LSB Industries, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. LSB Industries (NYSE: LXU) manufactures nitrogen-based chemical products for agricultural, industrial and mining customers, primarily at facilities in Arkansas, Alabama and Oklahoma; it also operates a Covestro facility in Texas.
Financial performance
Unless noted otherwise, amounts are in millions of dollars. The audited financial statements received an unqualified opinion.
| Metric | 2019 | 2018 |
|---|---|---|
| Net sales | $365.1 | $378.2 |
| Gross profit | $5.0 | $15.8 |
| Gross margin | 1.4% | 4.2% |
| Operating loss | $39.1 | $23.0 |
| Net loss | $63.4 | $72.2 |
| Net loss attributable to common stockholders | $96.4 | $102.7 |
| Net cash from operating activities | $2.1 | $17.6 |
| Capital expenditures | $36.1 | $37.1 |
- Sales declined 3% year over year. Agricultural revenue was essentially flat at $187.6 million; industrial and mining revenue together fell 7% to $177.4 million.
- Agricultural adjusted gross profit, a company-presented non-GAAP measure excluding depreciation, amortization and turnaround expense, rose to $28.5 million from $21.4 million. Industrial and mining adjusted gross profit declined to $58.0 million from $74.4 million.
- Higher agricultural selling prices supported that market’s results, but lower industrial ammonia benchmark prices, reduced mining demand, higher turnaround costs and lower industrial and mining margins weighed on consolidated gross profit. Natural gas costs fell, partly offsetting pressure.
- Net loss narrowed, chiefly alongside a $20.9 million income tax benefit versus a $1.7 million tax provision in 2018. The operating loss nevertheless increased; the tax benefit does not indicate improved operating profitability.
- Fourth-quarter 2019 sales were $73.9 million, gross loss was $12.3 million and net loss was $27.7 million. In fourth-quarter 2018, sales were $94.7 million, gross profit was $12.4 million and net loss was $13.0 million.
Liquidity, debt and capital structure
- Year-end cash and cash equivalents were $22.8 million, down from $26.0 million. The revolving credit facility was undrawn, with approximately $42.1 million available against a $75 million borrowing base, subject to eligible collateral and letters of credit.
- Net long-term debt, including the current portion, was $459.0 million, compared with $425.2 million. This included $435 million of 9.625% senior secured notes due May 2023. Interest expense rose to $46.4 million from $43.1 million.
- Operating cash flow of $2.1 million was substantially below capital spending of $36.1 million. Financing activities provided $30.6 million, principally from issuing $35 million of additional senior secured notes.
- Series E and F redeemable preferred stock had a carrying value of $234.9 million and a reported liquidation preference of $242.8 million. Series E carries a 14% cumulative dividend, with accumulated dividends of approximately $103 million at year-end; holders may elect redemption beginning October 25, 2023. The filing estimates a current semiannual compounded Series E dividend of $16.6 million.
- Stockholders’ equity fell to $247.3 million from $342.2 million. The company reported no common dividends and does not anticipate paying them in the near future.
- Management said cash on hand, revolver availability and operating cash flow should cover anticipated liquidity needs for the next 12 months. This is management’s assessment, not a guarantee.
Material changes, outlook and notable items
- 2019 operating loss included $13.2 million of turnaround expense, versus $9.8 million in 2018. The ammonia plants’ average on-stream rate improved to 91% from 89%; management targeted 94% for 2020.
- The company recorded a $9.7 million non-cash charge after writing non-core assets held for sale down to a de minimis amount; sales, primarily for scrap, were expected in 2020. It completed major turnarounds at Pryor and El Dorado during 2019.
- 2019 legal fees were $12.8 million, up from $8.3 million, mainly related to claims against Leidos concerning construction at El Dorado. A trial was scheduled for March 2020.
- In 2018, results included a $4.4 million recovery from a vendor settlement, $5.3 million of former-CEO severance and accelerated stock compensation, and a $6.0 million debt-extinguishment loss. These items affect comparisons with 2019.
- For 2020, management expected stronger product demand, assuming normal weather, but continued pricing pressure. Industry estimates cited by the company projected corn acres planted to increase about 5% versus 2019; the company also noted uncertainty around crop estimates and weather. No specific revenue or earnings guidance was provided.
- Planned 2020 capital expenditures were $25–30 million, including $5–10 million for margin-enhancement projects; management expected these projects to be completed over 12–18 months. Environmental project spending was forecast at $4.5–5.0 million.
- Key operating initiatives include plant safety and reliability, expanded industrial and mining distribution, margin-enhancement projects, and improving the capital structure and cost of capital.
Risks and contingencies
- Commodity and market exposure: Agricultural prices can diverge from natural gas feedstock costs; fertilizer oversupply, imports, weather, crop economics and seasonal demand can pressure prices, volumes and margins. Industrial and mining demand is exposed to economic and sector conditions.
- Operations and logistics: Aging facilities, unplanned outages, turnaround execution, specialized equipment replacement and transportation disruptions could reduce production or raise costs. The Magellan ammonia pipeline was being shut down, potentially increasing reliance on truck, rail and barge transport.
- Leverage and preferred obligations: The high-cost notes, debt covenants and substantial preferred dividends/redemption obligations constrain financial flexibility. A significant portion of debt matures in 2023. The company cautioned that inadequate cash flow or covenant breaches could create liquidity and default risks.
- Legal and environmental exposure: Litigation related to the 2013 West, Texas fertilizer explosion remained unresolved, with no liability reserve and no estimable loss range disclosed. The company also faced claims involving Global Industrial and Leidos; approximately $3.5 million of unapproved invoices was included in accounts payable. Environmental compliance, remediation and permitting costs could exceed estimates.
- Customer concentration: Ten customers represented approximately 47% of 2019 consolidated sales. Nine customers represented approximately 46% of year-end receivables.
- Other risks: Natural gas cost and availability, variable-rate borrowings, labor agreements, cybersecurity, insurance adequacy, regulatory changes and the ability to realize deferred tax assets may affect results and liquidity.
The company reported effective disclosure controls and internal control over financial reporting, with an unqualified auditor opinion on both the financial statements and internal controls.
Important facts for investors to verify
- Whether operating cash flow and revolver availability remain adequate relative to debt service, capital needs and preferred dividends.
- Progress on 2020 plant reliability targets, capital projects, spending and the expected margin benefits.
- Actual fertilizer prices, feedstock costs, weather effects, customer demand and the impacts of pipeline closure and transportation costs.
- Developments and potential financial exposure in the Leidos/Global Industrial and West, Texas litigation, including outcomes after the filing date.
- The terms, accrued obligations and potential funding or dilution implications of Series E preferred redemption and dividends.
- Whether the 2020 outlook assumptions and management’s 12-month liquidity assessment were borne out; this filing contains no quantified earnings or revenue forecast.