LSB Industries, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Financial statements are unaudited. LSB manufactures and sells chemical products to agricultural, industrial and mining markets.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $105.0 million | $121.5 million | $188.4 million | $215.7 million |
| Gross profit | $19.0 million | $19.7 million | $21.6 million | $27.0 million |
| Gross margin | 18.1% | 16.2% | 11.4% | 12.5% |
| Operating income | $10.7 million | $11.3 million | $3.7 million | $11.4 million |
| Net income (loss) | $(0.4) million | $6.6 million | $(19.8) million | $(4.9) million |
| Net loss attributable to common stockholders | $(9.6) million | $(1.5) million | $(38.0) million | $(20.9) million |
| Basic and diluted loss per common share | $(0.34) | $(0.05) | $(1.35) | $(0.75) |
| Net interest expense | $12.5 million | $11.3 million | $26.0 million | $22.3 million |
Q2 gross profit included a $5.7 million vendor-settlement recovery recorded as a reduction of cost of sales. Excluding that benefit, reported gross margin would have been lower; the filing does not present an adjusted GAAP gross margin. Q2 operating income declined despite the recovery, while higher interest expense and a smaller tax benefit contributed to the net loss.
Cash flow, debt and liquidity
- For the first half of 2020, operating cash flow was $19.4 million, investing cash outflow was $17.7 million, and financing cash inflow was $32.0 million. Cash increased $33.7 million to $56.5 million from $22.8 million at year-end 2019.
- Capital expenditures were $18.0 million in the first half. Management projected full-year 2020 capital expenditures of $25–30 million, including $5–10 million for margin-enhancement projects.
- Total debt, including the current portion and net of unamortized discount and issuance costs, was $499.0 million at June 30, 2020, versus $459.0 million at December 31, 2019. The balance included $435 million of 9.625% senior secured notes due May 2023 and $30 million drawn on the working-capital revolver.
- Revolver availability was approximately $12.6 million. Cash plus available revolver capacity was approximately $69.1 million. The company also received a $10 million PPP loan at 1% interest; potential forgiveness remained subject to application and approval.
- Redeemable Series E preferred stock had a $252.9 million carrying value and $259.8 million liquidation preference. It accrues dividends at 14%; accumulated dividends were approximately $120 million. The carrying value is accreting toward redemption value, increasing the claim senior to common equity.
- Management said cash, revolver availability and operating cash flow were expected to meet anticipated liquidity needs for the next 12 months. No revolver covenant trigger had occurred at June 30.
Changes versus prior comparable periods
- Q2 sales fell 14% year over year; first-half sales fell 13%. Lower selling prices were the principal agricultural headwind, while industrial and mining activity also weakened amid COVID-19-related demand reductions.
- Q2 agricultural sales declined 10%; industrial and mining sales declined 18%. Agricultural product volumes rose 6% in Q2, but average selling prices fell 32% for ammonia, 23% for UAN and 5% for HDAN.
- For the first half, agricultural volumes rose 10%, but average prices fell 33% for ammonia, 26% for UAN and 7% for HDAN. Industrial and mining product volumes were lower overall.
- First-half operating income fell 68% and net loss widened. SG&A increased $2.9 million, and interest expense increased $3.7 million year over year, including $1.4 million associated with a litigation judgment.
- Cash from operations was nearly flat year over year, while capital spending rose $5.1 million. Financing cash flow included the $30 million revolver draw and PPP proceeds.
Outlook, commentary and risks
- Management cited continued nitrogen-industry oversupply, lower fertilizer prices and uncertainty from the pandemic. Lower expected ethanol consumption and projected higher corn inventories could pressure crop and fertilizer economics. Management also noted pockets of recovery in industrial and mining markets but substantial uncertainty for the remainder of 2020; no numerical earnings or revenue guidance was provided.
- Lower natural-gas costs supported margins, but the Magellan ammonia pipeline closure increased transportation costs, which the company could not fully pass through to customers. Natural gas is a key production input; market prices for ammonia and natural gas, product demand, weather, plant reliability and logistics are significant risks.
- LSB remained operational as an essential business and reported no known employee COVID-19 cases at the time of filing. It had deferred expenses and capital spending and said PPP funds helped avoid workforce furloughs or terminations.
- In June, vendor settlements related to the El Dorado nitric acid plant totaled $7.6 million: approximately $5.7 million reduced cost of sales and $1.9 million reduced PP&E. Cash receipts and payments associated with the settlements occurred in July.
- Global Industrial received an approximately $8.7 million judgment, including prejudgment interest, relating to ammonia-plant construction. LSB accrued additional amounts, appealed, and obtained a stay pending appeal. The separate cross-claims against Leidos were awaiting a new trial date. Litigation concerning the West Fertilizer explosion continued; LSB said it could not estimate a possible loss and had recorded no reserve.
- Environmental compliance and remediation remain risks. Accrued environmental liabilities were $245,000; the company expected $2.0–2.3 million of additional environmental project spending in the second half of 2020. Certain permits and remediation matters remained under discussion with regulators.
- After quarter-end, LSB adopted a Section 382 rights agreement intended to protect tax attributes by deterring acquisitions of 4.9% or more of common shares, subject to agreement terms and exceptions. Management estimated 2020 valuation allowances of approximately $5.7 million for federal and $3.7 million for state deferred tax assets.
Most important facts for investors to verify
- Whether fertilizer pricing, industrial and mining demand, and transportation costs improve or deteriorate from the conditions described.
- How much of the Q2 margin and earnings comparison reflects the one-time $5.7 million vendor recovery, versus recurring operating performance.
- Cash generation, revolver availability, covenant headroom, debt service and the ability to meet the 2023 senior-note maturity and other obligations.
- PPP loan forgiveness status and the terms or consequences of any unforgiven balance.
- Outcome and potential financial exposure from the Global/Leidos and West Fertilizer matters, plus environmental obligations and permit developments.
- Series E preferred dividend accruals, liquidation preference and the increasing senior claim on value available to common stockholders.