LSB Industries, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2014. The unaudited filing covers LSB’s Chemical and Climate Control businesses. Amounts below are in millions of dollars unless otherwise stated.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $171.0 | $177.4 | $551.2 | $530.3 |
| Gross profit | $24.4 | $48.9 | $122.0 | $113.0 |
| Gross margin | 14.3% | 27.6% | 22.1% | 21.3% |
| Operating income (loss) | $(1.2) | $23.1 | $48.4 | $35.1 |
| Net income (loss) | $(3.8) | $10.3 | $19.0 | $17.6 |
| Diluted earnings (loss) per share | $(0.17) | $0.43 | $0.80 | $0.75 |
- Quarterly change: Sales declined 3.6%. The company swung to an operating and net loss, primarily reflecting planned maintenance outages at the Cherokee and Pryor chemical facilities. Chemical segment Q3 sales fell 9.1% and it recorded a $5.6 million operating loss; Climate Control sales rose 5.2% to $73.5 million.
- Nine-month change: Sales increased 4.0% and net income rose 7.7%. Chemical sales increased 14.1%, while Climate Control sales declined 9.6%. Chemical operating income improved to $46.8 million; Climate Control operating income fell to $17.4 million.
- Nine-month results included $28.0 million of business-interruption and property insurance recoveries, including $22.9 million recorded as a reduction to cost of sales, plus a separate $5.1 million property recovery in excess of losses. The comparison period included $18.4 million of business-interruption recoveries and a $4.5 million precious-metals recovery. These items affect comparability.
- Nine-month net interest expense was $17.5 million versus $6.7 million, primarily reflecting the 2013 issuance of senior notes; $9.2 million of interest was capitalized in 2014 versus $2.1 million in 2013.
Cash flow, liquidity and debt
- Nine-month cash from continuing operations was $56.9 million, compared with $45.3 million in 2013. Cash purchases of property, plant and equipment were $164.2 million, versus $113.7 million. Cash provided by operations less those expenditures was therefore approximately negative $107.3 million.
- Cash and cash equivalents were $169.8 million at September 30, 2014; short-term investments were $14.5 million. A further $126.8 million of cash and investments was restricted for capital projects. Total cash, equivalents and investments, including restricted balances, were $311.1 million.
- Total debt, including current maturities, was $459.4 million, down from $463.0 million at year-end 2013. This included $425.0 million of 7.75% senior secured notes due 2019. The revolving facility was undrawn; approximately $74.2 million was available based on eligible collateral and letters of credit.
- Stockholders’ equity was $432.4 million, compared with $411.7 million at December 31, 2013. The company reported a 4.89-to-1 fixed-charge coverage ratio at quarter-end and forecast covenant compliance for the next 12 months.
- Cash and investments held at financial institutions exceeded FDIC-insured limits by approximately $64 million.
Outlook, material projects and risks
- Management expected Climate Control sales to improve in Q4 2014 and 2015, citing LSB-branded products, despite the loss of Carrier heat-pump contracts, which had represented less than 3% of consolidated sales in the first nine months of 2014.
- Management described fertilizer fundamentals as positive but cited uncertainty from low corn prices, acreage and weather, imported fertilizer, and feedstock and product-price volatility. Mining-product demand was affected by softer coal-related demand. Agricultural sales are seasonal.
- At El Dorado, the ammonia plant was estimated to cost $275–$300 million, with $99 million capitalized by September 30; management expected completion in late 2015 and production in Q1 2016. The nitric acid plant and concentrator were estimated at $125–$130 million, with $85 million capitalized; production was expected in early to mid-2015. Project costs, schedules and expected benefits remain subject to execution and financing risks.
- Planned capital spending for the remainder of 2014 and 2015 was estimated at $388–$458 million in total. Management was discussing approximately $50 million of secured equipment financing. It expected to fund projects through restricted funds, working capital, operating cash flow and third-party financing, with revolver availability as a possible additional source.
- EDC gave notice that its Orica ammonium-nitrate supply agreement would not renew after April 9, 2015. The contract covered a 240,000-ton annual minimum; management said contracts had been signed for approximately half that volume and it was pursuing arrangements for the balance.
- Material contingencies include environmental compliance and remediation exposures, including matters for which potential costs were not estimable and no liability was recorded. LSB and EDC were named in litigation relating to the 2013 West Fertilizer explosion; no liability was recorded at quarter-end, and the insurer was handling the defense. The filing also describes an ongoing Oklahoma air-emissions investigation and an El Dorado wastewater-permit dispute.
- The company disclosed corrections for improperly recorded repair expenses and obsolete parts, totaling approximately $405,000 and $324,000, respectively; management deemed the effects immaterial to prior-period financial statements. The filing also identified risks from capital-project execution, environmental regulation, raw-material costs, facility downtime, ERP implementation and cybersecurity.
Key facts for investors to verify
- Whether chemical facilities sustained normal production after the Q3 turnarounds, and the resulting effects on volumes, margins and maintenance costs.
- Actual project spending, financing availability, completion dates and operational performance for the El Dorado expansion projects.
- Replacement sales and economics for the Orica volume after the agreement ends, and the effect of feedstock costs and fertilizer prices on margins.
- Progress and potential financial exposure from the West Fertilizer litigation, environmental matters and regulatory investigations.
- Whether liquidity, restricted project funds, covenant headroom and internal controls remain adequate as capital spending and ERP implementation continue.