LSB Industries, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; balance-sheet comparisons are to December 31, 2013. Amounts are in U.S. dollars. The company manufactures nitrogen-based chemical products and HVAC equipment through its Chemical and Climate Control businesses.
Financial results and liquidity
| Metric | Q1 2014 | Q1 2013 or comparison |
|---|---|---|
| Net sales | $178.5 million | $150.7 million |
| Gross profit | $48.7 million | $25.4 million |
| Operating income (loss) | $25.9 million | $(0.2) million |
| Net income (loss) | $11.6 million | $(0.1) million |
| Net income applicable to common stock | $11.3 million; $0.50 basic and $0.49 diluted per share | $(0.4) million; $(0.02) per share |
| Net cash from continuing operating activities | $20.3 million | $(20.1) million |
| Capital expenditures | $45.6 million | Not clearly stated in the supplied filing text |
| Cash and cash equivalents | $162.8 million | $143.8 million at Dec. 31, 2013 |
| Restricted cash and cash equivalents | $246.1 million | Combined restricted cash and investments were $291.0 million at Dec. 31, 2013 |
| Total debt, including current portion | $461.9 million | $463.0 million at Dec. 31, 2013 |
| Stockholders’ equity | $423.9 million | $411.7 million at Dec. 31, 2013 |
Gross profit was approximately 27.3% of sales, compared with approximately 16.9% a year earlier. Cash from continuing operations less capital expenditures was approximately negative $25.0 million. Restricted funds were designated for capital projects and are not equivalent to unrestricted operating cash. The $100 million revolving facility had no borrowings and approximately $79.7 million available at quarter-end, subject to eligible collateral and letters of credit.
Interest expense, net, was $6.7 million, up from $0.7 million, primarily reflecting the 7.75% Senior Secured Notes issued in 2013; $2.3 million of interest was capitalized on projects. The effective tax rate was 40%, versus 38% excluding a prior-period tax benefit.
Changes versus the prior comparable period
- Sales increased 18.5%, chiefly from Chemical Business sales, up $37.7 million to $115.2 million. Climate Control sales declined $9.9 million to $60.3 million.
- Chemical operating income improved to $28.8 million from a $3.8 million loss. The comparison was substantially affected by Cherokee Facility insurance recoveries: approximately $28.0 million was recognized in Q1 2014 versus $10.8 million in Q1 2013. Excluding those recoveries, chemical gross profit increased, but margins were pressured by higher natural-gas costs and lower fertilizer prices.
- Climate Control operating income declined to $4.3 million from $6.4 million. Its gross margin was 31.9%, versus 31.3%, despite lower sales and gross profit.
- General corporate expenses increased to $7.7 million from $3.1 million, including $4.2 million of fees and expenses related to activist-shareholder proposals and negotiations.
- Operating cash flow improved from a use of $20.1 million to provision of $20.3 million; cash at quarter-end rose $19.0 million from year-end.
Outlook, risks and unusual items
- Capital program: Management planned approximately $461–$572 million of capital spending for the remainder of 2014 and 2015, subject to change. Major El Dorado projects include an ammonia plant, estimated at $250–$300 million, and a nitric acid plant and concentrator, estimated at $115–$125 million. Management expected the ammonia plant to be completed in late 2015 and the nitric acid facilities to begin production in early to mid-2015. These projects are intended to improve capacity, efficiency and feedstock economics.
- Operating outlook: Management described nitrogen fertilizer fundamentals as positive but noted prices remained below the prior-year level, with margins exposed to fertilizer and natural-gas price movements, weather, crop economics, imports and production capacity. It expected limited short-term Climate Control sales growth, including because Carrier heat-pump contracts were to end May 11, 2014. April Climate Control orders were approximately $33 million and backlog approximately $59 million; two orders totaling approximately $8 million were expected to ship in 12–24 months.
- Plant reliability: Pryor experienced operational problems and lost production in Q1. Ammonia production reached its targeted rate by month-end March; the urea plant was down for the quarter and resumed production in early May. Management estimated a $13–$16 million adverse Q1 operating-income effect from Pryor downtime. El Dorado nitric-acid production remained below historical capacity pending construction; management estimated an approximately $1 million monthly operating-income impact until the new facilities begin production.
- Customer and contract changes: EDC gave Orica notice that it would not renew the ammonium-nitrate supply agreement after April 9, 2015, and intended to pursue commercial-explosives-market sales thereafter. Orica sales were approximately 5% of consolidated sales in Q1 2014; the agreement included payments for minimum volumes not taken. Carrier heat-pump contracts were also ending.
- Legal and environmental contingencies: LSB and EDC were named defendants in litigation arising from the 2013 West Fertilizer explosion; the company said product presence was uncertain and no liability had been established. Product-liability coverage had $100 million aggregate limits and a $250,000 self-insured retention. A Clean Air Act consent decree was executed but still subject to court approval; required pollution-control installations were estimated at $2–$3 million for each of five plants, plus a $725,000 civil penalty and a roughly $150,000 mitigation project. Separate environmental matters and an EPA investigation into an ammonia release at Pryor remained unresolved.
- Other notable items: The Cherokee insurance settlement totaled approximately $43.5 million, of which $28.5 million was received in January 2014; recoveries recognized in Q1 materially boosted reported results. Insurance premiums had increased and were expected to rise further. The company reported no material change in risk factors other than removal of the proxy-contest risk after agreements with activist shareholders. Management said it expected to meet debt covenants for the next 12 months; the fixed-charge coverage ratio was 6.2 to 1 at quarter-end versus a 1.10-to-1 minimum if the specified availability trigger applies.
Important facts for investors to verify
- How much of Q1 earnings and the year’s outlook depends on the nonrecurring Cherokee insurance proceeds, and how the underlying chemical margins evolve.
- Whether Pryor production stabilizes and whether the El Dorado expansion projects meet their stated cost, timing and operating targets.
- Actual unrestricted liquidity after accounting for project-restricted cash, capital spending, debt service and the collateral-based revolver availability.
- The eventual financial and operating effects of ending the Orica agreement and Carrier contracts, and the conversion of Climate Control orders and backlog into shipments.
- Developments in West Fertilizer litigation, environmental proceedings and consent-decree approval, including potential costs beyond amounts accrued.
- Debt covenants, interest costs and financing capacity as the company funds its substantial planned capital program.