LSB Industries, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. LSB manufactures nitrogen-based chemicals and HVAC products. Financial amounts below are in millions of dollars unless otherwise noted.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $182.7 | $201.7 | $376.5 | $380.2 |
| Gross profit | $34.9 | $48.9 | $77.2 | $97.6 |
| Gross margin | 19.1% | 24.2% | 20.5% | 25.7% |
| Operating income | $2.6 | $23.8 | $16.8 | $49.6 |
| Income from continuing operations | $0.4 | $11.1 | $7.1 | $22.8 |
| Net income applicable to common stock | $0.4 | $11.1 | $6.8 | $22.5 |
| Diluted EPS | $0.02 | $0.47 | $0.29 | $0.96 |
- Q2 sales fell 9%; operating income declined $21.2 million. Chemical sales dropped 16.9%, while Climate Control sales rose 6.5%.
- Chemical gross profit fell 53.4% in Q2, to $13.6 million; segment operating income fell 71.0%, to $6.8 million. Climate Control gross profit increased, but operating income declined to $4.0 million, reflecting higher selling and personnel costs.
- For the first half, reported Chemical gross profit included $22.9 million of business-interruption insurance recovery in 2014; Chemical operating income also included a $5.1 million property-insurance recovery. Excluding the $28.0 million total 2014 insurance recoveries, first-half Chemical operating income decreased about $0.9 million year over year.
Cash flow, debt and liquidity
- First-half cash from continuing operations was $40.3 million, versus $55.9 million in 2014. Investing used $98.8 million, primarily reflecting $157.4 million of property and equipment expenditures. Financing provided $4.5 million.
- Cash and cash equivalents were $132.7 million and short-term investments were $25.0 million at June 30, totaling $157.7 million. The $100 million revolver was undrawn; net availability was approximately $75.3 million, subject to eligible collateral and letters of credit.
- Total debt was $470.2 million, including $425 million of 7.75% senior secured notes due 2019. Stockholders’ equity was $443.9 million. The revolver’s fixed-charge coverage ratio was 3.4:1 at June 30; management forecast covenant compliance for the next 12 months.
- Capital expenditures were substantial: $157.4 million cash PP&E spending in the first half; segment disclosures report $187.4 million of additions, including noncash additions. Management estimated El Dorado expansion costs of $660–$680 million, with $437 million incurred and $223–$243 million remaining at June 30.
Material changes, outlook and risks
- The Orica ammonium-nitrate supply agreement expired April 9, 2015. It had guaranteed minimum annual volume of 240,000 tons and supported fixed overhead and profit; LSB reported about $4 million less Q2 contribution margin from LDAN than in Q2 2014. Management expected lower El Dorado volumes to continue until the new ammonia plant starts production, expected early Q2 2016. New 2016 contracts provide minimum annual volumes with penalties, but lack Orica’s take-or-pay structure.
- Chemical results were pressured by weak fertilizer pricing and demand, weather-related lower agricultural sales, lower U.S. coal production and mining demand, a 17-day Pryor outage, and El Dorado’s high cost of purchased ammonia. Management cited lower natural-gas feedstock costs and expected strong fall fertilizer prepay demand, while noting market and weather uncertainty.
- Management said the El Dorado ammonia plant was expected to be mechanically complete by year-end 2015 and begin production early Q2 2016. The nitric-acid concentrator began production in June 2015; the new nitric-acid plant was expected to start in mid-Q4 2016. In August, contractors advised that total expansion costs were estimated at $660–$680 million, partly due to work by a prior subcontractor. Management was pursuing additional financing and warned that funding shortfalls could require delaying, reducing or stopping discretionary projects.
- Climate Control’s Q2 bookings were $70.2 million, down 15% year over year; backlog was $75.1 million, up from $68.1 million. Management expected near-term sales growth, while citing weaker geothermal residential demand and Carrier contract losses. No specific consolidated earnings guidance was provided.
- Material contingencies include the West Fertilizer explosion litigation, where LSB/EDC were named defendants and no loss range could be estimated; and a BAE supply-contract suit with a pre-litigation demand exceeding $30 million, also without an estimable loss range or recorded liability. Environmental matters include ongoing permit, groundwater and investigation issues; accrued environmental liabilities were $0.5 million. Management also disclosed a proposed EPA settlement for Cherokee totaling $126,000.
- Other risks include expansion execution and funding, chemical-plant outages, commodity and feedstock price volatility, seasonality, environmental compliance, and possible customer demand or pricing weakness. The company reported effective disclosure controls and no material change to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether El Dorado expansion costs, remaining funding needs and the ammonia and nitric-acid start-up schedules remain on plan.
- Progress replacing Orica volumes, including contract volumes, penalty provisions, actual sales and El Dorado economics.
- Cash generation, revolver availability, covenant headroom and financing for remaining capital commitments.
- Developments and potential exposure in the West Fertilizer and BAE cases, and changes in environmental liabilities.
- Whether Chemical demand, fertilizer prices, coal-market conditions and Climate Control bookings/backlog support management’s stated outlook.