LSB Industries, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; financial statements are unaudited. LSB manufactures and sells chemical products for agricultural, industrial and mining markets. Comparisons are with Q1 2019 unless otherwise noted.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Net sales | $83.4 million | $94.2 million; down 11% |
| Gross profit and margin | $2.6 million; 3.1% | $7.3 million; 7.8% |
| Operating income (loss) | $(7.0) million | $0.1 million |
| Net loss | $(19.5) million | $(11.5) million |
| Net loss attributable to common stockholders / diluted loss per share | $(28.3) million / $(1.01) | $(19.4) million / $(0.69) |
| Net cash from operating activities | $(2.2) million | $7.1 million |
| Capital expenditures | $10.7 million | $7.1 million |
| Cash and cash equivalents at March 31 | $37.5 million | $22.8 million at December 31, 2019 |
| Total debt, including current portion, net | $490.5 million | $459.0 million at December 31, 2019 |
- Quarterly revenue declined in agricultural products and industrial/mining products, each down 11%. Agricultural revenue was $41.5 million; industrial and mining revenue was $42.0 million.
- Agricultural sales volume rose 15%, but average selling prices fell: ammonia 34%, UAN 28%, and HDAN 11%. Lower agricultural prices drove a 50% decline in adjusted agricultural gross profit.
- Industrial and mining adjusted gross profit fell 5% to $16.9 million; its adjusted gross margin increased to 40.2% from 37.3%, reflecting improved production and volumes, partly offset by lower benchmark pricing. Lower natural gas costs provided an estimated $6.3 million offset to gross-profit pressure.
- Interest expense rose 23% to $13.5 million, including $1.3 million related to the Global Industrial judgment and higher debt following the 2019 note issuance.
- Cash from financing was $27.4 million, mainly reflecting a $30 million revolver draw. At March 31, the company reported $20.5 million of revolver availability and approximately $58 million of combined cash and borrowing capacity.
- The $435 million principal amount of 9.625% senior secured notes is due May 2023. Their estimated fair value was $348 million at March 31, versus $449 million at December 31, 2019; carrying value remained $435 million.
- Series E redeemable preferred stock had a $243.7 million carrying amount and $251.1 million liquidation preference. Its 14% cumulative dividend and accretion reduced amounts attributable to common stockholders; the filing reports $111.3 million of accumulated Series E dividends.
Material changes, outlook and risks
- COVID-19: Facilities were designated essential and remained operating. Management reported no known employee infections as of the filing and some demand pullback in industrial and mining markets. It expected to shift some production toward agricultural markets, while acknowledging economic and demand uncertainty.
- Management deferred plant expenses and SG&A for at least 60 days and deferred $5–$6 million of non-EHS capital spending until Q4 2020. It reported a $10 million Paycheck Protection Program loan received in April 2020; some or all may be forgiven if program conditions are met.
- Management expected 2020 capital expenditures of $25–$30 million, including $5–$10 million for margin-enhancement projects, and stated available liquidity and operating cash flow should fund anticipated needs for the next 12 months. These are forward-looking expectations, not guarantees.
- Management anticipated stronger fertilizer demand from expected higher corn acreage, tempered by fertilizer and corn price pressure. COVID-19-related declines in ethanol production, imports, weather, supply and logistics costs could affect planting, prices and demand. Industrial and mining activity was also exposed to economic weakness.
- On April 23, 2020, a court issued final judgment awarding Global Industrial approximately $7.4 million, plus approximately $1.3 million prejudgment interest and post-judgment interest at 4.25%. The company recorded related amounts in Q1, intends to appeal and seek a stay. The related trial against Leidos was delayed to September 2020.
- LSB remained a defendant in litigation relating to the 2013 West Fertilizer explosion. Some claims were settled, but other claims remained; the company said it could not estimate a possible loss range and had no reserve apart from insured unpaid settlement amounts.
- Other risks include environmental compliance and remediation, natural-gas and commodity prices, facility reliability, transportation costs and substantial debt. Environmental accruals were $183,000; the company estimated $3.1–$3.5 million of additional environmental project expenses for the remainder of 2020.
- Management estimated 2020 valuation allowances of approximately $5.3 million for federal and $3.3 million for state deferred tax assets. Changes in estimates or tax rules could materially affect reported results.
Important facts for investors to verify
- Whether demand, prices and margins recover as planting activity progresses, and the extent of COVID-19 effects on industrial and mining sales.
- Liquidity and covenant headroom: revolver availability depends on eligible collateral; the minimum fixed-charge coverage covenant applies if availability falls below the specified trigger. No trigger event had occurred at March 31.
- Outcomes and potential additional costs from the Global/Leidos dispute and remaining West Fertilizer litigation, including the appeal, stay request and delayed trial.
- Ability to service debt and address the Series E preferred stock’s cumulative 14% dividend, $251.1 million liquidation preference and 2023 holder redemption right.
- Capital-spending and cost-deferral plans, the expected forgiveness and repayment terms of the April PPP loan, and actual environmental costs.
- The filing’s corn acreage discussion includes differing figures: management cited a 97 million-acre forecast, while its accompanying April report table lists 89.7 million acres. Verify the applicable USDA estimate and its implications.