LSB Industries, Inc. — Q2 2021 Form 10-Q
Business context and reporting period. LSB manufactures and sells chemical products for agricultural, industrial and mining markets. This unaudited quarterly report covers the three and six months ended June 30, 2021; comparisons are to the corresponding 2020 periods. Results are subject to agricultural seasonality and plant-maintenance timing.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $140.7 million | $105.0 million | $238.8 million | $188.4 million |
| Gross profit | $35.0 million | $19.0 million | $43.1 million | $21.6 million |
| Gross margin | 24.9% | 18.1% | 18.0% | 11.4% |
| Operating income | $26.5 million | $10.7 million | $26.0 million | $3.7 million |
| Net income (loss) | $23.7 million | $(0.4) million | $10.4 million | $(19.8) million |
| Net income (loss) attributable to common stockholders | $12.6 million | $(9.6) million | $(10.5) million | $(38.0) million |
| Basic / diluted EPS | $0.44 / $0.42 | $(0.34) / $(0.34) | $(0.37) / $(0.37) | $(1.35) / $(1.35) |
- Revenue mix: Q2 agricultural sales were $66.5 million, industrial and other chemical products $60.6 million, and mining products $13.6 million. Industrial and mining sales rose sharply, while agricultural revenue increased modestly.
- Cash flow: First-half operating cash flow was $30.6 million, investing cash outflow $14.5 million (including $14.8 million of PP&E expenditures), and financing cash outflow $14.7 million. Cash increased to $17.6 million from $16.3 million at year-end 2020.
- Debt and liquidity: Total debt, including current maturities and net of discount and issuance costs, was $470.5 million, versus $484.2 million at December 31, 2020. The $435 million senior secured notes carry a 9.625% coupon and mature May 2023. The working-capital revolver was undrawn, with approximately $50.3 million available; no covenant trigger had occurred.
- Preferred securities: Series E and F redeemable preferred stock had a $292.8 million carrying value and $297.7 million liquidation preference. Series E dividends accrue at 14.5%, increasing to 15% in April 2022 and 16% in April 2023.
Material changes versus the prior period
- Q2 sales rose 34%, and operating income increased 148%. Higher selling prices and increased industrial and mining product sales drove improvement; higher natural-gas costs and reduced agricultural volumes partly offset it.
- Q2 net income included a $10 million gain from forgiveness of the Paycheck Protection Program loan. The prior-year quarter included approximately $5.7 million of vendor recoveries that reduced cost of sales. These items affect comparability.
- Agricultural selling prices increased year over year in Q2: UAN 50%, HDAN 20%, and ammonia 60%. Agricultural product volume fell 20%, including lower HDAN and ammonia sales. Industrial and mining product volume rose 38%.
- Winter Storm Uri disrupted natural-gas supply and production at El Dorado and Pryor, affecting output and inventory. Wet May weather delayed fertilizer application and extended the selling season into July.
- First-half operating cash flow improved by $11.2 million year over year, while cash from financing swung from a $32.0 million inflow in 2020 to a $14.7 million outflow in 2021.
Outlook, management commentary, risks and unusual items
- Management cited stronger nitrogen-fertilizer pricing and demand, tight industry supply, recovering industrial markets, and improved mining demand. It expected fertilizer pricing to remain strong through the remainder of 2021 and into 2022, while noting higher natural-gas costs.
- Management targeted 2021 ammonia production of approximately 810,000–830,000 tons, including an expected 30-day Cherokee turnaround in Q3 that would reduce production by about 15,000 tons. Full-year capital expenditures were estimated at $30–$35 million, including about $5 million for margin-enhancement projects.
- On July 19, 2021, after quarter-end, the company agreed to exchange approximately $300 million of Series E and F preferred stock held by an Eldridge affiliate for common shares at a $6.16 exchange price. The proposed transaction also includes a special common-stock dividend of 0.30 shares per share held. Closing is conditional, including approval by unaffiliated common stockholders; it was not completed as of the report date.
- Key risks include commodity-price and natural-gas volatility, weather, plant downtime and turnaround execution, transportation costs, seasonal demand, customer collections, environmental compliance and substantial indebtedness. Management said available cash, revolver capacity and operating cash flow should cover anticipated liquidity needs for the next 12 months.
- Contingencies include continuing West Fertilizer litigation, for which the company could not estimate a possible loss range and had not established a reserve apart from unpaid settlements; and the appealed Global Industrial judgment. Environmental liabilities accrued were $0.467 million. Environmental permits and remediation obligations could involve additional costs.
Important facts for investors to verify
- Whether the preferred-stock exchange and related stockholder approval occurred, and the final share issuance, special-dividend terms and impact on common-stock dilution and preferred dividends.
- How much of reported earnings and margin improvement reflects recurring operations versus the $10 million PPP forgiveness gain and prior-year vendor settlements.
- Whether pricing, natural-gas costs, fertilizer volumes and the post-storm production recovery developed as management expected.
- Progress toward 2021 ammonia production and capital-spending targets, including the Cherokee turnaround and plant reliability.
- Debt refinancing or repayment plans ahead of the $435 million notes’ May 2023 maturity, and continued revolver availability and covenant compliance.
- Developments in West Fertilizer and Global Industrial litigation, environmental matters, and related potential cash exposures.