LSB Industries, Inc. Reports Improved Operating Results for the 2018 Fourth Quarter

OKLAHOMA CITY–(BUSINESS WIRE)–LSB Industries, Inc. (NYSE: LXU) (“LSB” or the “Company”) today
announced results for the fourth quarter ended December 31, 2018.

Fourth Quarter Highlights

  • Net sales of $94.7 million for the fourth quarter of 2018, compared to
    adjusted net sales(1) of $72.3 million for the fourth
    quarter of 2017 ($88.9 million was originally reported for the fourth
    quarter of 2017, which excludes $16.6 million for the comparative
    impact to revenue from new revenue recognition standards adopted in
    2018 primarily related to the Baytown facility, that are not reflected
    in prior year financials).
  • Net loss from continuing operations of $13.0 million for the fourth
    quarter of 2018, compared to net loss of continuing operations of $0.2
    million for the fourth quarter of 2017.
  • Adjusted EBITDA(1) of $23.3 million for the fourth quarter
    of 2018, compared to $1.0 million for the fourth quarter of 2017 ($0.3
    million was originally reported for the fourth quarter of 2017
    including $0.6 million of consulting costs and $0.1 million of
    turnaround).
(1) This is a Non-GAAP measure. Refer to the Non-GAAP
Reconciliation section.
 

“Our fourth quarter results were consistent with our expectations headed
into the period and improved significantly relative to the 2017 fourth
quarter,” stated Mark Behrman, LSB’s President and CEO. “Net sales and
adjusted EBITDA increased as compared to last year driven by stronger
pricing across our agricultural and industrial products and stronger
overall sales volumes, partially offset by the impact of a spike in
natural gas prices that occurred in the latter half of the quarter that
impacted us by approximately $5 million.”

“We were pleased with the operating rates of all three of our
facilities. Cherokee’s ammonia plant ran at a 93% on-stream rate for the
quarter and 94% for the full year. Pryor’s ammonia plant delivered a 97%
on-stream rate for the quarter and for the second half of 2018, and for
the full year ran at 89%. This was Pryor’s best full year performance
since LSB brought the facility online in 2010, which we view as an
indication that the leadership changes and reliability investments we’ve
made, coupled with the maintenance management systems, procedures, and
preventative maintenance programs we’ve been implementing are yielding
positive results. While we anticipate that Pryor may have periods of
unscheduled downtime during 2019 as we continue to take actions to
develop its long-term reliability, we expect these periods of downtime
to be of less magnitude and frequency going forward. We believe we are
on the right path towards achieving Pryor’s potential to generate a
consistent mid-90s on-stream rate for its ammonia plant beginning in
2020. El Dorado’s ammonia plant also performed well, operating at a 98%
on-stream rate in the fourth quarter and 88% for the full year, also
showing continued operating improvement as compared to 2017.”

Mr. Behrman continued, “We realized year-over-year pricing improvement
for all of our major agricultural product categories during the fourth
quarter, with net pricing per ton for agricultural ammonia, UAN, and
HDAN rising 47%, 45%, and 18% respectively, reflecting the continued
absorption of new domestic production capacity along with reduced
volumes of low-priced product being imported into the U.S.”

“Looking ahead to 2019, we expect continued year-over-year improvement
in product pricing, albeit to a lesser degree than what we experienced
in 2018. During the first two months of 2019, U.S. nitrogen prices have
been trending downward due to weak demand for ammonia following a fall
application season that was hampered by a delayed harvest and very wet
weather across the corn belt. As a result, U.S. inventories of ammonia
and related products are now quite high, leading to a price decline that
has continued into the early part of 2019 as heavy snow and extreme cold
temperatures have delayed pre-spring applications. Despite these
weather-related headwinds, we expect that a slowing of U.S. capacity
expansions that we experienced over the past two years, coupled with
global demand for corn that continues to outpace supply, along with what
we believe will be a heavy spring fertilizer application season, will
lead to solid fundamentals for the U.S. nitrogen market for 2019 as a
whole. That is supported by sales prices of product sold in the first
quarter of 2019 and sales prices of forward sales that are above those
in the first quarter of 2018. Selling prices and volumes for our
industrial products during the 2018 fourth quarter were also higher than
the prior year’s fourth quarter, reflecting the continued strength of
the U.S. economy and our increased sales efforts. Sales prices for our
mining products were flat in the fourth quarter of 2018 as compared to
the fourth quarter of 2017, however, volumes improved as a result of our
efforts to expand our customer relationships and strengthen our
marketing activities in this sector.”

“Our overall outlook for 2019 calls for continued year-over-year
increases in our net sales and adjusted EBITDA,” Mr. Behrman concluded.
“While the favorable pricing trends that we experienced in 2018 have
slowed, we still expect to see increased product pricing, further
improvement in the operations of our facilities, and the key benefits of
our sales and marketing efforts, leading to higher sales volumes and
stronger profitability and cash flow for the year.”

         
Three Months Ended December 31,
2018 2017
(Dollars in millions)
Net Sales by Market Sector Net Sales   Sector Mix Adjusted

Net Sales(1)

Sector Mix % Change
Agricultural $ 40.9     43 % $ 32.4

 

45 %

26 %
Industrial 42.9 45 % 29.9

 

41 %

43 %
Mining 11.0   12 % 10.0

 

14 %

10 %
$ 94.7   $ 72.3 31 %
 
(1) Due to the January 1, 2018 adoption of ASC 606, Revenue from
Contracts with Customers (“ASC 606”), certain industrial sales are
no longer recognized. Since we adopted ASC 606 using the “modified
retrospective” method, the prior periods were not restated. However,
if we had applied ASC 606 to these specific arrangements during the
fourth quarter of 2017, net sales for these products would have been
reduced by approximately $16.6 million as illustrated above. See Non
– GAAP reconciliation section for more information.
 

Comparison of 2018 to 2017 periods:

  • Net sales of our agricultural products were up during the quarter
    relative to the prior year period driven by stronger pricing for
    agricultural ammonia, UAN, and HDAN, and to a lesser extent, higher
    sales volumes of Ammonia and UAN. The increased volumes were largely
    attributable to the higher on-stream rates at our Pryor facility,
    partially offset by a weak fall ammonia application.
  • Net sales of our industrial products increased due to higher selling
    prices for our industrial ammonia, which is principally indexed to
    Tampa pricing. This increase is primarily due to tighter ammonia
    supply resulting from a decline in the volume of imports into the U.S.
    Industrial product volumes also improved as compared to the fourth
    quarter of 2017 as a result of higher on-stream rates at our El Dorado
    facility. Mining products, particularly AN solution, saw modest volume
    improvement reflecting our sales and marketing efforts.
  • Operating loss and Adjusted EBITDA improved in the quarter relative to
    the prior year period primarily due to stronger product sales and the
    related improvement of fixed cost absorption from higher production
    rates despite an approximately $5 million impact from higher gas
    prices. Results were also impacted by increased SG&A costs related to
    continued litigation with a subcontractor that was involved in the
    expansion of our El Dorado facility. These headwinds were largely
    offset by a favorable settlement with a subcontractor responsible for
    past faulty work at our Pryor facility where the negative impact to
    our results was recognized in a prior year.

The following tables provide key sales metrics for our Agricultural
products:

    Three Months Ended December 31,

Product (tons sold)

  2018       2017     % Change  
Urea ammonium nitrate (UAN) 103,618 97,852 6 %
High density ammonium nitrate (HDAN) 46,650 48,782 (4 ) %
Ammonia 19,070 13,821 38 %
Other   2,023   4,801 (58 ) %
  171,361   165,256 4 %
 

Average Selling Prices (price per ton) (A)

UAN $ 180 $ 124 45 %
HDAN $ 240 $ 203 18 %
Ammonia $ 316 $ 215 47 %
(A) Average selling prices represent “net back” prices which are
calculated as sales less freight expenses divided by product sales
volume in tons.
 

The following table indicates the volumes sold of our major Industrial
products:

    Three Months Ended December 31,

Product (tons sold)

2018     2017     % Change
Ammonia 67,919 51,572 32 %
Nitric acid, excluding Baytown 35,870 25,375 41 %
Other Industrial Products 7,552 8,665 (13 ) %
111,341 85,612 30 %

The following table indicates the volumes sold of our major Mining
products:

    Three Months Ended December 31,

Product (tons sold)

2018     2017     % Change  
LDAN/HDAN/AN solution 42,277 38,990 8 %

Input Costs

Average natural gas cost/MMBtu $ 3.46 $ 3.00 16 %

Financial Position and Capital Expenditures

As of December 31, 2018, our total cash position was $26.0 million.
Additionally, we had approximately $37.2 million of borrowing
availability under our Working Capital Revolver. We generally have
higher working capital needs in the fourth quarter as we build inventory
going into the spring season. Additionally, during the fourth quarter,
we delivered product to several customers with extended short-term
payment terms as a means of optimizing our inventory and storage
capacity heading into the spring season. We utilize the Working Capital
Revolver to finance working capital fluctuations such as these, and, as
a result, had approximately $10.0 million of borrowings on the facility
at year-end which we expect to receive back in the first half of 2019 as
we sell down the inventory and collect on receivables. Total long-term
debt, including the current portion, was $425.2 million at December 31,
2018 compared to $409.4 million at December 31, 2017. The increase in
long-term debt relates to the refinance of our senior notes which we
completed in the second quarter of 2018. The aggregate liquidation value
of the Series E Redeemable Preferred at December 31, 2018, inclusive of
accrued dividends of $72.3 million, was $212.1 million.

Interest expense for the fourth quarter of 2018 was $11.1 million
compared to $9.3 million for the same period in 2017, and full year 2018
interest expense was $43.1 million. The increase in interest expenses
relates to the refinance of our senior notes which we completed in the
second quarter of 2018.

Capital expenditures were approximately $9.9 million in the fourth
quarter of 2018 and $37.0 million for the full year. For the full year
of 2019, total capital expenditures are expected to be between $30
million and $35 million. This is inclusive of a new sulfuric acid
converter at our El Dorado facility that we plan to install in the
fourth quarter of 2019 at an approximate cost of $7.5 million. We expect
this investment to significantly improve the reliability of that plant
while increasing the production capacity from approximately 140,000 tons
to 160,000 tons allowing us to take advantage of attractive market
conditions. We are finalizing the equipment financing for this capital
project.

Volume Outlook

The Company’s outlook for sales volumes for the full year 2019 are as
follows:

Products

     

Full Year 2019 Sales
(tons)

     

Full Year Actual
2018 Sales

(tons)

Agriculture:                
UAN       460,000 – 480,000       400,000
HDAN       280,000 – 300,000       284,000
Ammonia       95,000 – 115,000       82,000
                 
Industrial, Mining and Other:                
Ammonia       250,000 – 270,000       238,000
LDAN/HDAN and AN solution       175,000 – 195,000       181,000
Nitric Acid and Other Mixed Acids       100,000 – 120,000       110,000
Sulfuric Acid       130,000 – 150,000       137,000
DEF       15,000 – 25,000       13,000
           

Conference Call

LSB’s management will host a conference call covering the fourth quarter
results on Wednesday, February 27, 2019 at 10:00 a.m. ET/9:00 a.m. CT to
discuss these results and recent corporate developments. Participating
in the call will be President & Chief Executive Officer, Mark Behrman,
Senior Vice President & Chief Financial Officer, Cheryl Maguire and
Executive Vice President of Manufacturing, John Diesch. Interested
parties may participate in the call by dialing (201) 493-6739. Please
call in 10 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.lsbindustries.com
on the webcast section of the Investor tab of our website.

To listen to a webcast of the call, please go to the Company’s website
at www.lsbindustries.com
at least 15 minutes prior to 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 Industries, Inc., headquartered in Oklahoma City, Oklahoma,
manufactures and sells chemical products for the agricultural, mining,
and industrial markets. The Company owns and operates facilities in
Cherokee, Alabama, El Dorado, Arkansas and Pryor, Oklahoma, and operates
a facility for a global chemical company in Baytown, Texas. LSB’s
products are sold through distributors and directly to end customers
throughout the United States. Additional information about the Company
can be found on its website at www.lsbindustries.com.

Forward-Looking Statements

This press release contains certain forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements generally are identifiable by use of
the words “may,” “believe,” “expect,” “intend,” “plan to,” “estimate,”
“project” or similar expressions, and include but are not limited to:
financial performance improvement; view on sales to mining customers;
estimates of consolidated depreciation and amortization and future
Turnaround expenses; our expectation of production consistency and
enhanced reliability at our Facilities; our projections of trends in the
fertilizer market; improvement of our financial and operational
performance; our planned capital expenditures for 2019; reduction of
SG&A expenses; volume outlook and our ability to complete plant repairs
as anticipated.

Investors are cautioned that such forward-looking statements are not
guarantees of future performance and involve risk and uncertainties.
Though we believe that expectations reflected in such forward-looking
statements are reasonable, we can give no assurance that such
expectation will prove to be correct. Actual results may differ
materially from the forward-looking statements as a result of various
factors. These and other risk factors are discussed in the Company’s
filings with the Securities and Exchange Commission (SEC), including
those set forth under “Risk Factors” and “Special Note Regarding
Forward-Looking Statements” in our Form 10-K for the year ended December
31, 2018 and, if applicable, our Current Reports on Form 8-K. All
forward-looking statements included in this press release are expressly
qualified in their entirety by such cautionary statements. We expressly
disclaim any obligation to update, amend or clarify any forward-looking
statement to reflect events, new information or circumstances occurring
after the date of this press release except as required by applicable
law.

See Accompanying Tables

LSB Industries, Inc.

Financial Highlights

Three and Twelve Months Ended December 31,

       
December 31, December 31,
Three Months Ended Twelve Months Ended
2018     2017 2018   2017
(In Thousands, Except Per Share Amounts)
Net sales $ 94,730 $ 88,917 $ 378,160 $ 427,504
Cost of sales   82,319   99,121   362,325   422,038
Gross profit (loss) 12,411 (10,204 ) 15,835 5,466
 
Selling, general and administrative expense 15,031 8,238 40,811 34,990
Other expense (income), net   (137 )   2,309   (1,951 )   4,567
Operating loss (2,483 ) (20,751 ) (23,025 ) (34,091 )
 
Interest expense, net 11,056 9,326 43,064 37,267
Loss on extinguishment of debt 5,951
Non-operating other expense (income), net   (1,258 )   103   (1,554 )   (306 )
Loss from continuing operations before provision

(benefit) for income taxes

(12,281 ) (30,180 ) (70,486 ) (71,052 )
Provision (benefit) for income taxes   764   (30,018 )   1,740 (2)   (40,759 )
Loss from continuing operations (13,045 ) (162 ) (72,226 ) (30,293 )
 
Income from discontinued operations, net of taxes     1,076     1,076
Net income (loss) (13,045 ) 914 (72,226 ) (29,217 )
 
Dividends on convertible preferred stocks 75 75 300 300
Dividends on Series E redeemable preferred stock 7,092 6,195 26,840 23,443
Accretion of Series E redeemable preferred stock   493   1,635   3,375   6,487
Net loss attributable to common stockholders $ (20,705) $ (6,991 ) $ (102,741 ) $ (59,447 )
 
Income (loss) per common share:
Basic and diluted:
Loss from continuing operations $ (0.75) $ (0.30 ) $ (3.74 ) $ (2.22 )
Income from discontinued operations, net of taxes     0.04     0.04
Net income (loss) $ (0.75) $ (0.26 ) $ (3.74 ) $ (2.18 )
(1) Due to the January 1, 2018 adoption of ASC 606, Revenue from
Contracts with Customers (“ASC 606”), certain industrial sales and
associated cost of sales are no longer recognized. Since we adopted
ASC 606 using the “modified retrospective” method, the prior periods
were not restated. If we had applied ASC 606 to these specific
arrangements during the fourth quarter and full year of 2017, net
sales for these products would have been reduced by approximately
$16.6 million and $65.4 million, respectively. ASC 606 had no net
impact on operating income. See Non – GAAP reconciliation section
for more information.
(2) During the second quarter of 2018, we established a valuation
allowance on a portion of our federal deferred tax assets (resulting
in an income tax provision) since we currently believe that it is
more-likely-than not that a portion of our federal deferred tax
assets will not be able to be utilized.
 

LSB Industries, Inc.

Consolidated Balance Sheets

   
December 31,
2018     2017
(In Thousands)
Assets
Current assets:
Cash and cash equivalents $ 26,048 $ 33,619
Accounts receivable 67,043 59,873
Allowance for doubtful accounts (351) (303)
Accounts receivable, net 66,692 59,570
Inventories:
Finished goods 27,726 20,415
Raw materials 1,483     1,441
Total inventories 29,209 21,856
Supplies, prepaid items and other:
Prepaid insurance 10,924 10,535
Supplies 24,576 27,729
Prepaid and refundable income taxes 661 1,736
Other   8,303   8,695
Total supplies, prepaid items and other   44,464   48,695
Total current assets 166,413 163,740
 
Property, plant and equipment, net 974,248 1,014,038
 
Intangible and other assets, net 7,672 11,404
       
$ 1,148,333 $ 1,189,182
 

LSB Industries, Inc.

Consolidated Balance Sheets (continued)

   
December 31,
2018       2017
(In Thousands)
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable $ 62,589 $ 55,992
Short-term financing 8,577 8,585
Accrued and other liabilities 42,129 35,573
Current portion of long-term debt   12,518   9,146
Total current liabilities 125,813 109,296
 
Long-term debt, net 412,681 400,253
 
Noncurrent accrued and other liabilities 8,861 11,691
 
Deferred income taxes 56,612 54,787
 
Commitments and contingencies
 
Redeemable preferred stocks:
Series E 14% cumulative, redeemable Class C preferred stock, no par
value,

210,000 shares issued; 139,768 outstanding; aggregate liquidation
preference

of $212,071,000 ($185,231,000 at December 31, 2017)

202,169 174,959
Series F redeemable Class C preferred stock, no par value, 1 share
issued

and outstanding; aggregate liquidation preference of $100

 
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,
31,283,210 shares issued (31,280,685 shares issued at December 31,
2017)
3,128 3,128
Capital in excess of par value 198,482 193,956
Retained earnings   153,773   256,214
358,383 456,298
Less treasury stock, at cost:
Common stock, 2,438,305 shares (2,662,027 shares at December 31,
2017)
  16,186   18,102
Total stockholders’ equity   342,197   438,196
$ 1,148,333 $ 1,189,182
 

LSB Industries, Inc.
Non-GAAP Reconciliation

This news release includes certain “non-GAAP financial measures” under
the rules of the Securities and Exchange Commission, including
Regulation G. These non-GAAP measures are calculated using GAAP amounts
in our consolidated financial statements.

EBITDA Reconciliation

EBITDA is defined as net income (loss) plus interest expense, plus loss
on extinguishment of debt, plus depreciation, depletion and amortization
(DD&A) (which includes DD&A of property, plant and equipment and
amortization of intangible and other assets), plus provision for income
taxes. We believe that certain investors consider EBITDA a useful means
of measuring our ability to meet our debt service obligations and
evaluating our financial performance. EBITDA has limitations and should
not be considered in isolation or as a substitute for net income,
operating income, cash flow from operations or other consolidated income
or cash flow data prepared in accordance with GAAP. Because not all
companies use identical calculations, this presentation of EBITDA may
not be comparable to a similarly titled measure of other companies. The
following table provides a reconciliation of net income (loss) to EBITDA
for the periods indicated.

         

LSB Consolidated

Three Months Ended
December 31,

Twelve Months Ended
December 31,

2018       2017   2018       2017  
(In Millions)
 
Net income (loss) $ (13.0 ) $ 0.9 $ (72.2 ) $ (29.2 )
Plus:
Interest expense 11.1 9.3 43.1 37.3
Loss on extinguishment of debt 6.0
Depreciation, depletion and amortization 17.3 17.3 72.6 69.2
Provision (benefit) for income taxes 0.8 (30.0 ) 1.7 (40.8 )
Income from discontinued operations       (1.1 )       (1.1 )
EBITDA $ 16.1   $ (3.6 ) $ 51.2   $ 35.4  
 

LSB Industries, Inc.
Non-GAAP Reconciliation (continued)

Adjusted EBITDA

Adjusted EBITDA is reported to show the impact of one time/non-cash or
non-operating items-such as, loss (gain) on sale of a business and other
property and equipment, one-time income or fees, certain fair market
value adjustments, non-cash stock-based compensation, and consulting
costs associated with our 2018 reliability and purchasing initiatives.
For comparative purposes, 2017 is also adjusted to remove the impact of
businesses sold during 2017. We historically have performed Turnaround
activities on an annual basis, however we are moving towards extending
Turnarounds to a two or three-year cycle. Rather than being capitalized
and amortized over the period of benefit, our accounting policy is to
recognize the costs as incurred. Given these Turnarounds are essentially
investments that provide benefits over multiple years, they are not
reflective of our operating performance in a given year. As a result, we
believe it is more meaningful for investors to exclude them from our
calculation of adjusted EBITDA used to assess our performance for
comparative 2017 has also been adjusted to remove the impact of
Turnaround maintenance costs.

Contacts

LSB Industries, Inc.:
Mark Behrman, President & CEO
Cheryl
Maguire, Senior Vice President and CFO
(405) 235-4546

Investor
Relations Contact: The Equity Group Inc.

Fred Buonocore, CFA
(212) 836-9607
Kevin Towle (212) 836-9620

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