LSB Industries, Inc. — Q2 2014 Form 10-Q
All dollar amounts are in millions unless otherwise noted. The filing covers the three and six months ended June 30, 2014, compared with the same 2013 periods. LSB manufactures nitrogen-based chemical products and HVAC equipment through its Chemical and Climate Control businesses.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $201.7 | $202.2 | $380.2 | $352.9 |
| Gross profit | $48.9 | $38.7 | $97.6 | $64.1 |
| Gross margin | 24.2% | 19.1% | 25.7% | 18.2% |
| Operating income | $23.8 | $12.2 | $49.6 | $12.0 |
| Income from continuing operations | $11.1 | $7.5 | $22.8 | $7.4 |
| Net income | $11.1 | $7.4 | $22.8 | $7.4 |
| Diluted EPS | $0.47 | $0.31 | $0.96 | $0.31 |
| Interest expense, net | $5.7 | $0.5 | $12.4 | $1.3 |
For the first half, Chemical sales rose 26.2% to $251.0 million, while Climate Control sales fell 16.6% to $123.1 million. Chemical operating income increased to $52.4 million from $2.6 million; Climate Control operating income declined to $8.9 million from $15.8 million. Six-month consolidated operating margin was 13.1%, versus 3.4% a year earlier.
Continuing operating cash flow was $55.9 million for the first half, compared with $6.9 million in 2013. Investing cash flow was a use of $9.9 million, including $92.9 million of PP&E expenditures; financing cash flow was a use of $13.2 million. Cash and cash equivalents ended at $176.5 million, versus $143.8 million at year-end 2013.
Liquidity, debt and capital spending
- At June 30, cash and short-term investments totaled $191.0 million. A further $198.1 million of restricted cash and investments was designated for capital projects; it is not equivalent to unrestricted operating liquidity.
- Total debt, including current maturities, was $460.3 million, versus $463.0 million at December 31, 2013. This included $425.0 million of 7.75% senior secured notes due 2019. The $100 million revolver was undrawn, with approximately $69.4 million available after collateral and letters of credit. The reported fixed-charge coverage ratio was 5.7 to 1; the minimum test applies when availability falls to specified levels.
- First-half capital expenditures were $107.1 million. Planned spending for the remainder of 2014 and 2015 was estimated at $392–$515 million, including major El Dorado expansion projects. The ammonia plant was expected to be completed by late 2015; the nitric acid plant and concentrator were scheduled to begin production in early to mid-2015.
Material changes, outlook and notable items
- Q2 sales were nearly flat year over year, but operating income increased by about $11.5 million. First-half sales increased $27.3 million, principally from Chemical, offset in part by lower Climate Control sales.
- Chemical results benefited from improved production at the Pryor and Cherokee facilities, which had experienced downtime in 2013. However, fertilizer selling prices fell while natural-gas feedstock costs rose, compressing margins per ton. The first-half results also included $22.9 million of business-interruption insurance recoveries; 2013 first-half Chemical gross profit included $14.2 million of such recoveries. A separate $5.1 million property-insurance recovery was recorded in 2014 operating income.
- Climate Control sales and profit declined amid lower orders, reduced backlog and customer delivery delays. Management expected Climate Control sales to increase in the second half of 2014 compared with the same period of 2013, partly through higher sales of LSB-branded products. No consolidated earnings guidance was provided.
- Management described nitrogen fertilizer fundamentals as historically strong but below 2013 levels, and cited risks including weather, crop economics, imported fertilizer, natural-gas prices and plant reliability. A 30–35 day Cherokee turnaround began in July; estimated remaining-2014 turnaround costs were $4.5–$5.0 million, excluding lost production effects.
- EDC gave notice that it would not renew its Orica ammonium-nitrate supply agreement after April 9, 2015. Orica represented approximately 5% of consolidated first-half 2014 sales. Carrier heat-pump contracts expired May 11, 2014; they had represented less than 5% of consolidated sales in the first half of 2014.
- Interest expense rose substantially following the issuance of the senior notes. Capitalized interest was $5.3 million in the first half of 2014, compared with $1.0 million in 2013. General corporate expenses also included $4.2 million of first-half fees related to activist shareholder proposals and settlement efforts.
- An EPA/DOJ consent decree was approved in May 2014. It requires emissions-control work at five nitric acid plants, estimated at $2–$3 million per plant, and a $725,000 civil penalty that was paid. Environmental matters include unresolved permit, investigation and remediation issues; accrued environmental liabilities were $0.6 million.
- LSB and EDC were named defendants in litigation concerning the 2013 West Fertilizer explosion. No liability had been established at June 30, 2014; the filing describes $100 million in aggregate product-liability limits and a $250,000 self-insured retention. The company also disclosed other operating, environmental, commodity-price, construction, financing and seasonal risks.
Important facts for investors to verify
- Whether Chemical facility reliability and production improvements persist, and how fertilizer prices and feedstock costs affect margins.
- Progress, remaining cost, financing and timing of the El Dorado ammonia and nitric-acid projects, given the substantial planned capital expenditures and restricted funding.
- Whether Climate Control orders and backlog support management’s expected second-half sales improvement, and the impact of the Carrier contract expiration.
- Liquidity available for operations after distinguishing unrestricted cash from project-restricted funds, and continued compliance with debt covenants.
- Developments in the West Fertilizer litigation, environmental investigations and consent-decree obligations, including potential costs not yet estimable or accrued.
- The extent to which reported earnings depend on insurance recoveries and other unusual items; first-half 2014 results included material insurance-related gains.