CVR Partners, LP — Q2 2020 Form 10-Q
Business context and reporting period
CVR Partners produces and wholesales nitrogen fertilizer, principally ammonia and UAN, from facilities in Coffeyville, Kansas, and East Dubuque, Illinois. This unaudited filing covers the quarter and six months ended June 30, 2020; comparisons are with the corresponding 2019 periods. Amounts below are in millions unless stated otherwise.
Financial performance and position
- Revenue: Q2 net sales were $105.1 million, down 23.7% from $137.7 million. First-half sales were $180.2 million, down 21.5% from $229.5 million. Management attributed the declines mainly to lower ammonia and UAN prices.
- Profit and margins: Q2 net loss was $41.6 million versus net income of $19.0 million; first-half net loss was $62.3 million versus net income of $12.9 million. Q2 operating loss was $25.8 million, including a $41.0 million non-cash goodwill impairment. Excluding that charge, operating income was approximately $15.2 million. Cost-of-sales gross margin was approximately 18.8% in Q2 versus 29.8% in Q2 2019; first-half gross margin was approximately 11.2% versus 25.1%.
- EBITDA: The company-reported non-GAAP EBITDA was negative $2.3 million for Q2 versus $59.6 million, and $8.3 million for the first half versus $85.7 million. Adjusted EBITDA is no longer presented beginning in 2020.
- Cash flow: First-half operating cash flow was $6.8 million versus $34.7 million. Investing cash outflow was $10.2 million and financing cash outflow was $1.1 million; cash declined $4.4 million to $32.6 million. First-half cash interest paid was $30.0 million.
- Liquidity and debt: Reported total liquidity was $53.1 million at June 30, consisting of $32.6 million cash and $45.6 million available under the asset-based facility, adjusted for $25.0 million of cash in the borrowing base. Debt including current portion was $634.2 million. The principal debt was $645 million of 9.25% senior secured notes due June 2023; $2.24 million of 6.50% notes due April 2021 was classified current. The $45.6 million facility had no borrowings or outstanding letters of credit. The Partnership reported covenant compliance.
- Distributions and units: No distributions were declared for Q2 or paid for the fourth quarter of 2019 or first quarter of 2020; the Board reported no available cash for those periods. Q2 earnings per unit were a loss of $0.37. The Partnership repurchased 890,218 units for approximately $1.0 million at an average $1.07 per unit; approximately $9.0 million of authorization remained.
Material changes and management commentary
- Q2 and first-half sales fell primarily due to pricing: management’s sales bridge attributed $31.5 million of the Q2 decline and $54.2 million of the first-half decline to unfavorable pricing, partly offset by volume effects.
- Management cited competitive pricing, softer natural gas and corn prices, shifting UAN trade flows following EU import duties, and reduced industrial ammonia demand. COVID-19 also weakened economic activity and ethanol production; average Q2 2020 U.S. ethanol production was down 30% from 2019, though it had recovered 27% by July.
- The Partnership wrote off all $41.0 million of Coffeyville goodwill after lower product-price expectations and other factors triggered an interim impairment test. Management said it had not identified an impairment indicator for long-lived asset groups as of June 30, but continues to monitor conditions.
- Management expected volatility in product demand and feedstock availability and pricing through the rest of 2020, and said it could not predict the pandemic’s full financial or operational impact. It nevertheless expected solid crop-input demand for the remainder of 2020 and viewed long-term U.S. nitrogen fertilizer fundamentals as intact; this is not specific earnings guidance.
- To preserve liquidity, the Partnership deferred the Coffeyville turnaround from fall 2020 to summer 2021 and the East Dubuque turnaround from 2021 to 2022, and reduced remaining-2020 maintenance spending to critical or necessary work. Estimated full-year 2020 capital expenditures were $19–$23 million ($14–$16 million maintenance and $5–$7 million growth). Management believed available cash, operations and potential facility borrowings would cover anticipated needs for at least 12 months, subject to uncertainty.
- The NYSE notified the Partnership that its average unit price was below $1 for the required 30-trading-day period. It had until January 1, 2021 to regain compliance; failure could lead to suspension or delisting. Potential actions included further repurchases or a reverse unit split, with no assurance of regaining compliance.
- A July 31, 2020, post-quarter agreement with Messer provides for a 15-year on-site supply arrangement and installation of an oxygen storage vessel. The Partnership expected the vessel lease to result in $20–$25 million of financing-lease capitalization when placed in service.
Important facts for investors to verify
- Whether fertilizer pricing, corn and ethanol demand, and feedstock costs recover or deteriorate further, and the assumptions behind the goodwill impairment valuation.
- Liquidity and debt-service capacity, including the 2021 note maturity, borrowing-base availability, covenant terms, and actual cash needs through the turnaround schedule.
- Progress toward NYSE minimum-price compliance by January 1, 2021, and any effect of delisting on unit liquidity or access to financing.
- Whether the Board resumes distributions, given the absence of available cash for the reported periods and the Partnership’s discretionary distribution policy.
- Actual capital spending and the scope, timing, and financing-lease accounting for the Messer oxygen-vessel project.