LSB Industries, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. Financial amounts are in U.S. dollars; figures are converted to millions unless otherwise indicated. The company manufactures nitrogen-based chemicals and HVAC products through its Chemical and Climate Control businesses.
Financial performance
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Net sales | $193.9 million | $178.5 million |
| Gross profit | $42.4 million | $48.7 million |
| Gross margin | 21.8% | 27.3% |
| Operating income | $14.2 million | $25.9 million |
| Income from continuing operations | $6.7 million | $11.6 million |
| Net income applicable to common stock | $6.3 million | $11.3 million |
| Basic / diluted earnings per share | $0.28 / $0.28 | $0.50 / $0.49 |
| Cash from continuing operations | $12.6 million | $20.3 million |
Sales rose 8.6%, while gross profit fell 13.1% and operating income fell 45.0%. The comparison is materially affected by $28.0 million of insurance recoveries recorded in Q1 2014, including $22.9 million credited against cost of sales and $5.1 million recorded separately. Excluding those recoveries, management said Q1 2015 Chemical gross profit increased $16.3 million and Chemical operating income increased $15.8 million year over year.
- Chemical: Sales increased 10.1% to $126.8 million; gross profit was $21.8 million and operating income $16.7 million. Higher sales and improved production at Pryor and Cherokee helped, but El Dorado’s purchased-ammonia cost disadvantage remained significant.
- Climate Control: Sales increased 8.0% to $65.2 million; gross profit was $20.0 million and operating income $4.3 million, approximately flat. Higher air-handler, chiller and fan-coil sales were partly offset by weaker geothermal heat-pump sales and lower gross margin.
Cash, debt and liquidity
- Cash and cash equivalents were $161.6 million; short-term investments were $24.5 million. Including $25.0 million of noncurrent restricted investments, total current and noncurrent cash and investments were $211.1 million, down from $272.3 million at year-end 2014.
- Current assets were $399.5 million and current liabilities $164.1 million, implying working capital of approximately $235.3 million and a current ratio of about 2.4.
- Total debt was $455.7 million, versus $457.3 million at December 31, 2014. This included $425.0 million of 7.75% secured notes due 2019. The current portion of long-term debt rose to $25.5 million from $10.7 million.
- The $100 million revolver was undrawn; approximately $75.6 million was available based on eligible collateral and letters of credit. The reported fixed-charge coverage ratio was 3.7 to 1; management expected covenant compliance over the next 12 months.
- Continuing investing activities used $31.9 million, including $66.8 million of cash capital expenditures, partly offset by $46.0 million released from restricted cash. Continuing financing activities used $5.9 million.
Outlook, risks and notable items
- Management anticipated strong nitrogen demand in Q2 as delayed applications from excessive rain and cooler weather were expected to resume. It described fertilizer fundamentals as generally favorable, while noting lower corn prices, import competition and weaker mining demand.
- The Orica ammonium-nitrate supply agreement ended April 9, 2015. Management said rebuilding El Dorado sales volumes after expiration would affect results. The facility incurred an estimated $4 million operating loss in Q1 from purchased-ammonia economics; the new ammonia plant was expected to address that disadvantage.
- Planned capital additions for the remainder of 2015 were estimated at $227 million–$276 million. El Dorado expansion projects were estimated at $495 million–$520 million in total, with $333 million capitalized by March 31. Management expected the ammonia plant to be completed in late 2015 and begin operating in early 2016; the new nitric-acid plant was scheduled to begin production in Q3 2015. Project timing, cost and financing remain execution risks.
- Management reported $16 million received in April to finance an El Dorado natural-gas pipeline and was discussing financing for additional project equipment. Funding needs, construction delays, operating performance and access to financing could affect liquidity.
- Environmental and legal exposures include a $514,000 environmental accrual, including an estimated $112,000 for alleged Cherokee Facility violations. Potential costs for certain environmental matters could not be reasonably estimated. In the West, Texas fertilizer-plant litigation, LSB and its subsidiary were defendants; no liability or loss range was established. A ClimateMaster class action filed April 30, 2015 alleged equipment defects and more than $5 million in damages; the company had not completed its investigation or determined insurance coverage.
- Q1 2015 included $1.7 million of shareholder-related fees, down from $4.2 million a year earlier; management estimated $1.5 million–$2.0 million for Q2. Preferred-stock dividends of $0.3 million were paid; the company did not anticipate common-stock dividends in the near term.
- Management identified agricultural seasonality, feedstock and commodity-price volatility, plant reliability, environmental compliance, litigation and substantial capital spending as relevant risks. Disclosure controls were assessed as effective; ERP implementation was ongoing.
Key facts for investors to verify
- Whether the planned El Dorado projects meet stated cost, completion and start-up schedules, and whether additional financing is secured.
- Whether the new ammonia plant reduces El Dorado’s purchased-feedstock disadvantage and improves facility profitability after the Orica contract ended.
- Whether operating cash flow and available liquidity can support the remaining capital program, debt service and working-capital needs.
- How fertilizer prices, weather, crop economics, imports and mining demand affect Chemical volumes and margins; and whether Climate Control backlog converts to sales.
- Developments in the West, Texas litigation, the ClimateMaster class action and environmental matters, including potential insurance coverage and any change in loss estimates.