LSB INDUSTRIES, INC. is a manufacturing, marketing, and engineering company with activities reaching a worldwide basis. LSB is headquartered out of Oklahoma City, OK with 1,780 full time employees and was founded in 1968. LSB's principal business activities, through its subsidiaries, are the manufacturing and sale of a broad range of hydronic fan coils, water source and geothermal heat pumps, large custom air handlers and other products used in commercial and residential air-conditioning systems. It also manufactures and sells chemical products for mining, quarry and construction, agricultural uses, and to the industrial acid markets.
Segment Breakdown: LSB's revenue comes 41% from their Climate Control division, 58% from their Chemical division, and 1% from 'Other.'
LSB Industries is the second largest supplier of ammonium nitrate in the South Central United States and is the largest domestic merchant/supplier of concentrated nitric acid in the United States. LSB is also a key manufacturer and supplier of blasting agents and commercial mining products. The Chemical Business supplies three basic business units: agricultural products, industrial products and mining products.
LSB Industries is the leading producer in the USA of hydronic fan coils, water source heat pumps, and geothermal products for heating and cooling. In 2010, according to the Air-Conditioning, Heating and Refrigeration Institute, as cited in LXU’s 2010 10-K, LSB Industries captured 38% of the geothermal market. Product lines include fan coils, water source heat pumps and geothermal products are sold under the Company's labels and to major OEM manufacturers of air conditioning and heating equipment for resale under their labels.
The graph below represents the Climate Control Market Outlook into 2014 and is revealing strong growth and sales due to increase in single family home construction.
Geothermal – Geothermal heating systems are systems that use convection to heat air pumped through pipes buried deep underground, effectively gathering the natural energy of the earth and pumping it back to the surface. This is an incredibly energy efficient system.
Water Source Heat Pumps – Water source heat pumps work in very similar ways to geothermal heat pumps. The main difference is that heat is drawn from a nearby water source instead of from the ground. These systems are incredibly efficient as well.
Hydronic Fan Coil – Hydronic fan coils are systems that pass air over pipes containing cooled or heated water. The heat is transferred into or out of the air depending on the relative temperature of the pipe, and is then blown into a closed space (such as a room) to closely manage the temperature.
LSB Industries is part of the industrial and agricultural chemicals industry as well as the industrial applications sector. For LXU's Climate Control Business, market share for geothermal HVAC systems increased to 38% despite a total decline in sales across the industry. However, backlogs for orders have risen significantly as firms attempt to take advantage of the low interest rates, which would effectively secure them cheap debt to finance their construction project.
Further, the Chemical Business is expected to grow in 2011. Market outlook for ethanol production, of which corn is an input, is higher for 2011, indicating that corn production will need to significantly increase in order to service all of America's crop needs. As the rest of the economy continues to build and gain momentum, industrial needs will continue to rise and hence, the industrial and mining chemical segments will as well.
These are the main publicly traded companies listed below which had the best comparisons to the Chemical Business and Climate Control Business of Lsb. Continental Materials Corporation (CUO) is the only main competitor which is publicly traded that could be compared to the Climate Control Business.
CF Industries (CF)
CF Industries Holdings, Inc. manufactures and distributes nitrogen and phosphate fertilizer products in North America and export markets. It operates in two segments, Nitrogen and Phosphate. The Nitrogen segment offers ammonia, urea, and urea ammonium nitrate solutions. The Phosphate segment provides diammonium phosphate, monoammonium phosphate, and granular muriate of potash used in agricultural fertilizer applications. The company also owns a 50% interests in GrowHow UK Limited, a fertilizer manufacturer in the United Kingdom; an ammonia facility in the Republic of Trinidad and Tobago; and KEYTRADE AG, a global fertilizer trading company. CF Industries Holdings customers include cooperatives and independent fertilizer distributors located in the grain-producing states of the Midwestern United States. The company was founded in 1946 and is headquartered in Deerfield, Illinois. The company has a market cap of roughly $9 billion and is part of the Agriculture Chemicals industry just as Lsb is in as well. Even though this company has a significantly larger market cap it still poses as a direct competitor.
Potash Corp. (POT)
Potash Corporation of Saskatchewan Inc. produces and sells fertilizers and related industrial and feed products primarily in the United States and Canada. The company mines and produces potash, which is used as fertilizer. It also offers solid and liquid phosphate fertilizers; animal feed supplements; and industrial acids that are used in food products and industrial processes. In addition, the company produces nitrogen fertilizers, as well as nitrogen feed and industrial products, including ammonia, urea, nitrogen solutions, ammonium nitrate, and nitric acid. Potash Corp. has a market cap of about $52 billion and is part of the same industry as Lsb industries which is why it is considered a competitor. Even though it has a significantly larger market cap it has some parallels to Lsb. POT is currently trading at $60.55 a share as of 3/7/2011 and has a price to earnings ratio of 30.74.
Agrium Inc.( AGU)
Agrium produces and markets agricultural nutrients, industrial products and specialty products worldwide. It is also involved in the retail supply of agricultural products in North and South Americas. The company is split into three segments: Retail, Wholesale and Advanced Technologies. The retail segment focuses on marketing nutrient crop products, offers agronomic services, product application, soil and leaf testing and analysis and crop scouting services. The wholesale segment produces, markets and distributes crop nutrient products for agricultural and industrial customers. The advanced technology segment produces and markets controlled-release crop nutrients and micro nutrients for agriculture, specialty agriculture, professional turf, hotriculture and consumer lawn and garden markets. It was formerly known as Cominco Fertilizers Limited and changed its' name to Agrium in 1995. It was founded in 1931 and is headquartered in Calgary, Canada. Agrium is part of the Agricultural Chemicals industry and Basic Materials segment. It is currently trading at 94.15 (as of 3/1/11) with a market cap of 15B and a P/E of 20. The company distributes a dividend of .10%.
Continental Materials Corporation (CUO)
Continental Materials Corporation produces and sells heating, ventilation and air conditioning (HVAC) and construction products in North America. The company sells its construction products directly to general and sub-contractors, government entities and individuals. It sells HVAC products directly to retail home centers and retail outlets, HVAC installing contractor and equipment manufacturersfor commercial applications, as well as plumbing, heating and air conditioning wholesale distributors. It was founded in 1954 and is based in Chicago, Ilinois. Continental Materials Corporation is part of the General Building Materials industry and the Industrial Goods sector. Continental Materials Corp is currently trading at 22.71 (3/1/11) with a market cap of 36 million.
The market cap of each company is significantly different. This puts each company in a different "zone" and competitive playing field. In accordance with economies of scale, the operating margin for the biggest company is the largest operating margin and the smallest company has the smallest/negative margin. The overwhelming majority of companies that are the Climate Control Business' nearest competitors, as cited in the most recent 10-K, are held privately.
LXU is approaching 2011 with an acquisitive mindset for their Climate Control Business. The lower revenues for 2009 will ultimately yield a lower acquisition price for most companies.
Industry and Competitor Analysis Table
The HVAC industry is incredibly competitive for contract sales. Over the past few years, this competition has intensified due to a decline in the number of new buildings being erected and older buildings being renovated. In 2010, the Climate Control Business had 3 customers provide 24% of the total revenue for that segment. This ultimately means that 3 customers accounted for 10% of LXU's total sales. This indicates that there is significant buyer power within the industry, and hence buyers have a strong ability to negotiate prices. Further, LSB Industries maintains relationships with large name clients such as Marriot and Ritz Carlton, who build new facilities somewhat frequently. Therefore, because the account can mean repeat business for LXU, those buyers represent and additional level of negotiating power.
The Chemical Business is very similar to the Climate Control Business in terms of buyer power. Not only is it incredibly difficult to differentiate oneself in this industry, lowering the cost of switching for buyers, but a significant portion of the revenue stream is provided by only a handful of clients, again indicating that there exists strong buyer power within the industry. In 2010, 5 customers provided enough sales to account for 45% of the total sales for the Chemical Business, which is equivalent to 26% of LSB Industries' total revenue. Such a high amount of revenue being sourced from a relatively short list of clients indicates that each client has a significant ability to negotiate contracts based on prices and other desired provisions. Further, because of the strategy that management employs (long-term, take or pay contracts) The Chemical Business can be locked in contracts for a substantially enduring period of time. This again lowers LXU's ability to strong-arm buyers into more favorable contract arrangements.
The major input for either business line, chemical or climate controlling, are raw materials such as basic commodities. Management, in the 2010 10-K, cites the ability to maintain significant buyer power with their suppliers because of the vast availability of the commodities, as well as the proprietary information available on the spot prices of each input. This environment suits LXU's needs quite well, and in turn allows them to service their input needs at prevailing prices. They occasionally hedge their risk of rising commodity prices through the use of financial instruments.
Threat of Substitutes
The Chemical Business has a strong threat of substitutes due to the difficultly within that industry to differentiate oneself and generate competitive advantages over one's competitors. In the latest 10-K, management discusses a recent development that shapes a certain fertilizer so that it is easier to handle. They say their main two differentiation tactics are location of production facilities, and the customer service provided to their clients. This low level of differentiation also drives down switching costs for the buyers, in turn further increasing competition amongst the players in the agricultural, mining, and industrial chemical industry.
Through aggressive research and development, management has been able to develop what they believe is the most efficient geothermal heating system available on the market. Also, a new facility under construction will soon produce ultra-efficient geothermal modular chillers. Although there exists many available substitutes for HVAC systems, LSB Industries provides the highest quality and broadest line of product. This provides the Climate Control Business with an important economic moat, and with a solid 38% market share, competitors will quickly try to replicate their efficient systems in order to attempt to steal LXU profits. However, despite this important competitive advantage, LXU still participates in an intense industry. This is because of the strong and growing demand for geothermal and hydronic fan coil climate control systems, as well as the large amount of capital necessary to install these HVAC systems. These factors, in conjunction with vast array of alternative methods of heating and cooling large buildings, intensifies the competition within the industry.
Rivalry amongst Competitors;
Barriers to Entry Barriers to entry in this industry are relatively high. Both the Chemical Business and the Climate Control business require a significant amount of capital in order to operate including capital invested into production facilities, distribution, and the research and development of new technologies and materials. LSB Industries is able to maintain the dominant position within the geothermal HVAC system sector because of the intense amount of capital they have employed to construct their products as well as the amount of capital they have allocated towards research and development efforts.
Looking at the financial ratios, but in particular the current ratio and quick ratio, they both reveal that LXU is more liquid compared to its competitors on both the chemicals and climate control side of the business. The company is able to cover its short-term obligations more easily when they came due, while their competitor Potash Company has a current ratio below 1 at 0.49.
Potash is a significantly larger company with more long-term obligations, due to the large amount of debt they have on their balance sheet at about $5.58 billion and Lsb at about $100 million. However, the larger amount of debt is only indicative of the size of POT, and without comparison, not necessarily and indicator of poor financial health.
LXU has a lower cash balance and cash per share compared to the average at $61 million and $2.91 respectively, while CF has the highest on both ends at $800 million and $11.23. The high cash per for CF shows how well capitalized the company is especially with having the lowest Debt to Equity (D/E) ratio compared to the rest of the companies. LXU has a D/E that is in line with the average, but POT has the most leveraged capital structure as they are financing a lot of their growth with debt. Hence they even have low cash per share balance.
At the same time, while looking at the sole public competitor in the climate control business, LXU is more highly levered and even has a higher interest coverage ratio. Even though the ratios reveal the company has a whole for LXU and not the ratios per business side, it still compares to CUO and the averages. Recently, LSB Industries also recently engaged Bank of America to raise a syndicate loan of $75MM, which would significantly change the capital structure of the firm. This engagement will be done on a best efforts case, and will be a long-term, five year payable.
Looking at the effectiveness ratios, LSB under performs on all levels compared to its competitors, except on the climate control side of the business. POT has the highest returns on all ratios as they have an ROA of 12.66%, and ROE of 26.09% and ROI of 15.20%. However, it is worth noting that the POT ROE may be inflated due to such a high level long-term debt. AGU is the only other competitor, which has a ROI higher than the average. This shows how POT may be more successfully employing their resources than everyone else in the chemicals business.
To value LXU and its competitors, a Price to Earnings (P/E), Price to Sales (P/S), and Price to Book (P/B), valuation ratios were used.
LXU, compared to its competitors, has the highest trailing P/E ratio at 73.15x earnings, while the average is at 37x. Their forward P/E is at 13.64x which means that their projected earnings are supposed to grow substantially. AGU and CF both have trailing and forward P/E’s in the middle of the spectrum, which means they are both relatively cheaper compared to the competitors.
With regards to price to sales, LXU has a lower P/S, which is better than all of its competitors except for on the chemicals side. To reiterate though, it is hard to compare LXU as a whole to any one competitor in a certain business segment, but it still gives a snapshot of the different players in the industry and how they fare to LXU. Hence, CUO has a better P/S and a lower P/B compared to LXU, which could mean that CUO is either undervalued significantly or there could exist some fundamental issues with the company itself. On the chemical side, LXU is in line with the average price to book ratio while POT has the highest at 7.66 and even has the P/S at 8.62, which is double than the average between the competitors.
Profitability and Growth Ratios
Looking at growth rates and profitability of LXU to its competitors, the profit margin and operating margin of LXU are significantly lower. The company does generate significantly less revenue compared to its competitors and to some respect can’t even been compared on that level due to the market cap. The competitors (except for CUO) have market caps of $5 billion or more while LXU is only at about $750 million.
On the climate control side of the business LXU posts stronger margins across the board and thus generates more revenue while keeping costs low relative to CUO as they have negative margins (negative earnings).
LSB Industries, according to their most recent 10-Q,spent $82,000 on advertising during the quarter ending September 30, 2010. This represents an increase of $15,000, or roughly 22.5%. Such a substantial increase will contribute to, and indicates that there is likely to be an increased level of long term earnings growth, according to McKinsey & Co. Valuation. According to the 10-K, LSB Industries has "significantly increased our sales and marketing efforts for all of our Climate Control products, primarily to expand the market for our products."
Recently, a wholly-owned subsidiary of LSB Industries, ThermaClime, which represents 48.5% of the company’s total revenue, hired Bank of America Leasing & Capital, LLC on a best-efforts basis to raise a syndicate financing structure of $75MM. This debt capital raise, if completed, will represent a significant level of additional debt being inserted into the capital structure. Such an increase in debt may fundamentally change many financial ratios, potentially adversely or positively affecting the firm’s cost of equity or debt. The overwhelming majority of LSB’s capital structure is equity, which represents approximately 83% of the firm’s capital structure. A portion of this loan would be used to retire a $60MM long-term loan maturing in November 2012. The remaining $25MM would be used to finance working capital needs.
Ultimately, an additional $25MM debt (representing a 5% increase in the capital structure, assuming the cost of debt and equity remain relatively constant) should impact the weighted average cost of capital to the point that it may potentially lower by approximately .3%. Therefore raising the Economic Value Added (EVA) spread, resulting in a higher EVA.
This debt would likely be priced at a rate equal to an index, likely the three-month LIBOR, plus a spread.
The Chemical Business for LSB Industries became the major business segment for LSB Industries representing 58% of total revenues for 2010, while it only occupied 49% of revenues for 2009. This major expansion is partially due to the economic downturn, which adversely affected the Climate Control Business for 2010. The other factor, was that the supply chain of LXU enabled the company to reach new markets. River transportation and rail systems transportation because a major contributor to the firm's ability to reach new markets. Additionally, the development and use of rail systems is subsidized through the American Recovery and Reinvesment Act. The additional monies available to the supply chain systems that the Chemical business are what enables the firm to be the firm to be the second largest supplier of ammonium nitrate in the South Central Region of the United States and the largest domestic provide of nitric acid.
The strategic placing of production facilities has, according to management, placed the firm in a considerable advantage over its competitors for shipping and distribution purposes. Further, lower shipping costs ultimately mean they can offer their product at a lower price to customers or maintain higher margins than their competitors.
LSB Industries pursues a strategy such that they develop relationships with customers whose needs for chemicals lead them to make substantial purchases at any one time. These agreement-based sales account for the majority of sales made by the Chemical Business (approximately 61%). The reason for this strategy is two-fold. The first reason is so that there is substantial product being guaranteed sold when an agreement is reached. The second is that this behavior allows the firm to hedge the risks associated with fluctuating costs of the chemicals. However, to hedge against that strategy, in case the price of LSB Industries' chemicals were to increase, roughly 40% of their sales were made at prevailing spot prices.
According to management, there is an expected increase in agricultural sales due to a planned increase in production in both wheat and corn. In accordance with this projection, management, through waterways and railing, plans on reaching new target markets where possible and justified. Tapping into the western continental market would yield substantial benefits for LXU.
Climate Control Business:
The Climate Control Business manufactures residential and commercial heating and cooling systems such as geothermal heat pumps. This segment pursues a strategy based on performance and relationship development.
They maintain relationships with many firms in the lodging sector including Hyatt, Marriot, and Ritz Carlton, among others. Management maintains that the Climate Control Business is a leading provider of climate control systems in the United States, and that this trend will continue, leading to increased growth. The pursuit of this business model through 2011 and the relative improvement in the economy is an important factor in LXU’s business model strategy.
Further, LXU manufactures the most broad line of geothermal and water source heat pumps. This dominance in the industry allows their competitors to also occasionally be their customers. LXU management plans on focusing on their dominant position and expanding their current product mix and upgrading those already developed. In addition to upgrading their current mix, they also plan on continuing to develop new technologies for the Climate Control Business - particularly their geothermal products. Management also plans on giving special attention to the development of the current market for geothermal products and expanding green HVAC installation in new buildings and renovations.
Lastly, management is also considering strategic acquisitions for their Climate Control Business.
Currently, the American Reinvestment and Recovery Act of 2009, which provides tax incentives to firms and individuals that decide to install alternative energy systems, including geothermal heating systems, is a major strength of LSB Industries. These tax incentives, depending on the kind of system installed (geothermal heat pumps), can have reimbursement levels reaching up to 30% of the cost for residential installations. During the downturn, the economic cycle adversely affected the sales of the Climate Control Business. This downturn was in part, hedged by the American Reinvestment and Recovery Act. The Recovery Act, according to Recovery.gov, still has significant funds to be distributed.
Additionally, a major part of becoming LEED certified by the Green Building Certification Institute of the U.S. Green Building Council involves installing ‘green’ or efficient HVAC systems. Management believes that through R&D, they have what is currently the most efficient geothermal and hydronic fan coil systems available in the industry. Further, they have developed a new geothermal system, a geothermal modular chiller, that they claim is more efficient than the systems they currently offer, which they commented on saying they were “ultra-efficient”. A new facility is currently being capitally expensed to accommodate for the production of geothermal modular chillers and an increase in hydronic fan coil production. LXU, in 2010, captured 38% of geothermal market, indicating an increased level of market share despite a decrease in industry revenue.
The Pryor Facility in Pryor, Oklahoma produces anhydrous ammonia and not until later in the fourth quarter of 2010 did the facility reach a sustained level of production. Due to this, management was unable to provide exact numbers on the increased level of production of anhydrous ammonia, however it is assumed by management that a significant increase in production will allow for an increase in the sales of their products.
Mining and industrial sales accounted for 61% of total sales for the Chemical Business for 2010; of the 61%, 69% of the sales for mining and industrial chemical segments were through take or pay contracts. Further, a current risk involved, fluctuating commodity prices, are hedged through management’s strategy of long-term contractual agreement based sales. The strength derived from this strategy is that LSB is able to pass the burden of increased commodity prices onto the customer, occasionally given a short lag (1-2 quarters) due to production requirements. Both segments (chemical and climate control) are able to benefit from this strategy.
Management feels that the strategic positioning of the production facilities for the Chemical Business gives them a considerable advantage over their competitors because of the ease of distribution and the ability to reach new markets, specifically the western side of the continental United States. This supply chain competitive advantage will lower costs for their buyers and further separate LSB Industries from their competitors.
This segment of the business is highly correlated with the construction and prevailing overall economic conditions. This level of correlation means that when a downturn is experienced, the Climate Control Business seriously suffers a decrease in profits, as is evidenced particularly by 2009.
Further, the construction of major geothermal systems for large commercial projects including hospitals or hotels can take several quarters. Such a length of time required for building makes the firm susceptible to canceled orders and further exposes them to adverse economic conditions. In addition to requiring significant time, copper is an important input in the Climate Control Business. Although management is typically able to pass the cost of the input on to the customer, a lag occasionally occurs. This lag exposes the company to significant risk and susceptibility to the price of copper.
The chemical production industry is consistently subject to environmental lawsuits and fees and other civil penalties. This is due to a large amount of bi-products and waste created in the production of chemicals. The production of these chemicals can provide a major expense to any firm that participates in the industry.
LSB is expected to keep launching new products and design product upgrades to keep the systems up to date and efficient. They have opportunities to increase their market share by launching new and improved products and building more facilities. Further, their Climate Control products are customizable to each individual customer's needs. This flexibility allows them to satisfy the needs of customers of various sized facilities.
Ethanol production during 2010 dramatically increased to 13 billion gallons in the United States. According to the Renewable Fuels Association, this production displaced the gasoline that would have been produced from 445 million barrels of crude oil. According to the same organization, production refining capacity across America reached 13.5 billion gallons/year and production could very easily surpass 13.5 billion gallons during 2011. This is relevant because the current stock-to-use ratio of corn is at its lowest point since 1995-1996. According to management, in order to maintain return to a normal level of corn stock, production of the crop is going to have to drastically increase during 2011. Ultimately, this indicates that the corn crop for 2011 will be expanding and hence, so will the fertilizer industry. Should LXU be able to capitalize on this opportunity of strong growth in the agricultural industry, they stand to experience a robust increase in sales and hence, net income and return to investors.
During the earnings call reporting the 2010 financial results, management commented that the chemical line was likely to continue to grow and maintain its newly dominant position as the company’s main revenue stream. With current crop forecasts and overall market forecasts, management feels that all chemical sectors will see strong positive growth into and through 2011. Further, as the industrial needs of the nation grow, LXU’s sales will increase for both its mining and industrial segments with sulfuric and nitric acid needs increasing. The American Recovery and Reinvestment Act of 2009 is also a major opportunity that LXU could capitalize on. The ARRA provided substantial subsidies to alternative methods of transportation, such as railroads. The Chemical Business, in 2010, became the major contributor of revenue to the company. This additional funding to supply chain channels means that, if LXU can capitalize on the expanded system, they have the opportunity to further enhance their market share and therefore grow their revenue stream.
Risks / Threats:
A major threat to LXU, through the Climate Control Business, is adverse economic conditions, specifically within the construction industry. This subsidiary, as a supplier the construction and renovation industries is subject to the same risks that they experience. The construction market is tightly tied to the prevailing market conditions, and therefore, LXU is as well. This close correlation between the market and the construction industry is due to the large amount of debt required to erect large real estate projects. Should an economic downturn occur, LSB Industries could be largely adversely affected, resulting in a significant loss of profit, and possibly even default if debt arrangements are unable to be serviced.
Global energy policy and market shifts also pose a threat to LSB Industries. The American Reinvestment and Recovery Act of 2009 provided subsidies through tax incentives for the installation of geothermal and other alternative energy systems. The expiration of these tax incentives, coupled with fluctuating energy prices, may result in a decreased level of sales for the Climate Control Business if installation of their products becomes economically inadvisable.
Further the Climate Control Business’ largest commodity-based risk is copper, as it is both a major input and is currently highly valued. However, despite being intensely subject to commodity price fluctuations, management has noted in both the 2010 10-K and during the 2010 Earnings Call that they are typically able to pass the increased input prices on to their customers, occasionally experiencing a lag due to order backlogs and required time for production.
The most substantial threat to the Climate Control Business is the business environment in which it operates. The industry is highly competitive, and while LXU has been able to differentiate itself based through its higher performance and efficiency models, there are many alternatives for heating and cooling a building beyond geothermal. While geothermal systems are incredibly energy efficient, other solutions exist such as using electricity generated by solar panels to heat or cool a structure. The Climate Control Business is also quite dependent on only a few customers; 24% of segment revenue, which accounts for 10% of total revenue, was provided by 3 customers in 2010. Destroyed relationships or contract termination with any one of these firms could financially impact this firm in a material way.
An additional, substantial threat to this company is commodity price fluctuations through its Chemical Business, and primarily, agricultural business segments. Mining, gas, agricultural products account for 58% of the total sales of LXU, and all three segments are subject to changes in commodity prices such as but not limited to, natural gas and ammonia. Weather may also adversely affect the financial position of the firm. If natural disaster or drought were to occur and destroy crop, particularly corn, the fertilizer producing segment of LSB Industries would significantly financially suffer. While LXU has managed to differentiate some of its chemical products in ways such as shape that makes handling easier, it is incredibly difficult to differentiate oneself in the chemical industry. Ultimately, this forces LXU to create competitive advantages for itself through its relationship management, customer service, and facility location, which ultimately impacts the supply chain. Short of facility location, these economic moats can be easily overcome and mimicked by competing firms. In 2010, 5 customers alone provided 45% of the Chemical Business revenue, which accounted for 26% of total revenue. This means that each of those customers is responsible for approximately 5% of total revenue. If for any reason one of these customers decided to begin sourcing its needs from any of LXU’s competitors, the financial standing of the firm may be materially compromised.
Seasonality: This firm is subject to various seasonal changes through its agricultural chemical producing segments and through its Climate Control Business. According to management, the climate control business sees fewer orders for HVAC systems in the 2nd and 3rd quarters, while the 2nd and 3rd quarters are typically the strongest quarters for the agricultural business due to farmers and ranchers preparing for and maintaining their crop.
LSB will be negatively impacted by the expiration of the federal tax credits for consumer energy efficiency. The tax credit reimburses up to 10% of costs, up to $500, for HVAC water heaters and will expire December 31, 2011. Geothermal heat pumps receive reimbursement of up to 30% with no upper limit, and will expire December 31, 2016. lastly, businesses are eligible for a federal tax credit up to 10% of the total system cost, 50% first year bonus depreciation, and five year accelerated depreciation for the balance of the cost.
Quarter 1 2008 Climate Control increased operating profit by 57%, and orders rose by 24%. Favorable raw material hedging decisions, hedging for copper, steel, and aluminium, helped contribute to the enormous success of climate control. In addition to climate control's success chemical sales increased as a result of significantly higher selling prices ofr agricultural products as well as increased global demand for fertilizer products. Although there was lower volume, higher selling prices more than offset this setback.
Quarter 2 2008 Chemical business sales increased by 43% thanks to higher spot market prices for agricultural products as well as higher selling prices for industrial acids and mining products related to increased raw material feedstock prices. Another positive note is how operating income increased by 63%.
Quarter 1 2009 Net sales for chemical business totaled $74.5M, an 18.5% decline from the first quarter of 2008. Decrease in sales primarily due to decrease 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, ofset partially by higher tons shipped of ammonium nitrate (AN) fertilizer. On a positive note, the profit margin increased to 23% from 17%.
Quarter 2 2009 Lower demand for hydronic fan coil products had a negative impact on the Climate Control business, partially offset by improved margins due to product mix and lower raw material costs. Chemical Business also suffered losses, sales totaled $69.9M which is a 38.4% decline from the second quarter of 2008. Dramatic decrease in sales primarily attributed to steep declines in raw material feedstock and fewer tons of products sold in the industrial and mining markets. The lower demand which resulted in lower shipments of industrial and mining products can be attributed to the general economic downturn. On a lighter note, gross margin improved to 17.6% from 14.5%.
Quarter 3 2009 Climate Control sales totaled $67.4, a 19.1% decrease from the third quarter of 2009. Reduced construction activity had a negative impact on heat pump and fan coil products, the primary reason for the dramatic decrease. On a lighter note, gross profit, as a percentage of sales, jumped to 36.7% from 29.9%. The chemical business took a beating with sales coming in at $59.7M, a 52% decrease from 2008 sales. Steep declines in commodity prices, including the selling prices for product offerings accompanied by steep declines in raw material feedstock costs and lower tons sold in mining markets are responsible for the dramatic decrease.
Quarter 4 2009 Operating income for the climate control business continued its downward trend: Sales came in at $5.6M, a 30% decline from 2008. Net sales dropped 26.3% due to reduced construction activity associated with the economic downturn. The chemical business division suffered another blow with sales coming in at $53.7M, a 43.3% decrease from 2008 numbers. Once again, steep declines in commodity prices, including the selling prices for our products accompanied by significantly lower raw material feedstock costs and lower tons sold in the mining markets where a contributing factor in the dramatic decrease in sales. (Q4 was a positive 19.05% earnings surprise, beating analysts estimates)
Quarter 1 2010 Net sales for the climate control business for the first quarter totaled $53.7M, a 26% decrease from first quarter 2009 due primarily to reduced commercial and institutional construction activity. Gross margin rose to 34.3% from 31.1%. Orders for GHP products for the residential market were up 30%, compared to last year where sales of other HVAC products rose on 18%. Sales of fertilizer grade ammonium nitrate took a hit resulting from a late start of the spring fertilizer season, partly as a result of cold and wet weather conditions. (Q1 was a negative 19.23 earnings surprise from analysts estimates)
Quarter 2 2010 Overall there was a 21.5% increase in sales, including a 52.2% increase in chemical business sales partially offset by a 10.7% decline in climate control sales. The upturn in the chemical business includes higher sales volume in all major product lines - agricultural products, industrial acids, and mining products, as well as an increase in selling prices driven by higher raw material input costs. The continued decline in climate control sales relates to the continued weakness in commerical and institutional construction. Backlog for the climate control business saw a favorable improvement. LSB was also awarded $11M in a lawsuit, awarded by the Arkansaw Supreme Court, for a pipe rupture and resulting fire damage at their pryor facility. (Q2 was a 12.5% favorable surprise form analyst estimates)
Quarter 3 2010 Net sales increased by 8.7%, driven by a 21.5% increase in chemical business net sales while climate control sales fell by 4.3%. The upturn in chemical business sales is compromised of higher sales volume in industrial and mining products, in addition to an increase in selling prices primarily driven by higher raw material input costs. Gross margin for the climate control division decreased slightly to 35.6% from 36.7%. (Q3 was a -23.88% earnings surprise from analysts estimates)
Quarter 4 2010 Net sales of the climate control segment was $72.5 million which was a $12.8 million increase compared to Q4 2009 (21.44%). The climate control business saw operating income and gross profit increased due to higher sales, favorable product mix and spending controls. On the other hand the chemicals segment had net sales of $97.3 million which is a 81.19% positive change compared to Q4 2009. The chemicals segment saw operating income and gross profit increase as a result of the Pryor Facility reaching a sustainable level of production and favorable market conditions.