LSB Industries, Inc. — Q1 2021 Form 10-Q
Business context and period. Unaudited results for the three months ended March 31, 2021, compared with Q1 2020. LSB manufactures and sells nitrogen-based agricultural, industrial and mining chemicals. Agricultural sales are seasonal; results are also affected by plant maintenance and natural gas prices.
Financial results and liquidity
- Revenue: $98.1 million, up 18% from $83.4 million. Agricultural sales were $44.9 million; industrial acids and other chemicals $40.3 million; mining products $12.9 million.
- Gross profit and margins: $8.1 million versus $2.6 million. Gross margin improved to 8.2% from 3.1%; adjusted gross margin, a company-defined non-GAAP measure, was 25.4% versus 24.1%.
- Operating and net results: Operating loss narrowed to $0.5 million from $7.0 million. Net loss was $13.3 million versus $19.5 million. Loss attributable to common stockholders was $23.4 million, or $0.82 per share, versus $28.3 million, or $1.01 per share. Series E preferred dividends and accretion materially increased the loss attributable to common stockholders.
- Cash flow: Operating activities provided $12.7 million, compared with $2.2 million used in Q1 2020; the filing attributes the 2021 inflow partly to working capital. Investing activities used $5.9 million, including $6.1 million of capital expenditures. Financing activities used $8.8 million. Cash declined $2.0 million to $14.2 million.
- Debt and liquidity: Debt, including current maturities and net of discounts and issuance costs, was $481.8 million. This included $435 million of 9.625% senior secured notes due May 2023. The revolving facility was undrawn, with approximately $41.8 million available; no springing covenant trigger had occurred. Management said cash, revolver availability and operating cash flow were expected to cover anticipated needs for the next 12 months.
- Preferred stock and equity: Series E redeemable preferred stock had a $282.1 million carrying value and $287.5 million liquidation preference; its dividend rate was 14% at quarter-end and rose to 14.5% in April 2021. Stockholders’ equity was $127.0 million.
Material changes and unusual items
- Revenue rose 18%; industrial and mining sales increased 27%, while agricultural sales increased 8%. Higher selling prices and volumes of upgraded products supported gross profit. Agricultural product tons sold rose 3%; industrial and mining tons rose 16%.
- February extreme cold disrupted natural gas supply and temporarily idled the Pryor facility; El Dorado also experienced a temporary gas restriction. LSB settled natural gas forward contracts and certain volume commitments, recognizing approximately $6.8 million in gains as a reduction to cost of sales, which partly offset disruption-related production and cost impacts. Natural gas average cost was $3.15/MMBtu, excluding that gain, versus $2.09/MMBtu a year earlier.
- Interest expense declined to $12.4 million from $13.5 million, primarily because Q1 2020 included interest related to the Leidos litigation judgment. SG&A declined 12% to $8.8 million, partly reflecting lower professional and legal fees.
Outlook, management commentary and risks
- Management cited stronger fertilizer demand and prices, supported by higher corn prices, reduced projected U.S. corn ending stocks and tight nitrogen supply following weather-related industry outages. These favorable conditions may be offset by natural gas and transportation costs, price volatility and forward sales contracted below spot prices.
- LSB targeted 2021 ammonia production of approximately 830,000–850,000 tons, including a planned 30-day Cherokee ammonia turnaround in Q3 that was expected to reduce production by about 15,000 tons. El Dorado and Pryor turnarounds were planned for Q3 2022.
- Expected 2021 capital expenditures were approximately $30 million, including about $5 million for margin-enhancement projects. Environmental project spending was expected to be $2.9–$3.3 million for the remainder of 2021, following $0.9 million in Q1.
- New nitric acid supply sales began in Q1 under a long-term contract for 70,000–100,000 tons annually. Carbon dioxide sales from El Dorado were expected to begin in Q4 2021. The company was also developing a strategy for low- or no-carbon ammonia and exploring capital-structure improvements and strategic acquisitions; these plans are not assured.
- Key risks and contingencies: Natural gas availability and pricing, weather, plant reliability and turnaround execution, fertilizer and commodity markets, logistics costs, environmental compliance and litigation. Environmental liabilities accrued were $468,000. The West Fertilizer litigation remained unresolved, with no reserve and no estimable loss range disclosed. In the Global/Leidos matter, a judgment awarded Global approximately $7.4 million plus $1.3 million of prejudgment interest; enforcement was stayed pending appeal. Performance bonds carried indemnification exposure of up to $9.7 million.
- The PPP loan forgiveness application was submitted in April 2021; forgiveness was not yet established at quarter-end. The company reported no material changes to the risk factors in its 2020 Form 10-K and stated disclosure controls were effective.
Investor facts to verify
- How much of the $6.8 million natural gas settlement gain was nonrecurring, and how did the cold-weather disruption affect production, volumes and margins after the gain?
- Whether fertilizer pricing and nitrogen-market tightness persist, and whether higher natural gas and freight costs can be passed through.
- Liquidity and refinancing plans for the $435 million notes due in May 2023, alongside the substantial Series E preferred dividend and redemption obligations.
- Outcomes and potential financial exposure from the PPP forgiveness application, Global/Leidos appeal and West Fertilizer litigation.
- Delivery against 2021 production and capital-spending expectations, and execution of the scheduled Cherokee turnaround.