LSB Industries, Inc. (NYSE: LXU) — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. LSB manufactures and sells agricultural, industrial and mining chemicals, including ammonia, nitrogen fertilizers and acids, from facilities in Arkansas, Alabama and Oklahoma; it also operates a facility in Texas.
Financial performance and liquidity
- Q3 revenue: $75.5 million, down 5% from $79.8 million a year earlier. Gross loss was $9.7 million, essentially unchanged; gross margin was negative 12.9% versus negative 12.2%. Operating loss widened to $19.2 million from $16.6 million. Net loss was $30.8 million versus $26.1 million, and loss per common share was $1.39 versus $1.22.
- First nine months: Revenue was $291.2 million, up 3%. Gross profit rose to $17.3 million from $3.4 million, and gross margin improved to 5.9% from 1.2%. Operating loss narrowed to $7.8 million from $20.5 million; net loss was $35.7 million versus $59.2 million. Loss per common share improved to $2.14 from $2.98.
- Cash flow: For the first nine months, operating cash flow was $41.0 million, investing cash outflow was $20.4 million, and financing cash inflow was $20.1 million. Cash increased to $66.8 million from $26.0 million at December 31, 2018. Capital expenditures were $20.5 million.
- Debt and liquidity: Long-term debt, including its current portion and net of discount and issuance costs, was $456.8 million, compared with $425.2 million at year-end 2018. The $435 million of 9.625% secured notes due 2023 is the largest component. The working-capital revolver was undrawn, with approximately $33.8 million available; no covenant trigger had occurred. Management said cash, revolver availability and operating cash flow should cover anticipated needs for the next 12 months.
- Preferred stock and equity: Series E redeemable preferred stock had a $226.3 million carrying value and approximately $235 million liquidation preference, accruing dividends at 14%. Stockholders’ equity declined to $283.5 million from $342.2 million.
Changes versus the prior comparable periods
- Q3 industrial and mining sales declined 9% to $40.0 million; agricultural sales were nearly flat at $35.5 million. Lower ammonia prices weighed on industrial results, while agricultural pricing and product mix supported agricultural adjusted gross profit.
- For the first nine months, agricultural sales increased 6% to $154.8 million, while industrial and mining sales were down 1% to $136.4 million. Improved agricultural pricing and ammonia performance drove the increase in gross profit; lower Tampa ammonia benchmark prices pressured industrial and mining margins.
- Q3 plant turnarounds cost approximately $7.2 million, versus $7.9 million in Q3 2018. Cherokee’s ammonia on-stream rate fell to 90% from 97%, affected by utility power outages and flooding; El Dorado improved to 96% from 89%, and Pryor was 91% versus 98%.
- Interest expense for the first nine months increased to $34.3 million from $32.0 million, primarily reflecting the 2018 notes issuance and the 2019 additional notes. The prior-year period also included a $6.0 million debt-extinguishment loss, which did not recur.
Outlook, management commentary and risks
- Management expected stronger ammonia demand and rising prices in Q4 2019 and into 2020, citing potential spring planting demand and depleted Midwest soil nutrients. This outlook was subject to weather, crop economics and inventory conditions; wet weather and delayed applications had contributed to elevated channel inventories and Q3 price pressure.
- Management reported completion of the El Dorado turnaround in August and completion of Pryor’s repair and maintenance phase in October, with Pryor then in start-up. Planned 2019 capital expenditures were approximately $37 million, including about $17 million in Q4; a sulfuric-acid converter project was expected to cost $7.5 million. A further $20 million of margin-enhancement capital projects was planned over 12–18 months.
- Procurement initiatives were expected to generate $3–$5 million of annualized savings over 2020–2021. LSB also identified plant reliability, safety, product distribution, margins and capital structure as priorities; achievement of these goals is not assured.
- In October 2019, the Koch ammonia purchase agreement was amended, with minimum purchase requirements for qualifying El Dorado production; the term runs to June 2022 and may renew annually.
- Risks include fertilizer commodity prices and weather-driven demand, natural-gas and freight costs, plant downtime and turnarounds, high debt and interest expense, environmental compliance and litigation. The West Fertilizer explosion litigation remained pending, with no loss reserve and no estimable range of loss disclosed. The Global/Leidos construction dispute also remained unresolved; trial on LSB’s cross-claims was scheduled for February 2020. The Wilson shareholder class settlement was completed and no liability remained.
Important facts for investors to verify
- Whether expected ammonia-market recovery materialized and whether weather, inventories and crop conditions changed the demand outlook.
- Whether Pryor’s restart and the company’s targeted plant on-stream rates were achieved, and the resulting production, cost and turnaround effects.
- Available revolver capacity, covenant status, cash generation and ability to meet debt service, capital spending and the accumulating Series E preferred obligations.
- Actual costs, timing and returns from planned capital projects and procurement savings.
- Developments in the West Fertilizer and Global/Leidos matters, including any change in potential exposure or legal costs.