LSB Industries Inc. reported a 7.7 percent increase in net income for the first quarter ending March 31, 2009, despite the global economic downturn. Net income was $11.7 million ($.51 per diluted share) on sales of $150.2 million, versus the year-ago $10.9 million ($.46 per share) and $160.4 million.
LSB Chairman and CEO Jack Golsen noted that both its Chemical and Climate Control businesses turned in very respectable performances and are on track to achieve long-term growth. In addition, he said the company continued to improve its balance sheet by reducing long-term debt and increasing cash and stockholders’ equity. LSB purchased $5.7 million of its debentures that were due 2012 at a discount to face value.
“Although we had a great first quarter, we see recession related softening of the markets we serve,” said Golsen. “Construction activity is down and we expect sales of our Climate Control business products to be lower this year than in 2008, with the possible exception of our geothermal heat pumps. Lower sales prices of our Chemical business products will also continue to impact our revenues. Despite this, we continue to invest in the areas that we believe have long-term strategic growth potential for LSB.” LSB is restarting its Pryor, Okla., plant in the third quarter, with Koch Nitrogen Co. taking the offtake production (GM May 11, p. 1).
The Chemical business had first-quarter operating income of $12.6 million on sales of $74.5 million, versus the year-ago $12.1 million and $91.3 million, respectively. Gross profits were $17.1 million, up from $15.3 million.
The company said $2.5 million of Chemical profit margin in excess of current market prices was due to firm sales price commitments made in 2008, when prices were higher than in 2009. The company also earned $2.2 million from the recovery of precious metals used in the Chemical business as catalysts. The business lost $1.6 million on natural gas and ammonia hedge contracts, compared to gains of $600,000 in the year-ago quarter.
First-quarter Chemical profits were impacted by $2 million spent in the first quarter to bring the Pryor Chemical Co. nitrogen plant up; $421,000 was spent on the Pryor project in the year-ago quarter. The company said current startup expense at Pryor is about $1 million per month, and it expects the remaining startup costs after March 31, 2009, to be $7-$9 million. It expects to spend another $5-$6 million for capital equipment to complete the start-up.
LSB expects the Pryor plant to initially produce 325,000 st/y of UAN and 35,000 st/y of anhydrous ammonia. It said the Koch contract is for a take-or-pay fixed volume at market price. “At current market prices we estimate an average net sales price per ton of UAN to range from approximately $175 per ton to $185 per ton,” said Golsen. “Remember, this will definitely change over time as market conditions change.” He added that LSB is considering the addition of other industrial products at Pryor, and is discussing this with industrial customers.
The dip in Chemical sales was attributed to lower selling prices caused by the steep decline in worldwide commodity prices, coupled with lower tons shipped of UAN and most industrial and mining products, offset partially by higher tons shipped of ammonium nitrate.
LSB said UAN tons were down due to high inventory levels in the distribution chain and less than optimum weather conditions, as well as fewer acres of wheat being planted than last year. Lower shipments of industrial and mining products were due to generally lower demand for industrial products because of the economic downturn.
Chemical agricultural sales were $32.8 million, 5 percent lower than the year-ago period. UAN shipments from the Cherokee, Ala., plant were 39 percent lower than the year-ago period, and revenues decreased 49 percent. “During the past year, total imports and domestic production were approximately 1.5 million tons too high for the total market,” said Barry Golsen, LSB president and vice chairman.
Ag grade AN from the El Dorado, Ark., plant saw a 36.4 percent increase in revenues, reflecting higher tons shipped, but lower sales prices per ton. Tons shipped were up 80.1 percent over the first quarter 2008.
This year LSB expects fewer AN imports, making the fundamentals more favorable to U.S. producers. The company expects to run its ag grade AN at full production through the spring season, and put current AN pricing at the $250/st FOB production point.
As for its industrial chemical products, LSB said those sales were $25.2 million in the first quarter, down 32 percent versus a year ago. It is experiencing softer demand and prices.
Most of the Chemical business is industrial and mining sales, which were 63 percent of the total chemical sales during 2008. About 85 percent of these are sold pursuant to agreements that have either a minimum purchase requirement or a fixed total contract profit irrespective of the volume taken by the customer. Therefore, LSB is somewhat insulated from a potential downturn in demand for industrial products.
LSB also noted that its input costs – natural gas for Cherokee and anhydrous ammonia for El Dorado – sank in the first quarter. It said that approximately one-half of El Dorado sales are to customers who accept the cost of ammonia as a pass through.
Climate Control operating income was off slightly, to $9 million on sales of $72 million from the year-ago $9.3 million and $66.3 million. Gross profits were up, at $22.4 million from $21.5 million. While the company is concerned over the economic downturn, there are some pluses: some of its large industrial customers have minimum purchase contracts; the national stimulus package could boost sales for the Climate Control business, as billions will be spent to modernize federal buildings; and a new 30 percent tax credit should aid the sales of residential geothermal heat pumps.