LSB Industries, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparative period is Q1 2016. Interim financial statements are unaudited. LSB manufactures and sells nitrogen-based chemical products for agricultural, industrial and mining markets. The Climate Control business was sold in July 2016 and is presented as discontinued operations.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net sales | $123.3 million | $99.0 million |
| Gross profit (loss); margin | $11.6 million; 9.4% | $(6.2) million; (6.2)% |
| Operating income (loss) | $2.3 million | $(17.3) million |
| Interest expense, net | $9.4 million | $1.4 million |
| Continuing-operations loss | $(6.0) million | $(15.8) million |
| Net loss attributable to common stockholders | $(13.2) million | $(24.6) million |
| Loss per common share | $(0.48) | $(1.08), including $0.03 from discontinued operations |
| Cash from continuing operating activities | $7.8 million | $11.7 million |
| Continuing investing cash flow | $(13.4) million | $(104.2) million |
- Sales increased 24.6%. Agricultural sales rose to $63.3 million, industrial and other chemical sales to $48.9 million, while mining sales fell to $7.6 million.
- Cash and cash equivalents were $45.0 million at March 31, down from $60.0 million at year-end. Current assets were $186.0 million and current liabilities $123.3 million.
- Total debt, including current maturities and net of debt discounts and issuance costs, was $417.3 million, versus $420.2 million at year-end. The $375 million Senior Secured Notes bear 8.5% interest and mature August 2019. The working-capital revolver was undrawn; available borrowing was approximately $44.9 million.
- Series E redeemable preferred stock had a $152.2 million carrying value and $167.3 million liquidation preference. Its 14% cumulative dividends and accretion affect amounts attributable to common stockholders.
- Capital expenditures were $7.6 million in Q1. Management expected full-year 2017 capital additions of $30–$35 million, including the planned Pryor turnaround.
Changes versus Q1 2016
- Gross profit improved by $17.8 million, and operating results turned positive. Management cited higher sales volume, improved plant reliability and fixed-cost absorption, lower El Dorado feedstock costs, and reduced fixed plant costs. Q1 2016 included a $12.1 million one-time consulting expense related to property-tax assessments.
- Agricultural product sales volumes rose 57%, while average selling prices fell: UAN 16%, HDAN 21%, and ammonia 7%. Improved production, expanded HDAN distribution and an earlier spring season supported volumes.
- El Dorado’s ammonia plant, which began operating in 2016, reached a 90% on-stream rate in Q1 2017 and produced above nameplate daily capacity. Cherokee and Pryor ammonia on-stream rates were 99% and 96%, respectively.
- Interest expense rose by $8.0 million, primarily because substantially less interest was capitalized after the El Dorado expansion entered service. Depreciation increased $6.5 million to $17.1 million for the same project-related reason.
- Continuing investing cash outflow was far lower than in Q1 2016, when major expansion spending was underway. Q1 2017 cash decreased by $15.0 million overall, ending at $45.0 million.
Outlook, commentary and risks
- Management expected fertilizer prices to remain pressured through 2017 amid additional global and North American nitrogen capacity, with typical seasonal strength during the spring selling period. Agricultural results are seasonal and sensitive to weather, crop economics, commodity prices and inventory levels.
- Management expected ammonia on-stream rates of at least 95% at Cherokee and Pryor for the remainder of 2017, and approximately 94% for El Dorado for the year. One planned Pryor turnaround was expected in Q4.
- Management cited approximately $6 million in annual SG&A savings and approximately $6 million in annual plant-cost savings, with benefits beginning to be realized. It also identified non-core assets that could generate $15–$20 million in net proceeds; their total net book value was approximately $44 million, and a sale could result in impairment or losses.
- LSB was exploring strategic alternatives, potentially including a sale, merger or other transaction, with Morgan Stanley retained as financial adviser. No transaction or outcome was assured.
- Management said cash, revolver availability and operating cash flow should fund anticipated liquidity needs for the next 12 months. No revolver covenant trigger had occurred at quarter-end. The revolver’s springing covenant can apply if availability falls to specified thresholds; the 2019 notes’ maturity and Series E redemption provisions remain important financing considerations.
- Environmental and litigation exposures include wastewater permitting issues at Pryor and El Dorado, an ongoing Pryor air-compliance investigation, and groundwater matters. The company reported $175,000 accrued for environmental matters; some potential costs could not be reasonably estimated.
- LSB and its subsidiary remain involved in litigation related to the 2013 West Fertilizer explosion; several claims had been settled, but other claims remained, and no reserve was established except for unpaid settlements. Other disclosed matters include a BAE supply-contract claim with an approximately $18 million demand and a remaining Global lien/claim of approximately $5 million; no liability was established for these claims.
- Management estimated that a valuation allowance of approximately $6.1 million for state net operating loss carryforwards would be recorded during 2017. The filing also identifies commodity-price, natural-gas, operating-reliability, environmental, financing and legal risks.
- Management stated disclosure controls and procedures were effective as of March 31, 2017. The filing provides no specific earnings guidance.
Important facts for investors to verify
- Whether production reliability and El Dorado’s operating rate can be sustained, and whether higher volumes can offset weaker fertilizer prices and feedstock costs.
- Cash generation, working-capital requirements, planned capital spending and continued access to revolver availability.
- Plans and funding for the August 2019 Senior Secured Notes maturity and the Series E preferred stock’s redemption and cumulative dividend obligations.
- Progress, net proceeds and any impairment implications of non-core asset sales, as well as the outcome of the strategic-alternatives review.
- Developments and potential exposure in the West Fertilizer, BAE, Global and environmental matters, including any changes to recorded reserves or estimates.