LSB Industries, Inc. — FY 2017 Form 10-K
Business context and period: Annual report for the year ended December 31, 2017. LSB manufactures nitrogen-based and other chemical products for agricultural, industrial and mining markets, principally at facilities in Arkansas, Alabama and Oklahoma; it also operates a Baytown, Texas facility for Covestro. The Climate Control Business was sold in 2016 and is reported as discontinued operations.
Financial performance and liquidity
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Net sales | $427.5 million | $374.6 million |
| Gross profit (loss) | $5.5 million; 1.3% margin | ($49.3 million); (13.2%) margin |
| Operating loss | ($34.1 million) | ($90.2 million) |
| Loss from continuing operations | ($30.3 million) | ($88.1 million) |
| Net income (loss) | ($29.2 million) | $112.2 million |
| Net income (loss) attributable to common stockholders | ($59.4 million); ($2.18) per share | $64.8 million; $2.54 per share |
| Cash from continuing operations | $2.3 million | ($22.0 million) |
| Capital expenditures | $35.4 million | $212.5 million |
- Revenue rose 14%, reflecting higher agricultural and industrial sales volumes; lower fertilizer prices and weaker mining sales partly offset growth.
- Cash and cash equivalents were $33.6 million at year-end, down from $60.0 million. Current assets were $163.7 million and current liabilities $109.3 million.
- Total debt, including current portion and net of issuance costs, was $409.4 million. This included $375 million of 8.5% Senior Secured Notes due in 2019. The $50 million working-capital revolver was undrawn, with $41.2 million available.
- Series E and F redeemable preferred stock had a $175.0 million carrying value and $185.2 million aggregate liquidation preference. Series E carries a 14% cumulative dividend; holders may elect redemption beginning August 2, 2019. Common dividends were not paid.
Material changes and unusual items
- Operating loss improved by $56.1 million year over year, and gross profit improved by $54.8 million. Drivers included increased volumes and improved El Dorado and Cherokee plant performance, lower fixed plant expenses, and a $2.9 million precious-metals recovery.
- Reported net income swung from 2016 profit to a 2017 loss largely because 2016 included a $282.0 million gain on sale of the Climate Control Business. 2017 discontinued-operations income was $1.1 million.
- Interest expense increased to $37.3 million from $30.9 million, chiefly because substantially less interest was capitalized after the El Dorado expansion was completed. Depreciation rose to $67.0 million from $59.4 million.
- A $23.0 million provisional tax benefit from the 2017 Tax Cuts and Jobs Act contributed to the reported tax benefit; management said the estimate could change with further analysis or guidance.
- Plant outages totaled 158 days in 2017 and management estimated approximately $21 million of lost improvement to operating results. Pryor’s ammonia plant was down 72 days after a September fire and related repairs.
- LSB sold its natural-gas working interests and other non-core assets for approximately $23.8 million in total proceeds; the sales contributed to a $7.0 million net loss on asset and business disposals. The company also recognized $8.1 million of Arkansas incentive tax credits.
Outlook, management commentary and risks
- Management expects 2018 capital improvements of approximately $35 million, including safety and reliability work. Planned turnarounds are expected at El Dorado and Cherokee in the third quarter of 2018.
- Initiatives include plant-reliability and maintenance-system improvements, expanding HDAN and nitric-acid distribution, reviewing customer margins, and centralized procurement. Management estimated procurement efforts could reduce annual expenses and capital spending by $3–$5 million; results are not assured.
- Management reported fertilizer prices had improved beginning in late 2017 and into early 2018, but warned that new U.S. nitrogen capacity could pressure prices. It did not provide formal earnings or revenue guidance.
- Key risks include the 2019 Senior Secured Notes maturity and preferred-stock redemption exposure; plant reliability and unplanned downtime; volatile natural-gas and fertilizer prices; seasonality and weather; customer concentration (seven customers generated approximately 46% of 2017 sales); and environmental, safety and regulatory obligations.
- Contingencies include litigation related to the 2013 West, Texas fertilizer explosion, a supply-contract dispute with BAE (whose pre-litigation demand was approximately $18 million), and a remaining approximately $5 million Global Industrial claim. The filing states that potential losses for these matters could not be reasonably estimated; no related reserve was established except for unpaid settlement amounts where applicable.
- Management stated available cash, revolver capacity and operating cash flow were expected to fund anticipated needs for the next 12 months. That outlook is subject to operating performance, working capital, debt obligations and covenant conditions.
Important facts for investors to verify
- How the company will refinance or repay the $375 million notes due in 2019 and address Series E preferred redemption and cumulative dividends.
- Whether operating cash generation improves enough to fund maintenance capital needs and support the stated liquidity outlook.
- Whether plant reliability recovers after 2017 outages, and whether planned 2018 turnarounds affect production or margins as expected.
- Whether fertilizer pricing and domestic supply-demand conditions support management’s outlook, and whether mining demand remains weak.
- Developments in the disclosed litigation and environmental matters, including potential financial exposure not currently estimable.
Audit: Ernst & Young LLP issued an unqualified opinion on the 2017 consolidated financial statements and internal control over financial reporting.