LSB Industries, Inc. (LSB Industries), a US-based diversified holding company, has reported net sales of $150.2 million for the first quarter of 2009, down 6.4%, compared with the net sales of $160.5 million in the year-ago quarter. It has also reported net income of $11.7 million, or $0.51 per diluted share, for the first quarter of 2009, up 7.7%, compared with net income of $10.9 million, or $0.46 per diluted share, in the year-ago quarter.
First Quarter 2009 Financial Highlights Compared to First Quarter 2008:
Operating income was $19.4 million compared to $19.3 million;
Net income applicable to common shareholders increased 7.9% to $11.4 million from $10.6 million.
Items Affecting Comparability of First Quarter 2009 Results to First Quarter 2008:
The first quarter 2009 gross profit includes:
Climate Control Business gains on copper hedging contracts of $.5 million compared to $2.6 million in the same quarter last year;
$2.5 million profit margin on Chemical Business sales in excess of current market prices due to firm sales price commitments made in 2008, when prices were higher than in 2009;
$2.2 million from the recovery of precious metals used in the Chemical Business as catalysts;
Chemical Business losses on natural gas and ammonia hedge contracts of $1.6 million compared to gains of $.6 million in the 2008 quarter.
Chemical Business 2009 operating income below the gross profit line was reduced by expenses of $2.0 million compared to $.4 million in the same period last year associated with the start-up of the Pryor Facility.
Also included in the 2009 pre-tax income, is a gain of $1.3 million from extinguishment of debt, as a result of acquiring $5.7 million of our Debentures Due 2012, below face value.
Review of First Quarter Results:
Climate Control Business:
Net sales for the Climate Control Business totaled $72.0 million, an 8.6% increase over the first quarter of 2008 primarily due to increases in sales of geothermal and water source heat pumps, offset by a decline in sales of hydronic fan coils and other Climate Control products. The outstanding performer during the quarter were residential geothermal heat pumps, with sales and new order bookings that were higher than the first quarter of 2008.
The gross margin of the Climate Control Business was 31.1%, down from 32.5% in the same period last year. However, eliminating the copper hedge gains discussed above from both periods, the gross profit increased in the first quarter 2009 compared to the first quarter 2008. As noted above, the gross margin benefit from gains on copper hedging contracts was $.5 million in 2009, compared to $2.6 million in 2008.
Segment operating income declined 3.7% from the same period in 2008. Again, the period-over period decline was due to higher copper hedging gains in the 2008 first quarter. Without those hedging gains in both periods, our operating profit would have improved in the first quarter 2009 from the first quarter of 2008.
In addition to the difference in copper hedging gains in the two periods, during the 2009 first quarter, sales expenses were higher than the first quarter of 2008 due to increased sales and marketing personnel, primarily focused on our geothermal heat pumps.
Bookings of new product orders during the first quarter were $54.9 million, a 22% decline from the first quarter of 2008. Lower bookings were generally due to the lower level of commercial construction activity, caused by the recession, offset partially by increased order levels for residential geothermal heat pumps.
At March 31, 2009, the backlog of product orders was $56.8 million compared to $68.5 million at December 31, 2008.
Chemical Business:
Net sales for the Chemical Business totaled $74.5 million, an 18.5% decline from the first quarter of 2008. The decrease in sales was primarily due to decreases in the selling prices of Chemical Business products, caused by the steep decline in worldwide commodity prices, coupled with lower tons shipped of urea ammonium nitrate (UAN) fertilizer and most industrial and mining products, offset partially by higher tons shipped of ammonium nitrate (AN) fertilizer.
Shipments of UAN fertilizer were affected by high inventory levels in the distribution chain left over from last year, less than optimum weather conditions in the market areas the company serves, and fewer acres of wheat planted than last year. Lower shipments of industrial and mining products were due to generally lower demand for industrial products caused by the economic downturn.
The gross margin of the Chemical Business was 23%, up from 17% in the same period last year. Eliminating the items discussed above that impacted gross profit (gross profit in excess of current market prices, effects of natural gas and ammonia hedge contracts and recovery of precious metals) from both periods, the gross profit percentage increased in the first quarter of 2009 from the same period in 2008.
Segment operating income increased 4% from the same period in 2008. Part of the period-over-period increase was due to the items discussed above partially offset by the start-up costs related to the Pryor Facility. Without those items in both periods, the company’s operating income would have decreased slightly.
During the first quarter 2009, the company was able to maintain profitability, despite lower selling prices of the products the company produced, because the primary raw material feedstocks we use also declined in price compared to the first quarter of 2008.
Chief Executive Officer’s Remarks:
Jack Golsen, LSB’s board chairman and chief executive officer stated: “LSB started the year on an especially strong note considering the economic conditions. Both our Chemical and Climate Control businesses turned in very respectable numbers and they both are on track to achieve long-term growth. We just signed an off-take agreement with Koch Nitrogen Company for substantially all of the UAN production at our Pryor, Oklahoma plant, and production at that facility is expected to start during third quarter, barring delays. We also recently committed to construction on another 78,000 square foot addition to our ClimateMaster geothermal and water source heat pump manufacturing facility. We are continuing to increase our sales and marketing efforts for those products. We believe that the recently enacted federal tax credits for geothermal heat pumps will positively impact sales of those highly energy-efficient and green products.”
“During the first quarter we continued to improve our balance sheet, by reducing long-term debt, and increasing cash and stockholders’ equity. In addition to profit from our operations, we were able to purchase $5.7 million of our Debentures that are due in 2012 at a discount to face value.”
“Although we had a great first quarter, we see certain headwinds associated with recession related softening of the markets we serve. 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.”