LSB INDUSTRIES, INC. quarterly report, Q3 FY2018

LSB Industries, Inc. — Form 10-Q Summary

Reporting period: Quarter and nine months ended September 30, 2018. Financial statements are unaudited. LSB manufactures and sells chemical products for agricultural, industrial, and mining markets.

Financial performance and position

Metric	Q3 2018	Q3 2017	Nine months 2018	Nine months 2017
Net sales	$79.8 million	$92.4 million	$283.4 million	$338.6 million
Gross profit (loss)	($9.7) million	($7.3) million	$3.4 million	$15.7 million
Operating loss	($16.6) million	($15.4) million	($20.5) million	($13.3) million
Net loss	($26.1) million	($17.1) million	($59.2) million	($30.1) million
Net loss per common share	($1.22)	($0.91)	($2.98)	($1.93)

Gross margin was negative 12.2% in Q3 2018 versus negative 7.9% a year earlier; for the nine-month period it was 1.2% versus 4.6%.
Net interest expense was $11.0 million in Q3 and $32.0 million for the first nine months, up 18% and 15%, respectively, year over year. The nine-month results also included a $6.0 million loss on extinguishment of debt.
Continuing operating cash flow was $38.8 million for the first nine months, compared with $19.3 million in 2017. Capital expenditures were $27.2 million; continuing investing cash outflow was $16.2 million. Cash increased to $42.7 million from $33.6 million at year-end 2017.
At September 30, total debt, including current maturities and net of discounts and issuance costs, was $415.7 million; cash was $42.7 million. Series E redeemable preferred stock had a $194.6 million carrying value and approximately $205 million liquidation preference. Stockholders’ equity was $360.5 million.
Current assets were $158.0 million and current liabilities $122.5 million. The $400 million revolver was undrawn, with approximately $39.1 million available based on eligible collateral and letters of credit. No covenant trigger event had occurred.

Changes versus the prior comparable period

Reported Q3 sales fell 14%, and nine-month sales fell 16%. LSB adopted ASC 606 on January 1, 2018 using the modified retrospective method; prior periods were not restated. The standard reduced reported 2018 sales by $15.8 million in Q3 and $49.2 million year to date, with corresponding cost-of-sales and SG&A reductions and no change to operating loss. Without ASC 606, Q3 2018 sales would have been $95.6 million versus $92.4 million in Q3 2017; nine-month 2018 sales would have been $332.6 million versus $338.6 million.
Agricultural sales rose 16% in Q3, mainly on higher prices, but agricultural volume fell 11%. Industrial and other chemical sales fell 27% as reported in Q3; the company says they would have increased 8.5% on an ASC 606-comparable basis. Mining sales declined 17% in Q3, with management attributing the decline largely to shipment timing.
Q3 gross loss worsened by $2.5 million. A 35-day Cherokee turnaround and a five-day El Dorado ammonia-plant turnaround contributed to $7.9 million of turnaround costs, lost production and reduced fixed-cost absorption. The comparable 2017 quarter included $1.1 million of turnaround costs.
In April 2018, LSB issued $400 million of 9.625% senior secured notes due 2023 and redeemed its $375 million of 8.5% notes due 2019. The refinancing lengthened the notes’ maturity but increased interest expense and generated the $6.0 million extinguishment loss. The Series E preferred holder’s redemption election date was extended to October 25, 2023; its current annual dividend rate is 14%.

Outlook, commentary, and risks

Management expects improving fertilizer prices to continue into Q4 2018 and the first half of 2019, and expects those pricing trends to continue in Q4. It forecast average ammonia-plant on-stream rates of approximately 94% in Q4 and reported no Q4 turnarounds were scheduled. These are management expectations, not guarantees.
Management plans approximately $34 million of 2018 capital expenditures, including $6.8 million for the remainder of the year. It expects cash, revolver availability, and operating cash flow to fund anticipated liquidity needs for the next 12 months.
Initiatives include improving plant reliability and safety, growing HDAN, nitric acid and mining-product sales, and reducing costs. Management estimates procurement and other identified measures could reduce annual expenses and capital spending by $3 million to $5 million; benefits had begun to appear in Q3. The company cautions these initiatives may not deliver expected results.
Principal business risks include seasonal and weather-sensitive fertilizer demand, commodity prices and supply, natural-gas costs, transportation constraints, plant reliability and unplanned downtime, competitive imports and capacity, and weaker coal demand affecting mining products. Management does not expect a significant near-term increase in mining business.
Environmental exposures include facility permits and potential compliance or remediation costs. An Arkansas environmental order included a $124,000 penalty; the company accrued it. The potential cost of further groundwater remediation at El Dorado could not be reasonably estimated.
Litigation remains significant. A settlement term sheet for the shareholder securities case was signed October 11, 2018 for $18.45 million, payable by insurers; LSB recorded both a liability and matching insurance receivable at September 30. Claims related to the West Fertilizer explosion remain pending, and no reserve was recorded because a possible loss range could not be estimated. A contractor dispute includes approximately $3.5 million in disputed invoices already recorded in accounts payable.
The company had not completed its accounting for all effects of the 2017 Tax Cuts and Jobs Act. It estimated 2018 valuation allowances of approximately $11.1 million for federal and $5.2 million for state deferred tax assets; changes could materially affect reported results.
The filing lists an October 18, 2018 securities exchange agreement and new preferred-stock designations in its exhibits. Their transaction terms are not clearly provided in the supplied filing text; consult the related filing for details.

Most important facts for investors to verify

Underlying sales and margins after adjusting comparisons for ASC 606, and whether higher fertilizer prices translate into sustained profitability.
Plant uptime, turnaround effects, and progress toward the forecast Q4 on-stream rate.
Debt-service capacity and the cash cost of 9.625% notes, alongside the substantial Series E preferred dividends and liquidation preference.
Availability of revolver capacity under the borrowing base and any future covenant triggers.
Insurance coverage and recovery for the $18.45 million securities settlement, and developments in the West Fertilizer and Global Industrial litigation.
Actual environmental compliance and remediation costs, tax valuation allowances, and the terms and consequences of the October 2018 preferred-stock exchange.