LSB Industries, Inc. — 2020 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2020; it is not a standalone Q4 filing. LSB manufactures nitrogen-based chemicals and fertilizers for agricultural, industrial and mining markets, operating facilities in Arkansas, Alabama and Oklahoma and managing a customer’s facility in Texas. Agricultural products represented 51% of 2020 sales, industrial products 38% and mining products 11%.
Financial performance
| Metric | 2020 | 2019 |
|---|---|---|
| Net sales | $351.3 million | $365.1 million |
| Gross profit / gross margin | $17.0 million / 4.9% | $5.0 million / 1.4% |
| Operating loss | $15.5 million | $39.1 million |
| Net loss | $61.9 million | $63.4 million |
| Net loss attributable to common stockholders; diluted loss per share | $99.4 million; $3.53 | $96.4 million; $3.44 |
| Cash from operating activities | $(2.5) million | $2.1 million |
| Capital expenditures | $30.5 million | $36.1 million |
Liquidity and debt. At year-end, cash was $16.3 million and availability under the undrawn working-capital revolver was approximately $41.8 million, for combined cash and borrowing capacity of about $58.1 million. Net long-term debt, including current portion, was $484.2 million, including $435 million of 9.625% senior secured notes due May 2023. Redeemable preferred stock had a carrying value of $272.1 million and a liquidation preference of approximately $278.0 million. Management said expected cash, revolver availability and operating cash flow should meet anticipated needs for the next 12 months.
Changes versus the prior period
- Annual sales declined 4%, with lower selling prices across agricultural products and weaker industrial and mining demand partly offset by higher agricultural sales volumes.
- Agricultural adjusted gross profit fell 32% to $19.3 million; industrial and mining adjusted gross profit increased 6% to $61.6 million. These market measures exclude specified costs and recoveries.
- Gross profit improved year over year, helped by lower natural-gas costs, approximately $5.7 million of vendor settlement recovery recorded as a reduction to cost of sales, and the absence of 2019 turnaround expenses of $13.2 million. However, interest expense rose to $51.1 million from $46.4 million.
- Operating cash flow moved from $2.1 million provided to $2.5 million used. Cash fell from $22.8 million to $16.3 million, while debt increased from $459.0 million to $484.2 million.
- Q4 2020 sales were $88.9 million versus $73.9 million in Q4 2019; quarterly net loss was $21.7 million versus $27.7 million. Loss attributable to common stockholders was $31.6 million versus $36.4 million.
Outlook, commentary and risks
- 2021 outlook: Management targeted ammonia production of approximately 830,000–850,000 tons, including the effect of a planned 30-day Cherokee turnaround, and capital expenditures of about $30 million, including approximately $5 million for margin-enhancement projects. Environmental project spending was estimated at $4.1–$4.6 million.
- Management cited improving agricultural indicators and fertilizer pricing entering the 2021 spring season, but cautioned that higher natural-gas costs and imports could temper price gains. It also reported gradual demand recovery in industrial and mining markets.
- A new El Dorado nitric-acid supply contract calls for 70,000–100,000 tons annually from 2021 through 2027, subject to renewal terms. A carbon-dioxide capture and sales arrangement was expected to begin in Q4 2021. The company was exploring low-carbon ammonia opportunities and ways to improve its capital structure.
- COVID-19 weakened industrial and mining volumes and contributed to 2020 fertilizer-market oversupply and lower prices. In February 2021, extreme cold and natural-gas supply constraints temporarily interrupted Pryor operations and restricted El Dorado supply; the filing reported Pryor restarting and El Dorado back in production by February 23.
- Key risks include high leverage and 2023 maturities, cumulative Series E preferred dividends and potential holder redemption beginning October 2023, natural-gas and fertilizer price volatility, plant outages, seasonality, customer concentration, environmental compliance, and litigation. Eight customers represented approximately 42% of 2020 sales.
- Unusual legal matters include a Global Industrial judgment of approximately $7.4 million plus $1.3 million prejudgment interest, with post-judgment interest; the judgment was stayed pending appeal. The company reported no reserve for the continuing West Fertilizer litigation and said a potential loss range could not be estimated.
Important facts for investors to verify
- How the company plans to address the $435 million notes due in May 2023 and the Series E preferred stock’s redemption and compounding dividend burden.
- Whether operating cash flow, revolver availability and working capital can support operations, planned capital spending and debt service.
- Whether the 2021 production, pricing and demand outlook is being realized, including performance under the new nitric-acid contract.
- The current status and potential financial exposure of the Global appeal, West Fertilizer claims and other environmental or legal contingencies.
- The effect of natural-gas prices, imports, plant reliability and customer concentration on realized margins and liquidity.