LSB Industries, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2017. LSB manufactures and sells agricultural, industrial, and mining chemicals. Results reflect continuing operations unless noted; the Climate Control business was sold in July 2016 and is presented as discontinued operations.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $92.4 million | $80.3 million | $338.6 million | $289.2 million |
| Gross profit (loss) | $(7.3) million | $(36.4) million | $15.7 million | $(40.4) million |
| Gross margin | (7.9)% | (45.3)% | 4.6% | (14.0)% |
| Operating loss | $(15.4) million | $(45.9) million | $(13.3) million | $(72.1) million |
| Loss from continuing operations | $(17.1) million | $(39.5) million | $(30.1) million | $(62.9) million |
| Net income (loss) attributable to common stockholders | $(24.7) million | $112.0 million | $(52.5) million | $92.8 million |
Q3 2016 and nine-month 2016 net income included after-tax discontinued-operation income of $173.0 million and $196.6 million, respectively, primarily from the $281.6 million gain on sale of Climate Control. Common-stockholder results also reflect Series E preferred dividends and accretion. Continuing-operations loss per share was $0.91 for Q3 and $1.93 for the nine-month period, versus $2.25 and $4.17 losses in the comparable 2016 periods.
- Sales and operations: Q3 sales rose 15.1%, with higher volumes across agricultural, industrial, and mining products. Nine-month sales rose 17.1%, led by agricultural and industrial products; mining sales declined 8.6%. Improved facility reliability, higher volumes, lower plant costs, and better fixed-cost absorption drove the gross-profit improvement. Nine-month results also benefited from a $2.9 million precious-metals recovery and did not repeat $12.1 million of 2016 property-tax consulting costs.
- Pricing and expenses: Q3 average selling prices fell 28% for ammonia, 9% for UAN, and 3% for HDAN. Nine-month prices fell 17%, 14%, and 11%, respectively. SG&A declined 20% in Q3 and 15.7% for nine months. Net interest expense was $9.3 million in Q3, down from $13.3 million, but rose to $27.9 million for nine months from $21.1 million, partly because less interest was capitalized after the El Dorado expansion was completed.
- Cash flow: Continuing operating activities provided $19.3 million for nine months, versus $0.8 million used in 2016. Continuing investing activities used $2.2 million, including $25.2 million of PP&E expenditures, partly offset by $22.6 million of asset-sale proceeds. Continuing financing activities used $21.7 million. Cash declined $7.0 million to $53.1 million from year-end 2016.
Balance sheet, liquidity, and financing
- At September 30, cash was $53.1 million; current assets were $162.1 million and current liabilities $87.5 million.
- Total debt, including current maturities and net of discounts and issuance costs, was $410.4 million, compared with $420.2 million at December 31, 2016. The balance included $375 million of 8.5% Senior Secured Notes due August 2019.
- The working-capital revolver was undrawn, with approximately $38.6 million available. The facility matures in 2022, subject to a springing earlier maturity tied to the 2019 notes. No covenant trigger had occurred at quarter-end; if availability falls to the specified threshold, financial covenants apply.
- Series E redeemable preferred stock had a $167.1 million carrying value and a $179 million liquidation preference, accrues dividends at 14%, and may be put to the company beginning August 2019. Accrued Series E dividends were approximately $39.3 million. The filing says preferred-stock accretion could accelerate if an earlier redemption is expected.
- Management expected approximately $10 million of fourth-quarter capital additions, bringing full-year 2017 capital additions to approximately $35 million, excluding the recognized incentive-tax-credit effect. The company did not anticipate common-stock cash dividends in the near term.
Material changes, outlook, risks, and unusual items
- Plant availability: Pryor had a July electrical outage and a 17-day turnaround, then a late-September fire affecting the ammonia plant. Management expected repairs and production resumption in the third week of November 2017; affected firm sales were being covered with product from other facilities or purchases. El Dorado’s ammonia plant was also down for October repairs and resumed production October 22. The company recorded approximately $0.6 million of embedded losses on sales commitments expected to be fulfilled with purchased product.
- Management outlook: Management expected fertilizer-price pressure to continue through the remainder of 2017 amid new nitrogen capacity, supply buildup, and weaker commodity prices; it expected excess ammonia supply to be absorbed by early 2018. Management targeted minimum Cherokee ammonia on-stream rates of 95% for the rest of 2017 and continued cost reductions, with a stated goal of another $5–$7 million in annual savings over 18 months. These are operational expectations, not formal earnings guidance.
- Market and operating risks: Fertilizer demand and pricing depend on crop economics, weather, global supply, natural-gas costs, and transportation. Mining demand remains exposed to coal-market conditions. Unplanned outages, input-cost volatility, customer concentration, debt service and refinancing, and environmental compliance could affect results and liquidity.
- Environmental and legal contingencies: Pryor’s wastewater-injection permit runs through 2018 and may not be renewed. El Dorado appealed terms of a renewed discharge permit; resolution was expected to take at least six months. Other matters include groundwater monitoring and an air-emissions investigation at Pryor. Litigation includes claims related to the 2013 West Fertilizer explosion, a BAE supply-contract dispute with a stated pre-litigation demand of approximately $18 million, and a remaining Global subcontractor claim of approximately $5 million. For several matters, potential losses cannot be reasonably estimated and no liability was recorded beyond specified settlement or accrued amounts.
- Unusual transactions and accounting: Arkansas approved approximately $8.1 million of incentive tax credits in Q3, reducing PP&E by about $7.4 million and cost of sales by $0.7 million. LSB sold Zena’s natural-gas assets in June for approximately $16.3 million, recognizing an approximately $4.0 million loss and using part of proceeds to repay its secured note. In October, LSB sold its engineered-products business for $3.5 million to entities owned by immediate family members of Executive Chairman Jack Golsen, recognizing an approximately $0.8 million loss; proceeds were designated for working capital. Golsen planned to retire as Executive Chairman at year-end and had a transition agreement providing a $480,000 annual cash retainer plus specified benefits.
- The company planned to adopt the new revenue-recognition standard on January 1, 2018, using the modified-retrospective method, but had not determined its financial-statement effect. Management reported disclosure controls were effective as of September 30, 2017.
Key facts for investors to verify
- Whether Pryor repairs and production resumed on the expected schedule, and whether subsequent plant reliability supports management’s on-stream expectations.
- Whether fertilizer prices, ammonia inventories, and new nitrogen capacity develop as management anticipated, and how they affect margins and cash generation.
- Liquidity and refinancing plans for the $375 million notes due in 2019, alongside the Series E preferred redemption and dividend obligations.
- Actual capital spending, cost savings, and realization of the Arkansas tax credits and asset-sale proceeds.
- Developments in environmental permits and investigations, West Fertilizer and BAE litigation, and the Global claim, including any resulting financial exposure.
- The financial impact of the related-party engineered-products sale and the terms and cost of the Executive Chairman’s transition arrangement.