LSB Industries, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; interim financial statements are unaudited. LSB operates Chemical and Climate Control businesses.
Financial performance and liquidity
Amounts are in millions of dollars unless stated otherwise.
| Metric | Q1 2013 | Q1 2012 or prior date |
|---|---|---|
| Net sales | $150.7 | $190.2 |
| Gross profit / gross margin | $25.4 / 16.9% | $44.4 / 23.4% |
| Operating income (loss) | $(0.2) | $23.1 |
| Net income (loss) | $(0.07); $(0.02) per diluted share | $14.3; $0.61 per diluted share |
| Cash from continuing operations | $(20.1) | $11.1 |
| Capital expenditures | $44.3 | $15.6 |
| Cash and cash equivalents | $68.7 at March 31 | $98.0 at December 31, 2012 |
| Total long-term debt, including current portion | $105.8 at March 31 | $72.4 at December 31, 2012 |
| Stockholders’ equity | $354.9 at March 31 | $354.5 at December 31, 2012 |
Current assets were $279.6 million and current liabilities $127.0 million at quarter-end. The $50 million revolving facility was undrawn, with approximately $48.4 million available subject to borrowing terms and eligible collateral. The company reported $6.5 million of short-term financing in addition to long-term debt.
Material changes and operating drivers
- Sales fell 20.8% year over year. Chemical sales declined 37.6% to $77.5 million; Climate Control sales grew 12.0% to $70.3 million.
- Chemical gross profit fell to $2.4 million from $24.0 million, and the segment recorded a $3.8 million operating loss versus $20.3 million operating income. The main cause was production downtime at Pryor, Cherokee, and El Dorado, including lost volume and under-absorbed fixed costs.
- Climate Control gross profit increased to $22.0 million from $19.4 million; segment operating income rose to $6.4 million from $5.8 million. Commercial/institutional demand improved, while residential product sales remained weaker.
- Operating cash use reflected working-capital and tax-payment outflows, including $10.9 million for prepaid and accrued income taxes and $9.8 million for receivables. Financing cash inflow of $30.7 million was principally from the new secured promissory note; investing cash use was $39.8 million.
Outlook, risks, and unusual items
- Facility recovery: Pryor production resumed in late April 2013 and Cherokee in early May. Management said those facilities were ramping up. El Dorado’s damaged nitric acid plant is to be replaced; the new plant and concentrator are expected to be completed in the first half of 2015. Management estimated El Dorado’s monthly operating impact at $1–$2 million until then.
- Downtime impact: Management estimated Q1 adverse operating-result effects of $24–$27 million at Pryor, $14–$17 million at Cherokee, and $2–$5 million at El Dorado, based on current market conditions and with the specified insurance recoveries included for Cherokee and El Dorado. The filing estimated the combined effect of the incidents on Q1 pretax operating results at $40–$49 million.
- Insurance: Recognized business-interruption recoveries reduced cost of sales, including $10.8 million in Q1 for Chemical operations. Some El Dorado and Cherokee amounts remained deferred or unrecognized pending realization or further insurer approval. In April, insurers denied the Pryor claim. The company reported receiving $15 million on the Cherokee claim in April.
- Capital plans: The estimated cost of the El Dorado nitric acid plant and concentrator is approximately $120 million. Management also described a possible El Dorado ammonia plant costing $250–$300 million, subject to board approval, permits, and financing. Total committed and planned capital expenditures were estimated at $535–$600 million; planned projects and timing depend in part on financing and other conditions.
- Other outlook: Management expected moderate near-term Climate Control sales growth and saw potentially favorable nitrogen-fertilizer market fundamentals once chemical facilities returned to normal operations. These expectations are subject to economic, weather, commodity-price, production, and market risks. The company estimated $4.0–$4.5 million of 2013 process-safety and reliability program expenses and $3.0–$4.0 million of environmental compliance expenses for the remainder of 2013.
- Contingencies: Environmental matters include Clean Air Act discussions with EPA/DOJ, potential emissions-control investments estimated at $2–$3 million for each of six remaining plants, and an ongoing Oklahoma air-emissions investigation. Environmental liabilities accrued were $0.6 million; potential additional costs were not always reasonably estimable. The El Dorado wastewater pipeline was expected to cost the company approximately $3.7 million to fund, with annual operating costs estimated at $0.1–$0.15 million.
- Debt and covenant risk: The secured term loan includes a $56.3 million balloon due in March 2016; the Zena secured note includes a $15.3 million balloon due in February 2016. Borrowers were in compliance with term-loan covenants at quarter-end, and management forecast compliance for the rest of 2013. Cross-default provisions apply to the revolver and term loan.
- Q1 included $1.2 million of dismantling and demolition expense, a $0.2 million long-lived-asset impairment, and a $0.5 million one-time tax benefit from retroactive tax legislation. The filing reported disclosure controls were effective and no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether Pryor and Cherokee achieved sustained production and whether El Dorado’s replacement projects remain on schedule and within estimated cost.
- Amounts, timing, and final approval of insurance recoveries, including the impact of the Pryor claim denial and the insurers’ reservations of rights on other claims.
- Funding sources and liquidity available for the substantial committed and planned capital program, including whether the proposed ammonia plant proceeds.
- Compliance with debt covenants, availability under the revolver, and plans for the 2016 balloon payments.
- Progress and potential financial exposure from environmental matters, regulatory negotiations, and the Oklahoma investigation.