest rate by more than 300 basis points and extended maturities. The filing says the financial-statement impact was still being evaluated.
- Q3 costs included approximately $5.0 million of change-of-control and stock-dividend-related compensation expense. Cherokee’s 40-day turnaround generated $8.0 million of expense and an estimated 21,000 tons of lost production.
Outlook, commentary and risks
- Management targeted 2021 ammonia production of approximately 770,000–780,000 tons, despite the Cherokee turnaround, and expected full-year capital expenditures of $35–$40 million, including about $5 million for margin-enhancement projects. Management said cash, revolver availability and operating cash flow should cover anticipated liquidity needs for the next 12 months.
- Management expected fertilizer pricing strength to continue through the remainder of 2021 and into 2022, citing demand, constrained nitrogen supply and higher natural gas costs. This is a management expectation, not guaranteed guidance. The filing provides no clear full-year revenue or earnings forecast.
- Key operating priorities include plant safety and reliability, expanding industrial and mining distribution, improving product mix, pursuing low- or zero-carbon ammonia opportunities, and evaluating acquisitions. A new nitric acid contract calls for 70,000–100,000 tons annually; carbon dioxide sales were expected to begin in Q4 2021.
- Important risks include commodity-price volatility—particularly natural gas—weather and plant outages, seasonal agricultural demand, transportation costs and truck-driver availability, competition, environmental compliance and permitting, and substantial debt. Natural gas averaged $3.71/MMBtu in Q3 2021 versus $1.98 a year earlier. The February 2021 cold-weather event disrupted production and supply.
- Contingencies include environmental matters, for which accrued liabilities were approximately $0.5 million, and continuing litigation relating to the 2013 West Fertilizer explosion; LSB said it could not estimate a possible loss range for that litigation. A separate Global Industrial judgment awarded about $8.7 million plus interest; LSB appealed and the judgment was stayed pending appeal.
Most important facts for investors to verify
- Whether higher selling prices continue to outpace feedstock, freight and maintenance costs, and whether production targets are achieved.
- The realized cash-interest savings, fees and any change in total debt following the $500 million refinancing and redemption of the old notes.
- The extent of the preferred-stock exchange’s effect on control, share count, per-share results and future preferred dividends.
- Cash conversion and working-capital needs, including receivables and the availability of the asset-based revolver.
- Developments in environmental permits and liabilities, West Fertilizer litigation, and the Global Industrial appeal.