LSB Industries, Inc. Reports Results For The 2012 Second Quarter

LSB Industries, Inc. (NYSE: LXU) announced today results for the second quarter ended June 30, 2012.

Second Quarter 2012 Financial Highlights Compared to Second Quarter 2011:
  • Sales were $209.3 million compared to $235.6 million;
  • Operating income was $42.3 million compared to $48.3 million;
  • Net income and net income applicable to common shareholders were $26.0 million compared to $28.6 million; and
  • Diluted earnings per common share were $1.11 compared to $1.22.

Discussion of Second Quarter of 2012:

The $26.3 million decrease in consolidated sales was primarily the result of a $17.5 million or 11.2% decrease in Chemical Business’ sales and a $9.6 million or 12.5% decrease in Climate Control Business’ sales.

Our consolidated operating income was $42.3 million for the second quarter of 2012 compared to $48.3 million for the same period in 2011. The $6.0 million decrease in operating income includes $3.6 million in our Chemical Business and $1.9 million in our Climate Control Business. Additionally, the second quarter of 2011 included an insurance recovery of $8.6 million (recorded as a reduction to cost of sales) relating to a business interruption claim relating to our Chemical Business.
  • The Chemical Business’ sales and operating income were adversely affected by unplanned downtime events:
    • We estimate the Pryor, Oklahoma chemical plant (the “Pryor Facility”) lost approximately 70,000 tons of potential urea ammonia nitrate (“UAN”) sales due to the unplanned downtime of its urea reactor. The impact of the lost UAN production was partially offset by the continued production and sales of anhydrous ammonia, primarily into its agricultural markets. We estimate the unplanned downtime at the Pryor Facility reduced the Chemical Business’ operating income, including lost absorption and gross profit margins, by approximately $10 million during the quarter. The urea reactor was returned to service in July 2012.
    • The El Dorado, Arkansas chemical plant (“El Dorado Facility”) lost all nitric and sulfuric acid production on May 15, 2012 when a reactor in its 98% concentrated nitric acid plant (“DSN plant”) exploded destroying the DSN plant and damaging the other three regular concentration nitric acid plants and the sulfuric acid plant. Without acid production for the remainder of the second quarter, all production at the El Dorado Facility was lower than would have been expected resulting in lost absorption and gross profit margins. We estimate that the event reduced the Chemical Business’ operating income for the second quarter by approximately $7 million. Currently, two of the three regular concentration nitric acid plants are back in production and the third plant is expected to be back in production by the end of August. Repairs to the sulfuric acid plant should be complete and production of sulfuric acid should restart in the fourth quarter.
  • The decrease in the Climate Control Business’ operating income was primarily due to lower sales volume.

First Six Months 2012 Financial Highlights Compared to First Six Months 2011:
  • Sales were $399.5 million compared to $413.1 million;
  • Operating income was $65.4 million compared to $82.3 million;
  • Net income was $40.3 million compared to $49.5 million;
  • Net income applicable to common shareholders was $40.0 million compared to $49.2 million; and
  • Diluted earnings per common share were $1.72 compared to $2.12.

The $13.6 million decrease in sales included a $4.7 million decrease in the Chemical Business and a $10.5 million decrease in the Climate Control Business. The decrease in consolidated operating income for the period was the result of decreases in the Chemical and Climate Control Businesses’ operating income of $12.3 million and $4.5 million, respectively.

Second Quarter Chemical Business Overview:

Our Chemical Business’ sales for the second quarter of 2012 were $138.1 million, a decrease of $17.5 million compared to the same period in 2011, which includes a $6.6 million decrease in industrial acids and other products sales and a $12.6 million decrease in mining products sales partially offset by a $1.7 million increase in agricultural products sales.

The downtime at our El Dorado Facility curtailed production of mining and industrial acids. In addition, sales of mining products declined due to a warmer than normal winter in North America which reduced demand for coal, resulting in excess coal inventories. Also with lower natural gas prices, certain utility companies switched fuel from coal to natural gas.

Second Quarter Climate Control Business Overview:

Net sales for the Climate Control Business were $67.5 million, or approximately $9.6 million below the same period in 2011, and included a $6.5 million decrease in geothermal and water source heat pump sales, a $1.9 million decrease in hydronic fan coil sales, and a $1.2 million decrease in other HVAC sales. Generally, the overall decline can be attributed to the lower beginning backlog entering the 2012 second quarter related to lower order intake during the first quarter of 2012. The overall decrease in net sales resulted in an approximately $1.9 million decrease in operating income.

Bookings of new product orders were $66.8 million in the second quarter of 2012 compared to $64.3 million for the second quarter of 2011, an increase of 3.8%. As compared to the second quarter of last year, orders for commercial/institutional products increased 6.6% and orders for residential product orders decreased 7.6%.

CEO’s Remarks:

Jack Golsen, LSB’s Board Chairman and CEO stated, “We were disappointed that net income and earnings per share for the second quarter were lower than last year’s second quarter, although we feel the results were remarkable considering the explosion and downtime at our El Dorado Facility and the repairs that were under-way at the Pryor Facility.”

Regarding El Dorado, Mr. Golsen said, “We have made good progress at El Dorado. Two of the three regular nitric acid plants are already back in production and we expect the third one to restart by the end of August. Sulfuric acid production should restart during the fourth quarter. Our 98% nitric acid plant was destroyed, but we plan to build a new nitric acid plant.”

Turning to Pryor, Mr. Golsen continued, “The repairs to the urea reactor at the Pryor Facility were completed. However, we have had continual problems with the ammonia converter at the main ammonia plant. These problems have prevented us from reaching optimum production rates. We plan to replace the converter and make other modifications in early 2013 that should allow us to achieve our targeted rates.”

Mr. Golsen concluded, “We are optimistic about the prospects for our agrochemical business, as most agricultural fundamentals remain strong. Whereas the current markets for our Climate Control products are soft, that business is well positioned to take advantage of the economic recovery when it occurs.”

Balance Sheet:

Mr. Golsen noted, “Our financial condition has continued to strengthen. At June 30, 2012, stockholders’ equity was $335 million and our long-term debt to equity ratio was 0.2 to 1.”

Conference Call

LSB’s management will host a conference call covering the second quarter results on August 8, 2012 at 5:15 pm EDT/4:15 pm CDT to discuss these results and recent corporate developments. Participating in the call will be Chairman and CEO, Jack E. Golsen; President and COO, Barry H. Golsen; and Executive Vice President and CFO, Tony M. Shelby. Interested parties may participate in the call by dialing (201) 493-6739. Please call in ten minutes before the conference is scheduled to begin and ask for the LSB conference call. To coincide with the conference call, LSB will post a slide presentation at www.lsb-okc.com on the webcast section of Investor Info tab.

To listen to a webcast of the call, please go to the Company’s website at www.lsb-okc.com at least 15 minutes before the conference call to download and install any necessary audio software. If you are unable to listen live, the conference call webcast will be archived on the Company’s website. We suggest listeners use Microsoft Explorer as their web browser.

LSB Industries, Inc.

LSB is a manufacturing and marketing company. LSB’s principal business activities consist of the manufacture and sale of commercial and residential climate control products, such as geothermal and water source heat pumps, hydronic fan coils, modular chillers and large custom air handlers; and the manufacture and sale of chemical products for the agricultural, mining and industrial markets.

This press release contains certain forward-looking statements within the meaning of the Private Securities Litigation Act of 1995. These forward-looking statements generally are identifiable by use of the words “believe,” “expects,” “intends,” “plans to,” “estimates,” “projects” or similar expressions, and such forward-looking statements include, but are not limited to, that the third nitric acid plant is expected back in production by the end of August; that we plan to build a new nitric acid plant; that sulfuric acid production at the El Dorado facility should start during the fourth quarter; that the other modifications to the Pryor Urea plant in early 2013 should allow us to achieve our targeted rates; and that the Climate Control Business is well positioned to take advantage of the economic recovery when it occurs. Investors are cautioned that such forward-looking statements are not guarantees of future performance and involve risk and uncertainties, and that actual results may differ materially from the forward-looking statements as a result of various factors, including, but not limited to, general economic conditions, effect of the recession on the commercial and residential construction industry, acceptance by the market of our geothermal heat pump products, acceptance of our technology, changes to federal legislation or adverse regulations, available working capital, ability to install necessary equipment and renovations at the Pryor and El Dorado facilities in a timely manner, insurance coverage to repair or replace the damaged facilities is denied or materially limited; weather conditions; inability to obtain in a timely manner any necessary regulatory approvals; ability to finance our investments, and other factors set forth under “A Special Note Regarding Forward-Looking Statements”, a discussion of a variety of factors which could cause the future outcome to differ materially from the forward-looking statements contained in this letter, and the Form 10-K for year ended December 31, 2011, and the Form 10Qs for the quarters ended March 31, 2012 and June 30, 2012.

LSB Industries, Inc.
Unaudited Financial Highlights
Six Months and Three Months Ended June 30, 2012 and 2011
 
  Six Months     Three Months
2012   2011 2012   2011
(in thousands, except per share amounts)
 
Net sales $ 399,520 $ 413,112 $ 209,275 $ 235,619
Cost of sales   289,341     287,172     143,540     163,533  
Gross profit 110,179 125,940 65,735 72,086
 
Selling, general and administrative expense 44,277 43,102 22,886 22,517
Provisions for losses on accounts receivable 123 121 83 79
Other expense 722 2,383 555 2,321
Other income   (348 )   (1,977 )   (112 )   (1,105 )
Operating income 65,405 82,311 42,323 48,274
 
Interest expense 2,311 3,580 1,179 1,868
Losses on extinguishment of debt - 136 - 136
Non-operating other expense (income), net   (272 )   (5 )   (267 )   2  

Income from continuing operations before provisions for income taxes and equity in earnings and losses of affiliate
63,366 78,600 41,411 46,268
Provisions for income taxes 23,253 29,149 15,451 17,492
Equity in losses (earnings) of affiliate   (341 )   (207 )   (170 )   78  
Income from continuing operations 40,454 49,658 26,130 28,698
 
Net loss from discontinued operations   118     110     97     53  
Net income 40,336 49,548 26,033 28,645
 
Dividends on preferred stocks   300     305     -     -  
Net income applicable to common stock $ 40,036   $ 49,243   $ 26,033   $ 28,645  
 
Weighted-average common shares:
Basic   22,332     21,657     22,341     22,133  
Diluted   23,516     23,485     23,509     23,526  
 
Income per common share:
Basic $ 1.79   $ 2.27   $ 1.17   $ 1.29  
Diluted $ 1.72   $ 2.12   $ 1.11   $ 1.22  
 

LSB Industries, Inc.

Notes to Unaudited Financial Highlights

Six Months and Three Months Ended June 30, 2012 and 2011
 

Note 1:
 

Net income applicable to common stock is computed by adjusting net income by the amount of preferred stock dividends and dividend requirements, if applicable. Basic income per common share is based upon net income applicable to common stock and the weighted-average number of common shares outstanding during each period.
 

Diluted income per share is based on net income applicable to common stock plus preferred stock dividends and dividend requirements on preferred stock assumed to be converted, if dilutive, and interest expense including amortization of debt issuance costs, net of income taxes, on convertible debt assumed to be converted, if dilutive, and the weighted-average number of common shares and dilutive common equivalent shares outstanding, and the assumed conversion of dilutive convertible securities outstanding.
 

Note 2:

Provisions for income taxes are as follows:
  Six Months Ended     Three Months Ended          
June 30, June 30,
2012   2011 2012   2011
(in thousands)
Current:
Federal $ 17,441 $ 21,914 $ 12,051 $ 12,766
State   3,273   5,669   2,198   3,123
Total current   20,714   27,583   14,249   15,889
 
Deferred:
Federal 2,220 1,378 1,049 1,414
State   319   188   153   189
Total deferred   2,539   1,566   1,202   1,603
Provision for income taxes $ 23,253 $ 29,149 $ 15,451 $ 17,492
 

The current provision for federal income taxes shown above includes regular income tax after the consideration of permanent and temporary differences between income for GAAP and tax purposes. For the six and three months ended June 30, 2012 and 2011, the current provision for state income taxes shown above includes regular state income tax and provisions for uncertain state income tax provisions.
 

Note 3:

Property and Business Interruption Insurance Claims:
 

Beginning February 27, 2012, the Pryor Facility experienced unplanned downtime in the urea plant due to a damaged stainless steel liner within the urea reactor. As a result, the Pryor Facility was unable to produce UAN through the end of the second quarter of 2012. A notice of insurance claims for property damage and business interruption was filed with the insurance carrier but the total amount has not been determined. Our insurance policy provides for replacement cost coverage relating to property damage with a $1.0 million deductible and provides for business interruption coverage for certain lost profits and extra expense with a 30-day waiting period. We received a reservation of rights letter from the insurance company. A recovery, if any, from our insurance coverage has not been recognized for accounting purposes since it is not probable and reasonably estimable and/or it is considered a gain contingency, which will be recognized if, and when, realized or realizable and earned.
 

On May 15, 2012, the El Dorado Facility suffered significant damage when a reactor in its DSN plant exploded. Due to extensive damages, the DSN plant is not being repaired but is being replaced with a new 65% concentrated nitric acid plant and a separate nitric acid concentration plant. In addition, several other plants and infrastructure within the El Dorado Facility sustained various degrees of damage. A notice of insurance claims for property damage and business interruption was filed with the insurance carriers but the total amounts have not been determined but are expected to be substantial. Because our replacement cost coverage for property damages is estimated to exceed our property loss deductible, the net book value of the damaged property and other recoverable costs incurred through June 30, 2012, we did not recognize a loss relating to property damage from this explosion but we recorded an insurance claim receivable relating to this event. The insurance claim receivable primarily consists of the disposal of the net book value of damaged property. As of June 30, 2012, the balance of the insurance claim receivable relating to this event was $13.5 million. In general, if, and when, a recovery from our insurance coverage exceeds the balance of the insurance claim receivable, a gain will be recognized.
 

Note 4:

Information about the Company’s operations in different industry segments for the six and three months ended June 30, 2012 and 2011 is detailed on the following page.
 
LSB Industries, Inc.
Notes to Unaudited Financial Highlights
 
 

Six Months Ended
   

Three Months Ended

June 30,

June 30,
2012   2011 2012   2011
Net sales: (in thousands)
Climate Control $ 130,304 $ 140,824 $ 67,546 $ 77,175
Chemical (1) 262,339 267,051 138,134 155,620
Other   6,877     5,237     3,595     2,824  
$ 399,520   $ 413,112   $ 209,275   $ 235,619  
Gross Profit: (2)
Climate Control $ 40,435 $ 44,881 $ 20,989 $ 23,395
Chemical (1) 67,498 79,112 43,500 47,644
Other   2,246     1,947     1,246     1,047  
$ 110,179   $ 125,940   $ 65,735   $ 72,086  
Operating income: (3)
Climate Control $ 13,151 $ 17,619 $ 7,313 $ 9,178
Chemical (1) 59,494 71,818 39,147 42,720

General corporate expenses and other business operations, net
  (7,240 )   (7,126 )   (4,137 )   (3,624 )
65,405 82,311 42,323 48,274
 
Interest expense (2,311 ) (3,580 ) (1,179 ) (1,868 )
Losses on extinguishment of debt - (136 ) - (136 )
Non-operating other income (expense), net:
Climate Control - 1 - -
Chemical - 1 - 1
Corporate and other business operations 272 3 267 (3 )
Provisions for income taxes (23,253 ) (29,149 ) (15,451 ) (17,492 )

Equity in earnings (losses) of affiliate, Climate Control
  341     207     170     (78 )
Income from continuing operations $ 40,454   $ 49,658   $ 26,130   $ 28,698  
 

LSB Industries, Inc.

Notes to Unaudited Financial Highlights

Six Months and Three Months Ended June 30, 2012 and 2011
 

(1)
 

During January 2012, a planned improvement project was performed at the Pryor Facility to increase anhydrous ammonia production levels, during which time the facility was not in production. In addition, the Pryor Facility experienced certain unplanned downtime in the ammonia and urea plants. The ammonia plant production was shut-down for a portion of March 2012 while the repairs were performed. The repairs to the urea plant were extensive resulting in the urea plant being shut-down from late February 2012 through June 2012. As a result, the Pryor Facility was unable to produce UAN during this time frame. On May 15, 2012, the El Dorado Facility suffered significant damage when a reactor in the DSN plant exploded. As a result, the DSN plant was severely damaged and several other plants and infrastructure within the El Dorado Facility sustained various degrees of damage. Therefore, the El Dorado Facility had only limited production of certain products during the remainder of the second quarter of 2012. As a result, the operating results of the Chemical Business for the six and three months ended June 30, 2012, were negatively impacted by the downtime of the Pryor and El Dorado Facilities. For the six and three months ended June 30, 2011, the Chemical Business recognized an insurance recovery of $8.6 million relating to a business interruption claim, which was recorded as a reduction to cost of sales.
 

(2)

Gross profit by industry segment represents net sales less cost of sales. Gross profit classified as “Other” relates to the sales of industrial machinery and related components.
 

(3)

Our chief operating decision makers use operating income by business segment for purposes of making decisions, which include resource allocations and performance evaluations. Operating income by business segment represents gross profit by business segment less selling, general and administrative expense (“SG&A”) incurred by each business segment plus other income and other expense earned/ incurred by each business segment before general corporate expenses and other business operations, net. General corporate expenses and other business operations, net, consist of unallocated portions of gross profit, SG&A, other income and other expense.

 
LSB Industries, Inc.
Consolidated Balance Sheets
(information at June 30, 2012 is unaudited)
 
  June 30,   December 31,
2012 2011
(in thousands)
Assets
Current assets:
Cash and cash equivalents $ 138,699 $ 124,929
Restricted cash 239 31
Short-term investments 10,006 10,005
Accounts receivable, net 97,375 87,351
Inventories:
Finished goods 24,868 29,009
Work in progress 4,931 4,855
Raw materials   28,023   25,642
Total inventories 57,822 59,506
Supplies, prepaid items and other:
Prepaid insurance 2,963 5,953
Precious metals 15,453 17,777
Supplies 8,533 7,513
Fair value of derivatives and other 42 53
Prepaid income taxes 1,619 8,679
Other   2,379   2,034
Total supplies, prepaid items and other 30,989 42,009
Deferred income taxes   3,505   4,275
 
Total current assets 338,635 328,106
 
Property, plant and equipment, net 179,009 164,547
 
Other assets:
Investment in affiliate 2,396 2,910
Goodwill 1,724 1,724
Other, net   6,332   4,722
Total other assets   10,452   9,356
$ 528,096 $ 502,009
 

(continued on following page)
 
LSB Industries, Inc.
Consolidated Balance Sheets (continued)
(information at June 30, 2012 is unaudited)
 
June 30, December 31,
2012 2011
(in thousands)
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 51,002 $ 57,891
Short-term financing 2,270 5,646
Accrued and other liabilities 25,407 28,677
Current portion of long-term debt   4,764   4,935
Total current liabilities 83,443 97,149
 
Long-term debt 70,051 74,525
 
Noncurrent accrued and other liabilities 16,310 15,239
 
Deferred income taxes 23,595 21,826
 
Commitments and contingencies
 
Stockholders' equity:

Series B 12% cumulative, convertible preferred stock, $100 par value; 20,000 shares issued and outstanding
2,000 2,000

Series D 6% cumulative, convertible Class C preferred stock, no par value; 1,000,000 shares issued and outstanding
1,000 1,000

Common stock, $.10 par value; 75,000,000 shares authorized, 26,679,530 shares issued (26,638,285 at December 31, 2011)
2,668 2,664
Capital in excess of par value 163,479 162,092
Retained earnings   193,924   153,888
363,071 321,644
Less treasury stock at cost:
Common stock, 4,320,462 shares   28,374   28,374
Total stockholders' equity   334,697   293,270
$ 528,096 $ 502,009

Copyright Business Wire 2010

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