LSB Industries, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2016. LSB manufactures and sells chemical products for agricultural, industrial and mining markets. The Climate Control Business was sold on July 1, 2016; its results are reported as discontinued operations, so continuing-operations comparisons exclude that business.
Financial performance and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $80.3 million | $88.6 million | $289.2 million | $347.7 million |
| Gross profit (loss) | ($36.4 million) | ($11.8 million) | ($40.4 million) | $21.6 million |
| Gross margin | (45.3%) | (13.3%) | (14.0%) | 6.2% |
| Operating loss | ($45.9 million) | ($62.2 million) | ($72.1 million) | ($54.0 million) |
| Loss from continuing operations | ($39.5 million) | ($36.4 million) | ($62.9 million) | ($35.1 million) |
| Net income (loss) | $133.6 million | ($33.8 million) | $133.7 million | ($26.7 million) |
| Basic and diluted EPS | $4.14 | ($1.48) | $3.72 | ($1.19) |
Net income included after-tax discontinued-operations income of $173.0 million in Q3 and $196.6 million for the nine months, principally from the Climate Control sale. Continuing-operations EPS remained negative: ($2.25) for Q3 and ($4.17) for the nine-month period.
- Cash flow: Nine-month continuing operating cash flow was a use of $0.8 million, versus $19.2 million provided in 2015. Continuing investing cash flow provided $43.7 million, including $349.4 million of sale proceeds, offset in part by $202.2 million of capital spending and restricted-cash movements. Continuing financing used $90.8 million, including approximately $80 million to redeem Series E preferred stock.
- Cash and liquidity: September 30 cash and cash equivalents were $76.0 million; restricted cash was $106.9 million. The revolver had no borrowings and approximately $22.6 million of availability, subject to borrowing-base collateral. Management said available cash, revolver capacity and operating cash flow should meet anticipated needs for the next 12 months.
- Debt and preferred stock: Reported debt, net of discounts and issuance costs, was $519.6 million, including $110.5 million classified current in anticipation of redemptions. After quarter-end, LSB paid approximately $106.9 million to redeem all $50 million of 12% notes and $50 million of 7.75% notes; it expects an $8.7 million extinguishment loss in Q4. The remaining $375 million of senior secured notes bears 8.5% interest, retroactive to August 1, 2016. Series E preferred stock remaining at quarter-end had a $156.4 million aggregate liquidation preference and a 14% dividend rate.
- Capital spending: Nine-month property, plant and equipment additions were $153.7 million, including $132 million for the completed El Dorado expansion. Planned Q4 2016 capital spending was approximately $14 million; expected ongoing annual capital projects from 2017 were $30–$35 million.
Material changes and operating drivers
- Q3 sales declined 9.4% year over year, while nine-month sales declined 16.8%. Agricultural selling prices fell sharply: Q3 UAN, HDAN and ammonia average prices were down 37%, 33% and 36%, respectively. Higher fertilizer volumes partly offset lower prices.
- Nine-month gross profit deteriorated by $62.0 million to a loss. Management cited lower selling prices, the expired Orica agreement, a $12.1 million one-time property-tax consulting cost, El Dorado start-up and commissioning costs, plant downtime and higher depreciation. Lower feedstock costs partly offset these items.
- Q3 gross loss worsened by $24.6 million. Downtime, lost fixed-cost absorption and repairs were estimated to reduce Q3 operating results by approximately $4.0 million at Cherokee, $7.5 million at Pryor and $14.5 million at El Dorado. Higher depreciation following completion of the El Dorado expansion also weighed on results.
- Interest expense rose to $13.3 million in Q3 from $0.9 million and to $21.1 million for nine months from $6.5 million. Drivers included the end of capitalized interest after the expansion was placed in service, additional borrowing costs and debt-modification costs. The 2015 quarter also included a $39.7 million noncash impairment of Marcellus Shale natural-gas properties, which did not recur in 2016.
Outlook, risks and unusual items
- Management expected agricultural product selling prices to remain at then-current levels through the rest of 2016. Fall fertilizer demand and timing remained exposed to weather and harvest delays; fertilizer prices also faced pressure from high grain stocks and expected industry capacity additions.
- Management estimated a further $5–$5.5 million Q4 operating-results impact from lower beginning inventory, reduced production and related costs following facility outages. Separately, it estimated a $2.5–$3 million Q4 impact from downtime at a new El Dorado nitric acid plant. A leaking nitrous oxide abatement vessel may require a temporary bypass and potentially a replacement vessel; management expected warranty coverage, but timing and outcome were uncertain.
- LSB identified approximately $6 million of annual SG&A savings after the Climate Control sale and was evaluating non-core asset sales that it estimated could provide about $20 million of net proceeds. These are plans or estimates, not assured results.
- Key risks include facility reliability and unplanned outages; commodity prices, natural-gas costs and seasonal demand; environmental permits and compliance costs; and ongoing litigation. The Pryor wastewater injection permit may not be renewed after 2018. Environmental matters included an air-quality investigation at Pryor and groundwater and discharge issues. LSB reported $231,000 accrued for environmental matters.
- Contingencies include remaining litigation related to the West Fertilizer explosion, for which the company said it could not estimate a loss range and had established no reserve; a BAE supply-agreement claim with a stated demand of approximately $18 million, with no reserve; and a remaining Global Industrial claim/lien of approximately $5 million, also with no reserve. Outcomes and potential exposure were uncertain.
- LSB established an approximately $9 million valuation allowance for state net operating loss deferred tax assets. Management said disclosure controls and procedures were effective as of September 30, 2016.
Important facts for investors to verify
- Whether continuing operations can return to positive gross margins and cash generation despite lower fertilizer prices and persistent operating costs.
- Actual post-redemption debt, interest burden, revolver availability and covenant compliance; the filing’s September 30 debt and cash balances precede the October redemptions.
- Repair and warranty outcomes, operating performance and any additional Q4 impact at Cherokee, Pryor and El Dorado, particularly the nitric acid plant vessel issue.
- Final Climate Control sale adjustments, escrow releases, transition-service costs and contingent liabilities.
- Developments and potential financial exposure in the West Fertilizer, BAE, Global Industrial and environmental matters; the filing does not provide clear loss estimates for several of these items.
- Whether planned cost savings, non-core asset sales and management’s 12-month liquidity assessment are achieved.