LXU

LSB Industries, Inc. - 10-Q Summary (Period Ended September 30, 2001)

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2001, and the nine-month period ended on that date. LSB Industries, Inc. is a diversified holding company operating through three primary segments: Chemical Business (fertilizers, explosives, acids), Climate Control Business (air handling and heat pumps), and Industrial Products Business (machine tools). The financial statements are unaudited but have been reviewed by Ernst & Young LLP.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased by $47.1 million (22%) compared to the nine months ended September 30, 2000. This was driven by the acquisition of the Cherokee Plant ($27.4 million contribution), increased demand for explosive products, and higher sales in the Climate Control segment.
• Profitability: The Company reported a net income of $4.9 million, a significant improvement from the net income of $11.2 million in the prior year period, though the prior year included a much larger extraordinary gain ($17.2 million vs. $2.6 million). Income from continuing operations before taxes improved from a loss of $5.4 million in 2000 to income of $2.5 million in 2001.
• Margins: Gross profit margin decreased to 16.9% from 19.7% in the prior year, primarily due to higher raw material costs (natural gas) and competitive pressures in the Chemical segment, partially offset by improved margins in Climate Control.
• Debt Reduction: The Company repurchased Senior Unsecured Notes with a face value of approximately $4.7 million, recognizing an extraordinary gain of $2.6 million. Total debt decreased slightly due to these repurchases, though revolving credit borrowings increased to fund working capital.
• Asset Sales: The Company sold the Crystal City Plant for approximately $4 million, recognizing a gain of $3.9 million. Proceeds were used to retire obligations related to the former automotive business and reduce revolver debt.

Guidance, Outlook, and Risks

• Liquidity and Capital Resources: Management believes the Company has adequate resources to meet obligations, contingent on successful execution of asset sales and financing. A new $50 million Working Capital Revolver Loan was secured in April 2001, with $39.1 million outstanding as of September 30, 2001. Borrowing availability is limited by required reserves.
• Dividend Arrears: The Company has not paid dividends on its Series 2 Preferred Stock since September 1999, with arrears totaling approximately $4.6 million. Failure to pay the December 2001 dividend will trigger rights for preferred shareholders to elect two additional directors. Series B Preferred dividends are also in arrears ($0.5 million).
• Environmental Contingencies: Significant risks exist regarding environmental compliance at the El Dorado Facility. A wastewater program is expected to require $2–$3 million in capital expenditures. The Company is negotiating financing for these costs. There are also unresolved liabilities related to a former waste disposal site, though the buyer of the Automotive Business assumed these liabilities (though their ability to perform is in doubt).
• Future Agreements: In November 2001, the Company signed long-term supply agreements with Orica USA Inc. and Nelson Brothers, LLC for ammonium nitrate products, securing future revenue streams. A gain of approximately $2.8 million is expected in Q4 2001 from the sale of explosives distribution sites.
• Accounting Changes: The Company adopted SFAS 133 (Derivatives) effective January 1, 2001, resulting in a cumulative effect adjustment of $(2.4) million to equity. Future adoption of SFAS 142 (Goodwill) and SFAS 143 (Asset Retirement Obligations) is expected in 2002 and 2003, respectively.

Investor Verification Checklist

• Dividend Default Risk: Verify the status of the December 2001 Series 2 Preferred dividend payment and the potential for preferred shareholders to elect additional directors.
• Environmental Capital Expenditures: Confirm the status of financing for the $2–$3 million wastewater remediation project at the El Dorado Facility.
• Liquidity Constraints: Review the covenants of the $50 million Working Capital Revolver and the $2.5 million Summit credit facility, specifically the required reserves and borrowing availability.
• Asset Sale Proceeds: Monitor the recognition of the expected $2.8 million gain from the sale of explosives distribution sites in Q4 2001.
• Related Party Transactions: Review the terms of the debt conversion involving SBL Corporation (family of the Chairman) and the sale of oil properties to GPC (subsidiary of SBL).