LSB Industries, Inc. (LSB Industries), a US based diversified holding company, has reported net sales of $749 million for the year-end 2008, up 27.7%, compared with the net sales of $586.4 million in the previous year-end. It has also reported a net income of $36.5 million, or $1.58 per diluted share, for the year-end 2008, compared with the net income of $46.9 million, or $1.84 per diluted share, in the previous year-end.
Fourth Quarter 2008 Compared to Fourth Quarter 2007:
Net sales increased 33.3% to $179.5 million from $134.7 million;
Climate Control sales increased 24.9% to $81.1 million from $64.9 million;
Chemical Business sales rose 42.7% to $94.8 million from $66.4 million;
Operating income declined to $1.8 million from $11.2 million;
Operating income before unusual items, shown in the table below, was $9.0 million compared to $9.1 million in the fourth quarter of 2007;
Net income was $3.6 million or $0.16 per diluted share compared to net income of $4.5 million or $0.20 per diluted share.
Tony Shelby, chief financial officer, commented, “As noted in the table below, the decline in fourth quarter operating income was partly attributable to certain unusual loss items primarily related to the steep decline in commodities and the effects of the general economic slowdown, both occurring in the latter half of 2008.”
Commenting further, he mentioned, “Non-operating income for the fourth quarter 2008 included a $5.5 million pre-tax gain from the repurchase of a portion of the company’s subordinated debentures partially offset by a $3.0 million loss on interest rate hedge positions included in interest expense.”
Shelby continued, “Income taxes for the quarter included a benefit of $1.0 million compared to a provision of $3.6 million in the 2007 quarter. The fourth quarter tax benefit of $1.0 million consisted of a tax provision at statutory rates offset by state tax credits, certain true-ups of the actual tax for 2007 based upon returns filed and an approximate $1.3 million deferred tax asset for state net operating loss carryforwards not previously reflected.”
2008 Compared to 2007:
Climate Control sales increased 8.7% to $311.4 million from $286.4 million;
Chemical Business sales rose 46.8% to $424.1 million from $288.8 million;
Operating income was $59.2 million compared to $59.0 million.
In 2008, in addition to the unusual loss items in the fourth quarter, the 2008 operating income was negatively impacted by additional unrealized losses relating to commodities contracts still held at year-end of $2.3 million, and $5.1 million as a result of unplanned downtime in the third quarter at the Cherokee Facility, which was offset by operating other income of $7.6 million from a litigation judgment.
In 2007, operating income benefited by $7.1 million from a $3.3 million litigation settlement and a $3.8 million insurance recovery.
In 2008, the tax provision was about $18.8 million compared to $2.5 million in 2007;
Jack Golsen, chairman and chief executive officer of LSB Industries commented, “We just completed a year with the highest sales and pre-tax income in the history of LSB. Considering the economic turmoil and downturn that occurred in 2008, we believe our results were more than acceptable. Even though the recession has continued into 2009 and it could have certain adverse effects on us, we remain optimistic about LSB’s long-term upside potential. In 2009 we will minimize our controllable costs to adjust to the economic conditions. In spite of this, we are undertaking certain strategic initiatives that are important to the long-term growth of LSB. We will not curtail these programs in an effort to boost short-term profits to the detriment of medium and long-term growth for LSB. Fortunately, we are entering 2009 with a strong balance sheet and adequate liquidity to execute our plan and grow our business.”
Barry Golsen, LSB’s president and chief operating officer, discussing results of operations and recent events, commented about LSB’s Climate Control Business, “For the fourth quarter, sales and operating income were both up 25% over 2007’s fourth quarter and for the full year, sales were up 9%. The 25% improvement in the fourth quarter sales and segment operating income were driven by an increase in geothermal and water source heat pump sales. The backlog for all Climate Control products at year-end 2008 was $68.5 million, providing solid support going into the first quarter of 2009. Orders for all Climate Control products in the final quarter of 2008 were $59.1 million compared to the $82.3 million average for the first three quarters of 2008. Some of this reduction was seasonal and some was due to the current economic downturn.”
He continued, “We believe that the current recession, will result in lower Climate Control sales in 2009. However, in this economy, it is difficult to forecast what will actually happen.
“For the full year 2008, residential geothermal heat pump sales increased about 82% compared to 2007, and new orders for these products were about two-and-one-half times the prior year. This is the most promising and fastest growing product line in LSB’s Climate Control Business: In spite of the recession, we see growth opportunities for geothermal heat pumps continuing in 2009, in part because of the tax credits and incentives under the American Reinvestment and Recovery Act of 2009, plus several billion dollars of planned direct spending by the federal government also contained in the Act. The provisions of the stimulus package could positively impact sales of our geothermal heat pump products, as well as other products we produce and sell that can be used to modernize federally owned and operated buildings, military installations, public housing and hospitals. The new legislation extends and expands federal tax credits for individuals who install geothermal systems in their residences to 30% of the total installed costs. Businesses are eligible for a federal tax credit equal to 10% of the total system cost, 50% first year bonus depreciation, and five year accelerated depreciation for the balance of the cost. Although we have more than doubled our manufacturing floor space for our heat pump products in the past two years, we are currently planning another 78,000 square foot expansion of our manufacturing facility and a 40,000 square foot expansion of our air coil production facility.”
Turning to LSB’s Chemical Business, Barry Golsen stated, “Sales for the fourth quarter increased by 43% and for the year, sales for the Chemical Business increased 47%. Our operating profit in the Chemical Business was lower than the prior year, but it was impacted by certain unusual non-cash items totaling $7.2 million as reflected in the table above. Also, in the 2007 fourth quarter we had a $2.3 million gain from an insurance recovery. Excluding those unusual items in both years, Chemical’s operating income was about the same as 2007.”
He continued, “Looking forward, indicators point to our Chemical Business’s 2009 agricultural product sales volume in tons shipped to be about the same as 2008 levels. However, due to the steep price declines in most commodities in the latter half of 2008, including the anhydrous ammonia and natural gas we use as feedstocks for our plants, as well as the lower selling prices per ton for our Chemical products, our sales dollars should be less. With regard to agricultural chemicals, industry sources are predicting higher demand for the nitrogen fertilizers we produce after the spring application depletes the fertilizer currently in storage throughout the distribution system. Weather permitting, this could result in a rebound in sales and firming of prices in the fall. We are also pleased to see that, following unprecedented volatility in commodity markets that occurred in the third and fourth quarters of 2008, there has been some settling and the market is moving forward.
“We expect that many of our mining and industrial customers will take less product in 2009 than in 2008 due to the downturn in housing, automotive and other sectors. However, to a certain degree we are insulated by sales agreements with either minimum volume requirements or fixed profit arrangements.