LSB Industries, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; comparisons are with Q1 2011 unless noted. LSB manufactures HVAC products through its Climate Control Business and nitrogen-based chemicals through its Chemical Business. The interim results are subject to seasonal effects, particularly agricultural fertilizer sales and plant maintenance. Dollar amounts below are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q1 2012 | Q1 2011 / prior date |
|---|---|---|
| Net sales | $190.2 | $177.5 |
| Gross profit / margin | $44.4 / 23.4% | $53.9 / 30.3% |
| Operating income / margin | $23.1 / 12.1% | $34.0 / 19.2% |
| Income from continuing operations | $14.3 | $21.0 |
| Net income applicable to common stock | $14.0 | $20.6 |
| Basic / diluted EPS | $0.63 / $0.61 | $0.97 / $0.90 |
| Cash from continuing operating activities | $11.1 | $16.3 |
| Capital expenditures | $15.6 | $4.6 |
| Cash and cash equivalents | $113.3 at March 31 | $124.9 at December 31, 2011 |
| Short-term investments | $10.0 at March 31 | $10.0 at December 31, 2011 |
| Total debt, including current portion | $76.0 at March 31 | $79.5 at December 31, 2011 |
| Stockholders’ equity | $308.1 at March 31 | $293.3 at December 31, 2011 |
Cash and short-term investments totaled $123.3 million at quarter-end. The $50 million working-capital revolver was undrawn at March 31; after its April amendment, borrowing availability was approximately $49 million as of April 6, subject to eligible collateral and letters of credit. Operating cash flow less capital expenditures was approximately negative $4.5 million. The secured term loan balance was $71.3 million, with a 4.03% weighted-average rate and a $56.3 million balloon payment due March 29, 2016.
Material changes and segment results
- Sales rose 7.2%, but gross profit fell 17.5% and operating income fell 32.2%. Lower earnings largely reflected planned and unplanned Pryor Facility downtime, along with weaker Climate Control gross profit and the absence of $0.7 million of prior-year litigation-settlement income.
- Chemical: Sales increased 11.5% to $124.2 million, while gross profit declined 23.7% to $24.0 million and operating income declined 30.1% to $20.3 million. Agricultural and industrial sales improved, but Pryor downtime reduced output and weighed heavily on profitability.
- Climate Control: Sales declined 1.4% to $62.8 million; gross profit fell 9.5% to $19.4 million and operating income fell 30.8% to $5.8 million. Management cited lower volume, product mix, higher input costs, and weaker overhead absorption.
- Q1 cash declined $11.6 million. Inventory increased $9.1 million, while capital spending was substantially higher than in Q1 2011.
Outlook, management commentary, and risks
- Pryor’s ammonia plant had planned improvement work in January and additional unplanned downtime in March. Urea production had been stopped since February 27; repairs were expected to continue through most of June 2012. The reported Q1 impact was approximately $13.1 million, comprising $8.0 million of lost absorption and gross profit, $3.0 million of losses on firm sales commitments, and $2.1 million of maintenance and repair costs. Further downtime was estimated to reduce operating income by about $0.9 million per week. An insurance claim was filed, but the amount was undetermined and no recovery was recognized.
- Management expected low-to-moderate near-term Climate Control sales growth and modest increases in the construction markets it serves. April 2012 Climate Control orders were approximately $20.1 million, with backlog of approximately $47.6 million at April 30.
- Management described fertilizer market fundamentals as positive at the time, while identifying commodity prices, imports, acreage, and weather as uncertainties. It expected mining sales to be lower for the balance of 2012, partly due to excess coal supply and lower demand.
- The April 4 revolver amendment extended maturity to March 29, 2016, with a possible extension to April 13, 2017 under specified conditions. It retained a minimum fixed-charge coverage covenant and removed the stated EBITDA and senior-leverage tests; the secured term loan retained its own covenants. The company reported compliance with applicable covenants at March 31 and forecast compliance for the remainder of 2012.
- Capital plans included $16.5 million of committed expenditures for the remainder of 2012, plus $32.1 million of additional planned spending subject to approval and conditions. Estimated turnaround costs were $8–$9 million; expected 2012 environmental-compliance expenses were $2.5–$3.5 million.
- Environmental exposures include potential Clean Air Act controls at nitric acid plants; the required work and total capital cost were not yet determined and could be significant. A $0.1 million potential civil-penalty liability was recorded. Other disclosed matters include wastewater-permit issues, groundwater monitoring and remediation uncertainty, and a settled EPA discharge matter with a $0.1 million payment.
- The Jayhawk litigation sought damages up to $12 million plus punitive damages; the company was awaiting the court’s decision and reported no accrued liability. The filing also describes product-liability claims, performance-bond indemnities of up to $12.9 million, and related-party real-estate transactions.
Most important facts for investors to verify
- Whether Pryor urea repairs were completed as expected, when production resumed, and the realized operating and insurance-recovery impacts.
- Whether chemical margins and overall profitability recovered after the Q1 downtime and the effects of higher fertilizer prices, feedstock costs, and agricultural seasonality.
- Whether Climate Control orders and backlog translated into shipments and sales, given lower Q1 order levels and backlog versus the prior year.
- Actual capital spending, cash generation, and liquidity relative to committed and planned expenditures, turnarounds, and environmental costs.
- Progress and potential cost of the Clean Air Act settlement and other environmental matters, including any additional penalties or required plant upgrades.
- Ongoing covenant compliance and debt repayment capacity, including the secured term loan’s 2016 balloon payment.