Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with a review of the other Items included in this Form 10-Q and our September 30, 2022 condensed consolidated financial statements included elsewhere in this report. A reference to a “Note” relates to a note in the accompanying notes to the condensed consolidated financial statements. This MD&A reflects our operating results, unless otherwise noted. Certain statements contained in this MD&A may be deemed to be forward-looking statements. See “Special Note Regarding Forward-Looking Statements.”
Overview
General
LSB is headquartered in Oklahoma City, Oklahoma and through its subsidiaries, manufactures and sells chemical products for the agricultural, mining and industrial markets. We own and operate facilities in Cherokee, Alabama, El Dorado, Arkansas and Pryor, Oklahoma and operate a facility on behalf of Covestro in Baytown, Texas. Our products are sold through distributors and directly to end customers primarily throughout the U.S. and parts of Mexico and Canada.
Key Operating Initiatives for 2022
We expect our future results of operations and financial condition to benefit from the following key initiatives:
•Investing to improve Environmental, Health & Safety and Reliability at our Facilities to further our Progress Towards Becoming a “Best in Class” Chemical Plant Operator while Supplying our Customers with Products of the Highest Quality.
▪We believe that our operational progress over the past several years represents proof that high safety standards not only enable us to protect what matters, which is the well-being of our employees, but also translates into improved plant performance. With that in mind, in 2022 we remain acutely focused on our efforts to further the progress we’ve made in creating a high performing safety culture as we advance the safety programs we have underway and implement new ones. We intend to invest additional capital at all three of our facilities to further promote safe and reliable operations in order to build upon the success we have had in implementing enhanced safety programs during the last three years.
▪We have several initiatives currently underway focused on continuing to improve the reliability of our plants which we expect will enable us to produce greater volumes of product for sale while lowering our unit cost of production and increasing our overall profitability. These initiatives are focused on operational excellence through enhancements in leadership at certain of our facilities, bolstering our operating procedures, leveraging the technology investments we have made to improve the optimization of our asset health monitoring and asset care maintenance programs. Additionally, our product quality program continues to focus on providing products to our customers that meet our quality standards.
•Continue Broadening the Distribution and Optimization of our Product Mix. Over the course of 2021 we were successful in improving upon the production capacity of our plants and we plan to continue to expand the distribution of our products by partnering with customers to take product into different markets while also focusing on opportunities to upgrade our margins through the optimization of our product mix. Additionally, we are evaluating several capital improvement projects for 2022 focused on margin enhancement opportunities related to our storage and distribution capabilities.
•Development and Implementation of a Strategy to Capitalize on Low Carbon Ammonia and Clean Energy Opportunities. The reduction of greenhouse gas emissions, particularly related to carbon dioxide, has been and we expect will increasingly become a global environmental priority as part of efforts to stem the harmful effects of climate change. There is increasing evidence from a variety of industry studies to indicate that ammonia can play a significant role in making meaningful progress towards this objective. As a result, we are currently evaluating and developing projects that could enable us to become a producer and marketer of blue and green ammonia and other derivative products. Blue ammonia is produced using natural gas and conventional processes but includes an additional stage where the carbon dioxide emissions are captured and permanently stored in deep underground rock formations, resulting in a low carbon emission product that, we believe, can be sold at a premium to agricultural, industrial, mining, power generation and marine customers seeking to reduce their carbon footprint and potentially capitalize on government incentives. Green ammonia is ammonia produced using renewable energy to power electrolyzers that extract hydrogen from water, resulting in zero-carbon production of ammonia, which we believe can also be sold at a premium to a variety of customers and industries around the world.
Ammonia has continued to emerge as one of the more viable alternatives to serve as a hydrogen-based energy source for a variety of applications due to its higher energy density and ease of storage relative to hydrogen gas. Blue and green ammonia can be used as zero carbon fuel in the maritime sector, as a carbon free fertilizer and as a coal substitute in power generation. If ammonia were to be adopted for these and other energy needs globally, some studies have indicated that future demand could increase significantly from current levels of global annual production of ammonia. We believe we are well-positioned to capitalize on this opportunity and become a market leader given our potential to retrofit our existing plants rather than needing to invest entirely in greenfield projects, which we believe can reduce our time to market for this product and also
19
reduce the upfront capital expenditures necessary to enable us to produce this product, thereby enhancing the economic attractiveness for us to such investments.
•Evaluate and Pursue Organic Capacity Expansion. We are evaluating opportunities across all of our facilities to increase production capacity through the implementation of several potential debottlenecking projects. Our initial calculations suggest that, assuming mid-market pricing assumptions for Tampa ammonia, UAN and natural gas, these projects could potentially represent significant incremental annual profitability.
•Pursue Acquisitions of Strategic Assets or Companies. We are actively engaged in evaluating and pursuing various opportunities to acquire strategic assets or companies, where we believe those acquisitions will enhance the value of the Company and provide attractive returns. We evaluate assets and companies that can provide us with geographic expansion, extend an existing product line, add one or more new product lines, leverage our existing ammonia production capabilities, or complement our existing business lines, among other accretive opportunities.
Recent Business Developments
Signed Agreements for Low and No Carbon Ammonia Projects
In April 2022 we entered into an agreement with Lapis Energy to develop a project to capture and permanently sequester CO2 at our El Dorado, Arkansas facility. Lapis, backed by Cresta Fund Management, a Dallas-based middle-market infrastructure investment firm, will make 100% of the capital investment required for the project development. The project is expected to be completed by 2025, subject to the approval of a Class VI permit, at which time CO2 injections are expected to begin. Once operational, the project at the El Dorado site will initially capture and permanently sequester more than 450,000 metric tons of CO2 per year in underground saline aquifers, with the potential to increase this quantity based on potential debottlenecking projects at the facility. The permanently sequestered CO2 generated from the facility’s ammonia production is expected to qualify for federal tax credits under Internal Revenue Code Section 45Q, which are $85 per metric ton of CO2 captured beginning in 2026. Once in operation, the sequestered CO2 is expected to reduce LSB’s scope 1 GHG emissions by approximately 25% from current levels. In addition, sequestering more than 450,000 metric tons of CO2 annually is expected to enable LSB to produce over 375,000 metric tons of blue ammonia annually, a product that could potentially be sold at higher price levels than conventional ammonia.
In May 2022 we entered into agreements with Thyssenkrupp Uhde USA, LLC and Bloom Energy, (NYSE:BE) to develop a project to produce approximately 30,000 metric tons of zero-carbon or “green” ammonia per year at our Pryor, Oklahoma facility. Thyssenkrupp Uhde will develop the engineering design to convert a small portion of Pryor’s existing conventional or “grey” ammonia capacity into green ammonia. Pending results of the feasibility study currently underway and subsequent board approval, the project is planned to be constructed in two phases: first with Bloom supplying a 10-megawatt solid oxide electrolyzer, followed by the installation of an additional 20-megawatt alkaline electrolyzer unit, which we plan to source from a leading manufacturer. Bloom will operate and maintain the solid oxide electrolyzer. The green hydrogen produced from the electrolyzers is expected to qualify for federal incentive programs such as the production and tax credit under Internal Revenue Code Section 45V, which are up to $3 per kilogram of clean hydrogen beginning in 2023.
Continued Improvement in Product Sales
Our product sales and profitability increased in the third quarter of 2022 as compared to the third quarter of 2021. We generated these improved results despite conducting Turnarounds at two of our facilities while we conducted only one Turnaround in 2021. Selling prices for all of our major products were higher for the third quarter of 2022 as compared to last year due to a combination of supply and demand factors.
Elevated corn prices remain a significant driver to the strength of fertilizer pricing. Current U.S. corn prices reflect the impact on global corn supplies of dry conditions in South America, the Western U.S. and parts of Europe coupled with continued high demand for corn from China along with continued solid ethanol production levels and the anticipated impact of challenging early-season weather conditions on the domestic corn crop. Recent USDA forecasts point to U.S. corn acreage to be planted in the 2022-2023 planting season to be approximately 88.6 million acres lower than the 2021-2022 estimate of 93.3 million acres, due largely to the impact of wet weather throughout the Midwest during the spring planting season.
Also supporting the strength in fertilizer prices has been the high cost of natural gas in Europe. Natural gas is the primary feedstock for the production of ammonia. While down from earlier this year, natural gas prices in European markets have risen to levels that have negatively impacted the economics of ammonia production in that region, prompting producers to cease operations at some Europe-based facilities at various points throughout 2022. The resultant decrease in global production of ammonia has supported the strength in nitrogen-based fertilizer prices.
Further contributing to increased fertilizer prices as compared to year-ago levels has been the impact of the Russian invasion of Ukraine which has resulted in a reduction in global supply of corn, ammonia and natural gas and served to support already high prices for all three commodities.
20
As a result of the factors discussed above, we anticipate a heavier than typical application of agricultural ammonia this fall as farmers seek to replenish the nitrogen in their soil ahead of the 2023 planting season in order to maximize yields to capitalize on attractive corn pricing.
With respect to our industrial products, selling prices remain higher than a year ago largely as a result of the aforementioned factors pertaining to natural gas. The Tampa ammonia benchmark price remains well above its average price level of the past ten years, which is favorable for selling prices as many of our industrial contracts are indexed to this benchmark price. Demand trends for nitric acid, our largest industrial product category, have weakened in recent weeks, reflecting global economic uncertainty. We believe, however, that we have a meaningful degree of downside protection from the potential impacts of a recession given the nature of our contracts and our ability to shift our production mix to products where demand and pricing are strongest.
See a more detailed discussion below under “Key Industry Factors.”
Key Industry Factors
Supply and Demand
Fertilizer
The price at which our fertilizer products are ultimately sold depends on numerous factors, including the supply and demand for nitrogen fertilizers which, in turn, depends upon world grain demand and production levels, the cost and availability of transportation and storage, weather conditions, competitive pricing and the availability of imports. Additionally, expansions or upgrades of competitors’ facilities and international and domestic political and economic developments continue to play an important role in the global nitrogen fertilizer industry economics. These factors can affect, in addition to selling prices, the level of inventories in the market which can cause price volatility and affect product margins.
From a farmer’s perspective, the demand for fertilizer is affected by the aggregate crop planting decisions and fertilizer application rate decisions of individual farmers. Individual farmers make planting decisions based largely on prospective profitability of a harvest, while the specific varieties and amounts of fertilizer they apply depend on factors such as their financial resources, soil conditions, weather patterns and the types of crops planted.
Additionally, changes in corn prices, as well as soybean, cotton and wheat prices, can affect the number of acres of corn planted in a given year and the number of acres planted will drive the level of nitrogen fertilizer consumption, likely affecting prices.
According to the October Report, farmers planted approximately 88.6 million acres of corn in 2022, down 5% compared to the 2021 planting season. In addition, the USDA estimates the U.S. ending stocks for the 2022 Harvest will be approximately 30 million metric tons, a 15% decrease from the 2021 Harvest. The UDSA also lowered the expected yield for the 2022 Harvest, down approximately 3% from a year ago.
The following October 2022 estimates are associated with the corn market:
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|
|
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|
|
|
|
|
|
2023 Crop |
|
|
2022 Crop |
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|
|
|
2021 Crop |
|
|
|
|
|
|
(2022 Harvest) |
|
|
(2021 Harvest) |
|
|
Percentage |
|
(2020 Harvest) |
|
|
Percentage |
|
|
|
October Report (1) |
|
|
October Report (1) |
|
|
Change (2) |
|
October Report (1) |
|
|
Change (3) |
|
U.S. Area Planted (Million acres) |
|
|
88.6 |
|
|
|
93.3 |
|
|
|
(5.0 |
%) |
|
90.7 |
|
|
|
(2.3 |
%) |
U.S. Yield per Acre (Bushels) |
|
|
171.9 |
|
|
|
176.7 |
|
|
|
(2.7 |
%) |
|
171.4 |
|
|
|
0.3 |
% |
U.S. Production (Million bushels) |
|
|
13,895 |
|
|
|
15,074 |
|
|
|
(7.8 |
%) |
|
14,111 |
|
|
|
(1.5 |
%) |
U.S. Ending Stocks (Million metric tons) |
|
|
29.8 |
|
|
|
35.0 |
|
|
|
(14.9 |
%) |
|
31.4 |
|
|
|
(5.1 |
%) |
World Ending Stocks (Million metric tons) |
|
|
301.2 |
|
|
|
307.0 |
|
|
|
(1.9 |
%) |
|
292.8 |
|
|
|
2.9 |
% |
1.Information obtained from WASDE reports dated October 12, 2022 (“October Report”) for the 2022/2023 (“2023 Crop”), 2021/2022 (“2022 Crop”) and 2020/2021 (“2021 Crop”) corn marketing years. The marketing year is the twelve-month period during which a crop normally is marketed. For example, the marketing year for the current corn crop is from September 1 of the current year to August 31 of the next year. The year begins at the harvest and continues until just before harvest of the following year.
2.Represents the percentage change between the 2023 Crop amounts compared to the 2022 Crop amounts.
3.Represents the percentage change between the 2023 Crop amounts compared to the 2021 Crop amounts.
The current USDA corn outlook for corn planted during 2022 is for reduced supplies, greater feed and residual use, lower exports and corn used for ethanol and smaller ending stocks. The USDA lowered production estimates by 49 million bushels to 13.9 million and assumes average yields will fall to 171.9 bushels per acre. Export estimates fell by 126 million bushels, which the USDA attributes to both smaller supplies and light early-season demand. Feed and residual use firmed by 50 million bushels, while corn used for ethanol fell by the same amount. Ultimately, supply fell more than use, so USDA lowered 2022/23 ending stocks by 57 million bushels to 1.172 billion bushels. Ethanol is commonly made from corn and ethanol production is a large user of U.S. corn, currently representing approximately 37% of total U.S. corn demand.
21
Industrial and Mining Products
Our industrial products sales volumes are dependent upon general economic conditions primarily in the housing, automotive and paper industries. Demand remains stable from domestic end-use markets, while orders from customers producing products largely for export to Europe and Asia have softened to a degree given weakening international economies. Importantly, in addition to our contractual agreements with industrial customers that specify minimum volumes, our product mix flexibility helps us mitigate the impact of a reduction in demand from certain end markets by shifting production to products with stronger demand. Our sales prices generally vary with the market price of ammonia or natural gas, as applicable, in our pricing arrangements with customers.
Our mining products are LDAN and AN solution, which are primarily used as AN fuel oil and specialty emulsions for usage in the quarry and the construction industries, for metals mining and to a lesser extent, for coal. Although our AN product is primarily sold for use in aggregates and precious metals mining operations, overall, we have been experiencing favorable trends in our mining business as rising global consumption of coal for energy has strengthened demand and pricing for AN. Overall, despite growing global recessionary forces, our industrial and mining business remains stable.
Natural Gas Prices
Natural gas is the primary feedstock used to produce nitrogen fertilizers at our manufacturing facilities. In recent years, U.S. natural gas reserves have increased significantly due to, among other factors, advances in extracting shale gas, which has reduced and stabilized natural gas prices, providing North America with a cost advantage over certain imports. As a result, our competitive position and that of other North American nitrogen fertilizer producers has been positively affected.
We historically have purchased natural gas either on the spot market, through forward purchase contracts, or a combination of both and have used forward purchase contracts to lock in pricing for a portion of our natural gas requirements. These forward purchase contracts are generally either fixed-price or index-price and for a fixed supply quantity. We are able to purchase natural gas at competitive prices due to our connections to large distribution systems and their proximity to interstate pipeline systems.
The following table shows the volume of natural gas we purchased and the average cost per MMBtu:
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Three Months Ended |
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|
|
September 30, |
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|
|
2022 |
|
|
2021 |
|
Natural gas volumes (MMBtu in millions) |
|
|
6.0 |
|
|
|
6.6 |
|
Natural gas average cost per MMBtu |
|
$ |
7.65 |
|
|
$ |
3.71 |
|
Transportation Costs
Costs for transporting nitrogen-based products can be significant relative to their selling price. We continue to evaluate the recent rising costs of freight domestically. As a result of increases in demand for available rail, truck and barge options to transport product, primarily during the spring and fall planting seasons, higher transportation costs have and could continue to impact our margins, if we were unable to fully pass through these costs to our customers. Additionally, continued truck driver shortages could impact our ability to fulfill customer demand. As a result, we continue to evaluate supply chain efficiencies to reduce or counter the impact of higher logistics costs.
Key Operational Factors
Facility Reliability
Consistent, reliable and safe operations at our chemical plants are critical to our financial performance and results of operations. The financial effects of planned downtime at our plants, including Turnarounds is mitigated through a diligent planning process that considers the availability of resources to perform the needed maintenance and other factors. Unplanned downtime of our plants typically results in lost contribution margin from lost sales of our products, lost fixed cost absorption from lower production of our products and increased costs related to repairs and maintenance. All Turnarounds result in lost contribution margin from lost sales of our products, lost fixed cost absorption from lower production of our products and increased costs related to repairs and maintenance, which repair and maintenance costs are expensed as incurred.
Our Cherokee Facility is currently on a three-year ammonia plant Turnaround cycle completing with the next ammonia plant Turnaround planned in the third quarter of 2024.
Our El Dorado Facility completed its scheduled ammonia plant Turnaround during the third quarter of 2022. Our Pryor Facility started its scheduled ammonia plant Turnaround during the third quarter which was completed in mid-October. Following those Turnarounds, they will be on a three-year and two-year ammonia plant Turnaround cycle, respectively.
22
Ammonia Production
Ammonia is the basic product used to produce all of our upgraded products. The ammonia production rates of our plants affect the total cost per ton of each product produced and the overall sales of our products. For 2022, we are targeting total ammonia production of approximately 750,000 tons to 780,000 tons despite Turnarounds at our Pryor and El Dorado Facilities, which lowered ammonia production during the third quarter by approximately 53,000 tons.
Forward Sales Contracts
We use forward sales of our fertilizer products to optimize our asset utilization, planning process and production scheduling. These sales are made by offering customers the opportunity to purchase product on a forward basis at prices and delivery dates that are agreed upon, with dates typically occurring within 12 months. We use this program to varying degrees during the year depending on market conditions and our view of changing price environments. Fixing the selling prices of our products months in advance of their ultimate delivery to customers typically causes our reported selling prices and margins to differ from spot market prices and margins available at the time of shipment.
Consolidated Results of the Third Quarter of 2022
Our consolidated net sales for the third quarter of 2022 were $184 million compared to $127.2 million for the same period in 2021. Our consolidated operating income for the third quarter of 2022 was $13.1 million compared to $5.4 million for the same period in 2021. The items impacting our operating results are discussed in more detail below and under “Results of Operations.”
Items Affecting Comparability of Results of the Third Quarter
Selling Prices
For the third quarter of 2022, average selling prices for our key products increased approximately 39% to 76% compared to the third quarter of 2021. As discussed above under “Recent Business Developments,” increased demand, higher corn prices, and tighter supplies of nitrogen products contributed to the improved pricing.
For the third quarter of 2022, average industrial selling prices for most of our products were also higher compared to the same period of 2021, primarily driven by the $483 per metric ton increase in the Tampa Ammonia benchmark price, as many of our industrial contracts are indexed to the Tampa Ammonia benchmark price.
Turnaround Activities
When a Turnaround is performed, overall results are negatively impacted. This impact includes lost contribution margin from lost sales, lost fixed cost absorption from lower production, and increased costs associated with repairs and maintenance. The effects of our Turnaround, exclusive of the impacts due to lost production during the downtime, are shown below:
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|
|
Turnaround |
|
Turnaround Expense |
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|
Estimated Lost Production |
|
Facility |
|
Related Period |
|
Downtime |
|
(In Thousands) |
|
|
(In Tons) |
|
El Dorado |
|
3rd Quarter 2022 |
|
27 days |
|
$ |
8,414 |
|
|
|
36,000 |
|
Pryor |
|
3rd Quarter 2022 |
|
25 days |
|
|
10,824 |
|
|
|
17,000 |
|
|
|
|
|
|
|
$ |
19,238 |
|
|
|
53,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Cherokee |
|
3rd Quarter 2021 |
|
40 days |
|
$ |
7,976 |
|
|
|
21,000 |
|
|
|
|
|
|
|
$ |
7,976 |
|
|
|
21,000 |
|
Change of Control and Special Dividend (2021 only)
As the result of the Exchange Transaction during the third quarter of 2021 Eldridge held over 60% of our outstanding shares of common stock on the closing in September 2021. A change of control event occurred as defined in certain agreements, including stock-based awards and cash-based awards. As a result, additional expense was recognized due to the change of control event. In addition, pursuant to anti-dilutive terms included in the cash-based awards, the number of units of cash-based awards increased due to the Special Dividend, also resulting in additional expense being recognized. In summary, we recognized approximately $5.0 million in expense, of which $1.2 million is classified as cost of sales and $3.8 million is classified as SG&A during the three months ended September 30, 2021.
23
Results of Operations
The following Results of Operations should be read in conjunction with our condensed consolidated financial statements for the three and nine months ended September 30, 2022 and 2021 and accompanying notes and the discussions under “Overview” and “Liquidity and Capital Resources” included in this MD&A.
We present the following information about our results of operations. Net sales to unaffiliated customers are reported in the condensed consolidated financial statements and gross profit represents net sales less cost of sales. Net sales are reported on a gross basis with the cost of freight being recorded in cost of sales.
Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021
The following table contains certain financial information:
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|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
|
|
Percentage |
|
|
|
2022 |
|
|
2021 |
|
|
Change |
|
|
Change |
|
|
|
(Dollars In Thousands) |
|
|
|
|
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
AN & Nitric Acid |
|
$ |
66,161 |
|
|
$ |
47,453 |
|
|
$ |
18,708 |
|
|
|
39 |
% |
Urea ammonium nitrate (UAN) |
|
|
50,459 |
|
|
|
26,034 |
|
|
|
24,425 |
|
|
|
94 |
% |
Ammonia |
|
|
52,075 |
|
|
|
42,307 |
|
|
|
9,768 |
|
|
|
23 |
% |
Other |
|
|
15,578 |
|
|
|
11,405 |
|
|
|
4,173 |
|
|
|
37 |
% |
Total net sales |
|
$ |
184,273 |
|
|
$ |
127,199 |
|
|
$ |
57,074 |
|
|
|
45 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit: |
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted gross profit (1) |
|
$ |
57,450 |
|
|
$ |
43,056 |
|
|
$ |
14,394 |
|
|
|
33 |
% |
Depreciation and amortization (2) |
|
|
(16,083 |
) |
|
|
(17,633 |
) |
|
|
1,550 |
|
|
|
(9 |
)% |
Turnaround expense |
|
|
(19,238 |
) |
|
|
(7,976 |
) |
|
|
(11,262 |
) |
|
|
141 |
% |
Total gross profit |
|
|
22,129 |
|
|
|
17,447 |
|
|
|
4,682 |
|
|
|
27 |
% |
Selling, general and administrative expense |
|
|
9,138 |
|
|
|
11,600 |
|
|
|
(2,462 |
) |
|
|
(21 |
%) |
Other expense (income), net |
|
|
(75 |
) |
|
|
474 |
|
|
|
(549 |
) |
|
|
|
Operating income |
|
|
13,066 |
|
|
|
5,373 |
|
|
|
7,693 |
|
|
|
143 |
% |
Interest expense, net |
|
|
12,193 |
|
|
|
12,956 |
|
|
|
(763 |
) |
|
|
(6 |
)% |
Non-operating other expense (income), net |
|
|
(2,219 |
) |
|
|
1,326 |
|
|
|
(3,545 |
) |
|
|
|
Provision for income taxes |
|
|
780 |
|
|
|
19 |
|
|
|
761 |
|
|
|
4005 |
% |
Net income (loss) |
|
$ |
2,312 |
|
|
$ |
(8,928 |
) |
|
$ |
11,240 |
|
|
|
126 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other information: |
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit percentage (3) |
|
|
12.0 |
% |
|
|
13.7 |
% |
|
|
(1.7 |
)% |
|
|
|
Adjusted gross profit percentage (3) |
|
|
31.2 |
% |
|
|
33.8 |
% |
|
|
(2.6 |
)% |
|
|
|
Property, plant and equipment expenditures |
|
$ |
16,100 |
|
|
$ |
11,252 |
|
|
$ |
4,848 |
|
|
|
|
(1)Represents a non-GAAP measure since the amount excludes unallocated depreciation, amortization and Turnaround expenses.
(2)Represents amount classified as cost of sales.
(3)As a percentage of the total net sales.
The following tables provide key operating metrics for the fertilizer and major industrial and mining products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
|
|
Percentage |
|
Product (tons sold) |
|
2022 |
|
|
2021 |
|
|
Change |
|
|
Change |
|
AN & Nitric Acid |
|
|
125,446 |
|
|
|
135,279 |
|
|
|
(9,833 |
) |
|
|
(7 |
)% |
Urea ammonium nitrate (UAN) |
|
|
115,352 |
|
|
|
82,555 |
|
|
|
32,797 |
|
|
|
40 |
% |
Ammonia |
|
|
55,825 |
|
|
|
80,001 |
|
|
|
(24,176 |
) |
|
|
(30 |
)% |
Total |
|
|
296,623 |
|
|
|
297,835 |
|
|
|
(1,212 |
) |
|
|
0 |
% |
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
|
|
Percentage |
|
Gross Average Selling Prices (price per ton) |
|
2022 |
|
|
2021 |
|
|
Change |
|
|
Change |
|
AN & Nitric Acid |
|
$ |
527 |
|
|
$ |
351 |
|
|
$ |
176 |
|
|
|
50 |
% |
Urea ammonium nitrate (UAN) |
|
$ |
437 |
|
|
$ |
315 |
|
|
$ |
122 |
|
|
|
39 |
% |
Ammonia |
|
$ |
933 |
|
|
$ |
529 |
|
|
$ |
404 |
|
|
|
76 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
|
|
Percentage |
|
Average Benchmark Prices (price per ton) |
|
2022 |
|
|
2021 |
|
|
Change |
|
|
Change |
|
Tampa Ammonia Benchmark |
|
$ |
1,093 |
|
|
$ |
610 |
|
|
$ |
483 |
|
|
|
79 |
% |
UAN Southern Plains |
|
$ |
482 |
|
|
$ |
355 |
|
|
$ |
127 |
|
|
|
36 |
% |
Net Sales
Net sales of our primary products increased during the third quarter of 2022 compared to the prior year period driven by stronger pricing for all of our products. Partially offsetting the benefit of stronger pricing was lower sales volumes related to Turnaround activity at our El Dorado and Pryor Facilities.
Demand for our industrial and mining products remains stable despite growing global recessionary forces. Our contractual agreements with industrial customers that specify minimum volumes and our product mix flexibility helps us mitigate the impact of a reduction in demand from certain end markets by shifting production to products with stronger demand. Our AN product is primarily sold for use in aggregates and precious metals mining operations, overall, we have been experiencing favorable trends in our mining business as rising global consumption of coal for energy has strengthened demand and pricing for AN.
Gross Profit
As noted in the table above, we recognized a gross profit of $22.1 million for the third quarter of 2022 compared to $17.4 million for the same period in 2021, or a $4.7 million improvement. Overall, our gross profit percentage was 12.0% compared to 13.7% for the same period in 2021. Our adjusted gross profit percentage decreased to 31.2% for the third quarter of 2022 from 33.8% for the third quarter of 2021.
The increase in gross profit was primarily driven by higher sales prices for our products partially offset by lower volumes of our ammonia and acid products. The improvement in gross profit was also partially offset by overall higher average natural gas costs, which averaged $7.65 per MMBtu for 2022 as compared to $3.71 per MMBtu for 2021. As a percentage of sales, gross profit and adjusted gross profit were lower overall as a result of Turnaround activity at our El Dorado and Pryor Facilities during the third quarter of 2022 compared to 2021 where we completed a Turnaround at our Cherokee Facility.
Selling, General and Administrative
Our SG&A expenses were $9.1 million for the third quarter of 2022, a decrease of $2.5 million compared to the same period in 2021. The net decrease was primarily driven by approximately $3.8 million of expense due to change of control and anti-dilutive provisions included in certain agreements as discussed above under "Items Affecting Comparability of Results of the Third Quarter" partially offset by an increase in professional fees.
Non-operating Other Expense (Income), net
Non-operating other income for the third quarter of 2022 was $2.2 million primarily relating to interest income from our short-term investments. For the same period in 2021, we had non-operating expenses of $1.3 million which primarily related to the change in fair value of the embedded derivative included in the Series E Redeemable Preferred prior to its extinguishment through the completion of the Exchange Transaction during September 2021.
Provision for Income Taxes
The provision for income taxes for the third quarter of 2022 was $0.8 million and for 2021 was minimal. The resulting effective tax rate for the third quarter of 2022 was 25.2%. For the third quarter of 2022, the effective tax rate is greater than the statutory rate primarily due to the impact of state taxes and valuation allowances. For the third quarter of 2021, the effective tax rate is less than the statutory rate primarily due to the impact of the PPP loan forgiveness, state tax law changes and valuation allowances. Also, see discussion in Note 7.
25
Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021
The following table contains certain financial information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
|
|
Percentage |
|
|
|
2022 |
|
|
2021 |
|
|
Change |
|
|
Change |
|
|
|
(Dollars In Thousands) |
|
|
|
|
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
AN & Nitric Acid |
|
$ |
234,103 |
|
|
$ |
154,029 |
|
|
$ |
80,074 |
|
|
|
52 |
% |
Urea ammonium nitrate (UAN) |
|
|
184,014 |
|
|
|
73,571 |
|
|
|
110,443 |
|
|
|
150 |
% |
Ammonia |
|
|
200,861 |
|
|
|
102,013 |
|
|
|
98,848 |
|
|
|
97 |
% |
Other |
|
|
49,079 |
|
|
|
36,398 |
|
|
|
12,681 |
|
|
|
35 |
% |
Total net sales |
|
$ |
668,057 |
|
|
$ |
366,011 |
|
|
$ |
302,046 |
|
|
|
83 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit: |
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted gross profit (1) |
|
$ |
330,732 |
|
|
$ |
120,652 |
|
|
$ |
210,080 |
|
|
|
174 |
% |
Depreciation and amortization (2) |
|
|
(49,885 |
) |
|
|
(51,314 |
) |
|
|
1,429 |
|
|
|
(3 |
)% |
Turnaround expense |
|
|
(25,064 |
) |
|
|
(8,823 |
) |
|
|
(16,241 |
) |
|
|
184 |
% |
Total gross profit |
|
|
255,783 |
|
|
|
60,515 |
|
|
|
195,268 |
|
|
|
323 |
% |
Selling, general and administrative expense |
|
|
29,711 |
|
|
|
28,938 |
|
|
|
773 |
|
|
|
3 |
% |
Other expense, net |
|
|
377 |
|
|
|
217 |
|
|
|
160 |
|
|
|
|
Operating income |
|
|
225,695 |
|
|
|
31,360 |
|
|
|
194,335 |
|
|
|
|
Interest expense, net |
|
|
34,455 |
|
|
|
37,618 |
|
|
|
(3,163 |
) |
|
|
(8 |
)% |
Loss (gain) on extinguishment of debt |
|
|
113 |
|
|
|
(10,000 |
) |
|
|
10,113 |
|
|
|
|
Non-operating other expense (income), net |
|
|
(5,627 |
) |
|
|
2,466 |
|
|
|
(8,093 |
) |
|
|
|
Provision (benefit) for income taxes |
|
|
32,277 |
|
|
|
(187 |
) |
|
|
32,464 |
|
|
|
|
Net income |
|
$ |
164,477 |
|
|
$ |
1,463 |
|
|
$ |
163,014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other information: |
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit percentage (3) |
|
|
38.3 |
% |
|
|
16.5 |
% |
|
|
21.8 |
% |
|
|
|
Adjusted gross profit percentage (3) |
|
|
49.5 |
% |
|
|
33.0 |
% |
|
|
16.5 |
% |
|
|
|
Property, plant and equipment expenditures |
|
$ |
32,531 |
|
|
$ |
26,101 |
|
|
$ |
6,430 |
|
|
|
|
(1)Represents a non-GAAP measure since the amount excludes unallocated depreciation, amortization and Turnaround expenses.
(2)Represents amount classified as cost of sales.
(3)As a percentage of the total net sales.
The following tables provide key operating metrics for the fertilizer and major industrial and mining products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
|
|
Percentage |
|
Product (tons sold) |
|
2022 |
|
|
2021 |
|
|
Change |
|
|
Change |
|
AN & Nitric Acid |
|
|
431,977 |
|
|
|
508,523 |
|
|
|
(76,546 |
) |
|
|
(15 |
)% |
Urea ammonium nitrate (UAN) |
|
|
346,066 |
|
|
|
313,794 |
|
|
|
32,272 |
|
|
|
10 |
% |
Ammonia |
|
|
192,076 |
|
|
|
229,788 |
|
|
|
(37,712 |
) |
|
|
(16 |
)% |
Total |
|
|
970,119 |
|
|
|
1,052,105 |
|
|
|
(81,986 |
) |
|
|
(8 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
|
|
Percentage |
|
Gross Average Selling Prices (price per ton) |
|
2022 |
|
|
2021 |
|
|
Change |
|
|
Change |
|
AN & Nitric Acid |
|
$ |
542 |
|
|
$ |
303 |
|
|
$ |
239 |
|
|
|
79 |
% |
Urea ammonium nitrate (UAN) |
|
$ |
532 |
|
|
$ |
234 |
|
|
$ |
298 |
|
|
|
127 |
% |
Ammonia |
|
$ |
1,046 |
|
|
$ |
444 |
|
|
$ |
602 |
|
|
|
136 |
% |
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
|
|
Percentage |
|
Average Benchmark Prices (price per ton) |
|
2022 |
|
|
2021 |
|
|
Change |
|
|
Change |
|
Tampa Ammonia Benchmark |
|
$ |
1,185 |
|
|
$ |
505 |
|
|
$ |
680 |
|
|
|
135 |
% |
UAN Southern Plains |
|
$ |
563 |
|
|
$ |
303 |
|
|
$ |
260 |
|
|
|
86 |
% |
Net Sales
Agricultural product sales increased driven primarily by higher sales prices for all of our agricultural products partially offset by lower sales volumes of HDAN and ammonia resulting from the impact of wet weather which delayed the application of fertilizer products. Also lowering sales volume in 2022 was the activity from two Turnarounds at our El Dorado and Pryor Facilities compared to one Turnaround at our Cherokee Facility during 2021. Historically, we have built inventory of HDAN used for fertilizer in the second half of the year, to sell in season, during the first nine months of the following year. Due to a shift in product mix to nitric acid volumes beginning in the second quarter of 2021, which are more ratable, we did not have significant inventory build of AN over the latter half of 2021 to sell during the fertilizer season in 2022. As discussed above under “Recent Business Developments,” increased demand, higher corn prices and tighter supplies of nitrogen products contributed to the improved pricing.
Demand for our industrial and mining products remains stable despite growing global recessionary forces. Our contractual agreements with industrial customers that specify minimum volumes and our product mix flexibility helps us mitigate the impact of a reduction in demand from certain end markets by shifting production to products with stronger demand. Our AN product is primarily sold for use in aggregates and precious metals mining operations, overall, we have been experiencing favorable trends in our mining business as rising global consumption of coal for energy has strengthened demand and pricing for AN.
Gross Profit
As noted in the table above, we recognized a gross profit of $255.8 million for the first nine months of 2022 compared to $60.5 million for the same period in 2021, or a $195.3 million improvement. Overall, our gross profit percentage was 38.3% compared to 16.5% for the same period in 2021. Our adjusted gross profit percentage increased to 49.5% for the first nine months of 2022 from 33.0% for the first nine months of 2021.
The increase in gross profit was primarily driven by higher sales prices for our products and increased UAN sales volumes partially offset by lower volumes of ammonia and acids products. The improvement in gross profit was partially offset by overall higher average natural gas costs, which averaged $6.45 per MMBtu for the first nine months of 2022 as compared to $3.20 per MMBtu for the same period of 2021. Also reducing gross profit was the Turnaround activity at our El Dorado and Pryor Facilities during the third quarter of 2022 compared to 2021 where we had a Turnaround at our Cherokee Facility.
Selling, General and Administrative
Our SG&A expenses were $29.7 million for the first nine months of 2022, a slight increase of $0.8 million compared to the same period in 2021. The net increase was primarily driven by approximately $2.6 million of expenses relating to nonrecurring transaction fees, $1.6 million in insurance and other miscellaneous fees and approximately $0.4 million in other professional fees partially offset by approximately $3.8 million of expense due to change of control and anti-dilutive provisions included in certain agreements as discussed above under "Items Affecting Comparability of Results of the Third Quarter".
Interest Expense
Interest expense for the first nine months of 2022 was $34.5 million compared to $37.6 million for the same period in 2021. The decrease relates primarily to lower interest expense incurred from the new senior secured notes held during the first quarter of 2022 which carry an interest rate of 6.25% compared to the same period in 2021 which the old senior secured notes interest rate was 9.625%.
Gain on Extinguishment of Debt – PPP Loan Forgiven
In June 2021, our PPP loan was fully forgiven by the SBA and lender. As a result, we recognized a gain on the extinguishment of debt of $10 million for the second quarter of 2021.
Non-operating Other Expense (Income), net
Non-operating other income for the first nine months of 2022 was $5.6 million primarily relating to a recognized settlement of our company owned life insurance from the payment by our insurer of a death benefit relating to the death of J. Golsen as discussed in Note 9 and interest income from to our short-term investments. For the same period in 2021, we had non-operating operating expense of $2.5 million which primarily related to the change in fair value of the embedded derivative included in the Series E Redeemable Preferred prior to its extinguishment through the completion of the Exchange Transaction during September 2021.
27
Provision (Benefit) for Income Taxes
The provision for income taxes for the first nine months of 2022 was $32.3 million compared to a benefit of $0.2 million for the same period in 2021. For the first nine months of 2022, the effective tax rate is less than the statutory rate primarily due to the impact of valuation allowances. For the first nine months of 2021, the effective tax rate is less than the statutory rate primarily due to the impact of the PPP loan forgiveness, state tax law changes, and valuation allowances. Also, see discussion in Note 7.
LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes our cash flow activities for the nine months ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2022 |
|
|
2021 |
|
|
Change |
|
|
|
(In Thousands) |
|
Net cash flows from operating activities |
|
$ |
259,182 |
|
|
$ |
65,471 |
|
|
$ |
193,711 |
|
|
|
|
|
|
|
|
|
|
|
Net cash flows from investing activities |
|
$ |
(392,948 |
) |
|
$ |
(25,719 |
) |
|
$ |
(367,229 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash flows from financing activities |
|
$ |
71,257 |
|
|
$ |
(23,161 |
) |
|
$ |
94,418 |
|
Net Cash Flow from Operating Activities
Net cash provided by operating activities was $259.2 million for the first nine months of 2022 compared to $65.5 million for the same period of 2021, a change of $193.7 million.
For the first nine months of 2022, the net cash provided is the result of a net income of $164.5 million plus adjustments of $50.0 million for depreciation and amortization of PP&E, $31.2 million for deferred taxes, other adjustments of $1.6 million and cash provided of $11.9 million primarily from our working capital.
For the first nine months of 2021, the net cash provided is the result of net income of $1.5 million plus adjustments of $51.4 million for depreciation and amortization of PP&E, other adjustments of $8.8 million less $10.0 million for a gain on extinguishment of debt, and net cash provided of $13.8 million primarily from our working capital.
Net Cash Flow from Investing Activities
Net cash used by investing activities was $392.9 million for the first nine months 2022 compared to $25.7 million for the same period of 2021, a change of $367.2 million.
For the first nine months of 2022, the net cash used primarily relates to purchases of short-term investments of $423.1 million and expenditures for PP&E of $32.5 million partially offset by short-term investment maturities of $59.7 million.
For the first nine months of 2021, the net cash used relates primarily to expenditures for PP&E.
Net Cash Flow from Financing Activities
Net cash provided by financing activities was $71.3 million for the first nine months of 2022 compared to net cash used of $23.2 million for the same period of 2021, a change of $94.4 million.
For the first nine months of 2022, the net cash provided primarily consists of proceeds of $200 million from the New Notes partially offset by payments for the acquisition of treasury shares of $101.9 million, payments on other long-term debt and short-term financing of $22.2 million, payments of $4.5 million for equity and debt-related cost and $0.1 million for other financing activities.
For the first nine months of 2021, the net cash used primarily consists of payments on other long-term debt and short-term financing of $20.2 million, payments of $2.6 million for equity and debt-related cost and $0.3 million for other financing activities.
28
Capitalization
The following is our total current cash, short-term investments, long-term debt and stockholders’ equity:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2022 |
|
|
2021 |
|
|
|
(In Millions) |
|
Cash and cash equivalents |
|
$ |
19.6 |
|
|
$ |
82.1 |
|
|
|
|
|
|
|
|
Short-term investments |
|
|
365.6 |
|
|
|
— |
|
Total cash, cash equivalents and short-term investments |
|
$ |
385.2 |
|
|
$ |
82.1 |
|
Long-term debt: |
|
|
|
|
|
|
Working Capital Revolver Loan |
|
$ |
— |
|
|
$ |
— |
|
Senior Secured Notes due 2028 (1) |
|
|
700.0 |
|
|
|
500.0 |
|
Secured Financing due 2023 |
|
|
5.3 |
|
|
|
7.7 |
|
Secured Financing due 2025 |
|
|
20.9 |
|
|
|
24.0 |
|
Secured Loan Agreement due 2025 |
|
|
— |
|
|
|
5.3 |
|
Other |
|
|
0.8 |
|
|
|
0.3 |
|
Unamortized discount and debt issuance costs |
|
|
(12.9 |
) |
|
|
(9.7 |
) |
Total long-term debt, including current portion, net |
|
$ |
714.1 |
|
|
$ |
527.6 |
|
Total stockholders' equity |
|
$ |
526.1 |
|
|
$ |
460.5 |
|
(1)See discussion contained in Note 4.
We currently have a revolving credit facility, our Working Capital Revolver Loan, with a borrowing base of $65 million. As of September 30, 2022, our Working Capital Revolver Loan was undrawn and had approximately $63.4 million of availability.
For the full year of 2022, we expect capital expenditures to be approximately $65 million. This capital spending is planned for reliability and maintenance capital projects.
From time to time, when the Company exceeds the funding threshold in our natural gas purchase commitments the Company is required to fund cash collateral to our counterparty.
We believe that the combination of our cash on hand, short-term investments, the availability on our revolving credit facility and our cash flow from operations will be sufficient to fund our anticipated liquidity needs for the next twelve months.
During May 2022, our Board authorized a $50 million stock repurchase program. In August 2022, our Board authorized an increase in the size of the stock repurchase program to $100 million. During the third quarter of 2022, we exhausted the repurchase authorization under the stock repurchase program. In October 2022, our Board approved another expansion of the stock repurchase program, authorizing us to repurchase an additional $75 million of our outstanding common stock under the stock repurchase program.
As of September 30, 2022, we have approximately $385 million of cash and short-term investments. From time to time, we may seek to deploy capital through additional share repurchases or the retirement or purchase of outstanding debt. Such repurchases may be made in open market purchases, privately negotiated transactions or otherwise and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.
Compliance with Long - Term Debt Covenants
As discussed in Note 4, the Working Capital Revolver Loan requires, among other things, that we meet certain financial covenants. The Working Capital Revolver Loan does not include financial covenant requirements unless a defined covenant trigger event has occurred and is continuing. As of September 30, 2022, no trigger event had occurred.
Loan Agreements
Senior Secured Notes due 2028 – LSB has $700 million aggregate principal amount of the 6.25% Senior Secured Notes currently outstanding, including the $200 million associated with the New Notes as discussed in footnote (B) of Note 4. Interest is to be paid semiannually in arrears on May 15th and October 15th, maturing October 15, 2028. The proceeds from the issuance of the New Notes were used to pay related transaction expenses, with the remainder intended to be used to pursue strategic acquisition opportunities, to fund organic growth and for general corporate purposes.
Secured Financing due 2023 – EDC is party to a secured financing arrangement with an affiliate of Eldridge. Principal and interest are payable in 48 equal monthly installments with a final balloon payment of approximately $3 million due in June 2023.
Secured Financing due 2025 – EDA is party to a $30 million secured financing arrangement with an affiliate of Eldridge. Principal and interest are payable in 60 equal monthly installments with a final balloon payment of approximately $5 million due in August 2025.
29
Working Capital Revolver Loan – At September 30, 2022, our Working Capital Revolver Loan was undrawn and had approximately $63.4 million of availability, based on our eligible collateral, less outstanding letters of credit as of that date. Also see discussion above under “Compliance with Long-Term Debt Covenants.”
Capital Expenditures – First Nine Months of 2022
For the first nine months of 2022, capital expenditures relating to PP&E were $32.5 million. The capital expenditures were funded primarily from cash and working capital.
See discussion above under “Capitalization” for our expected capital expenditures.
Expenses Associated with Environmental Regulatory Compliance
We are subject to specific federal and state environmental compliance laws, regulations and guidelines. As a result, our expenses were $2.9 million during the first nine months of 2022 in connection with environmental projects. For the remainder of 2022, we expect to incur expenses ranging from $0.8 million to $1.1 million in connection with additional environmental projects. However, it is possible that the actual costs could be significantly different than our estimates.
Seasonality
We believe fertilizer products sold to the fertilizer industry are seasonal, while sales into the industrial and mining sectors generally are less susceptible to seasonal fluctuations. The selling seasons for fertilizer products are primarily during the spring and fall planting seasons, which typically extend from March through June and from September through November in the geographical markets where we distribute the majority of our fertilizer products. As a result, we typically increase our inventory of fertilizer products prior to the beginning of each planting season in order to meet the demand for our products. In addition, the amount and timing of sales to the fertilizer markets depend upon weather conditions and other circumstances beyond our control.
Performance and Payment Bonds
We are contingently liable to sureties in respect of insurance bonds issued by the sureties in connection with certain contracts entered into by subsidiaries in the normal course of business. These insurance bonds primarily represent guarantees of future performance of our subsidiaries. As of September 30, 2022, we have agreed to indemnify the sureties for payments, up to $9.7 million, made by them in respect of such bonds. These insurance bonds are expected to expire or be renewed later in 2022-2023.
New Accounting Pronouncements
Refer to Note 1 for recently issued accounting standards.
Critical Accounting Policies and Estimates
See “Critical Accounting Policies and Estimates,” Item 7 of our 2021 Form 10-K. In addition, the preparation of financial statements requires us to make estimates and assumptions that affect the reported amount of assets, liabilities, revenues and expenses and disclosures of contingencies and fair values, including, but not limited to, various environmental and legal matters, including matters discussed under footnote A of Note 5.
Income Taxes - Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those differences are expected to be recovered or settled. We establish valuation allowances if we believe it is more-likely-than-not that some or all of deferred tax assets will not be realized. Significant judgment is applied in evaluating the need for and the magnitude of appropriate valuation allowances against deferred tax assets.
It is also reasonably possible that the estimates and assumptions utilized as of September 30, 2022 could change in the near term. Actual results could differ materially from these estimates and judgments, as additional information becomes known.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K under the Exchange Act.
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Item 4. Controls and Procedures
The Company maintains disclosure controls and procedures as defined in Rule 13a-15 under the Exchange Act designed to provide reasonable assurance that the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. These include controls and procedures designed to ensure that this information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Management, with the participation of the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company's disclosure controls and procedures as of September 30, 2022. Based on this evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures were effective as of September 30, 2022, at the reasonable assurance level.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained within this report may be deemed “Forward-Looking Statements” within the meaning of Section 27A of the Securities Act of 1933 (as amended, the “Securities Act”) and Section 21E of the Securities Exchange Act. All statements in this report other than statements of historical fact are Forward-Looking Statements that are subject to known and unknown risks, uncertainties and other factors which could cause actual results and performance of the Company to differ materially from such statements. The words “believe,” “expect,” “anticipate,” “intend,” “plan,” “may,” “could” and similar expressions identify Forward-Looking Statements. Forward-Looking Statements contained herein include, but are not limited to, the following:
•the impact of Eldridge and its affiliates holding a substantial percentage of our common stock;
•our ability to invest in projects that will generate the best returns for our stockholders;
•the impact from the COVID-19 pandemic;
•our future liquidity outlook;
•the outlook of our chemical products and related markets;
•the amount, timing and effect on the nitrogen market from the recent nitrogen expansion projects;
•the effect from the lack of non-seasonal volume;
•our belief that competition is based upon service, price, location of production and distribution sites and product quality and performance;
•our outlook for the industrial and mining industries;
•the availability of raw materials;
•our ability to broaden the distribution of our products, including our ability to leverage our nitric acid production capacity at our El Dorado Facility;
•our ability to develop a strategy to capitalize on ammonia opportunities;
•changes in domestic fertilizer production;
•the increasing output and capacity of our production facilities;
•on-stream rates at our production facilities;
•our ability to moderate risk inherent in agricultural markets;
•the sources to fund our cash needs and how this cash will be used;
•the ability to enter into the additional borrowings;
•the anticipated cost and timing of our capital projects;
•certain costs covered under warranty provisions;
•our ability to pass to our customers cost increases in the form of higher prices;
•our belief as to whether we have sufficient sources for materials and components;
•annual natural gas requirements;
•compliance by our facilities with the terms of our permits;
•the costs of compliance with environmental laws, health laws, security regulations and transportation regulations;
•our belief as to when Turnarounds will be performed and completed;
•expenses in connection with environmental projects;
•the effect of litigation and other contingencies;
•the increase in interest expense;
•our ability to comply with debt servicing and covenants;
•our ability to meet debt maturities or redemption obligations when due; and
•our beliefs as to whether we can meet all required covenant tests for the next twelve months.
While we believe the expectations reflected in such Forward-Looking Statements are reasonable, we can give no assurance such expectations will prove to have been correct. There are a variety of factors which could cause future outcomes to differ materially from those described in this report, including, but not limited to, the following:
•changes in the ownership percentage of Eldridge and its affiliates resulting in them no longer collectively holding a substantial percentage of common stock;
•changes associated with the COVID-19 pandemic and governmental and related responses;
•changes in general economic conditions, both domestic and foreign;
•material reductions in revenues;
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•material changes in interest rates;
•widespread inflation, both domestic and foreign;
•substantial supply chain disruptions;
•our ability to collect in a timely manner a material amount of receivables;
•increased competitive pressures;
•adverse effects on increases in prices of raw materials;
•changes in federal, state and local laws and regulations, including environmental regulations, or in the interpretation of such;
•changes in laws, regulations or other issues related to climate change;
•releases of pollutants into the environment exceeding our permitted limits;
•material increases in equipment, maintenance, operating or labor costs not presently anticipated by us;
•the requirement to use internally generated funds for purposes not presently anticipated;
•the inability to secure additional financing for planned capital expenditures or financing obligations due in the near future;
•our substantial existing indebtedness;
•material changes in the cost of natural gas and certain precious metals;
•limitations due to financial covenants;
•the loss of any significant customer;
•changes in operating strategy or development plans;
•our inability to adequately evaluate potential acquisitions of strategic assets or companies;
•an inability to fund the working capital and expansion of our businesses;
•our inability to improve our capital structure and overall cost of capital;
•changes in the production efficiency of our facilities;
•adverse results in our contingencies including pending litigation;
•unplanned downtime at one or more of our chemical facilities;
•changes in production rates at any of our chemical plants;
•an inability to obtain necessary raw materials and purchased components;
•material increases in cost of raw materials;
•material changes in our accounting estimates;
•significant problems within our production equipment;
•fire or natural disasters;
•an inability to obtain or retain our insurance coverage;
•difficulty obtaining necessary permits;
•difficulty obtaining third-party financing;
•risks associated with proxy contests initiated by dissident stockholders;
•changes in fertilizer production;
•reduction in acres planted for crops requiring fertilizer;
•decreases in duties for products we sell resulting in an increase in imported products into the U.S.;
•adverse effects from regulatory policies, including tariffs;
•volatility of natural gas prices;
•increases in imported agricultural products; and
•other factors described in “Risk Factors” in our Form 10-K for the year ended December 31, 2021, as amended by the Form 10-K/A filed on March 25, 2022.
Given these uncertainties, all parties are cautioned not to place undue reliance on such Forward-Looking Statements. We disclaim any obligation to update any such factors or to publicly announce the result of any revisions to any of the Forward-Looking Statements contained herein to reflect future events or developments.
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The following is a list of terms used in this report.
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ADEQ |
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The Arkansas Department of Environmental Quality. |
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AN |
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Ammonium nitrate. |
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ASU |
- |
Accounting Standard Update. |
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CAO |
- |
A consent administrative order. |
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Cherokee Facility |
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Our chemical production facility located in Cherokee, Alabama. |
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Chevron |
- |
Chevron Environmental Management Company. |
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COVID-19 |
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The novel coronavirus disease of 2019. |
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EDA |
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El Dorado Ammonia L.L.C. |
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EDC |
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El Dorado Chemical Company. |
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El Dorado Facility |
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Our chemical production facility located in El Dorado, Arkansas. |
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Eldridge |
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Eldridge Industries, L.L.C. |
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Environmental and Health Laws |
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Numerous federal, state and local environmental, health and safety laws. |
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EUC |
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Environmental Use Control. |
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FASB |
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Financial Accounting Standards Board. |
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Financial Covenant |
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Certain springing financial covenants associated with the working capital revolver loan. |
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Global |
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Global Industrial, Inc., a subcontractor asserting mechanics liens for work rendered to LSB and EDC. |
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Hallowell Facility |
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A chemical facility previously owned by two of our subsidiaries located in Kansas. |
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HDAN |
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High density ammonium nitrate prills used in the agricultural industry. |
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Indenture |
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The agreement governing the 6.25% senior secured notes. |
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IRS |
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Internal Revenue Service. |
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KDHE |
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The Kansas Department of Health and Environment. |
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LDAN |
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Low density ammonium nitrate prills used in the mining industry. |
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Leidos |
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Leidos Constructors L.L.C. |
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LSB |
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LSB Industries, Inc. |
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LSB Funding |
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LSB Funding L.L.C., an affiliate of Eldridge. |
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Maximum Revolver Amount |
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The maximum amount of outstanding advances available under our Working Capital Revolver Loan. |
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MD&A |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
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New Notes |
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The senior secured notes issued March 8, 2022 with an interest rate of 6.25%, which mature in October 2028. |
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Note |
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A note in the accompanying notes to the condensed consolidated financial statements. |
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Notes |
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The senior secured notes issued on October 14, 2021 with an interest rate of 6.25%, which mature in October 2028. |
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ODEQ |
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The Oklahoma Department of Environmental Quality. |
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PCC |
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Pryor Chemical Company. |
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PP&E |
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Plant, property and equipment. |
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PPP |
- |
Paycheck Protection Program. |
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Pryor Facility |
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Our chemical production facility located in Pryor, Oklahoma. |
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SBA |
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Small Business Administration. |
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SBT Investors |
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SBT Investors, L.L.C., an affiliate of Eldridge. |
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SEC |
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The U.S. Securities and Exchange Commission. |
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Secured Financing due 2023 |
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A secured financing arrangement between EDC and an affiliate of Eldridge which matures in June 2023. |
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Secured Financing due 2025 |
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A secured financing arrangement between EDA and an affiliate of Eldridge which matures in August 2025. |
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Senior Secured Notes |
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The Notes and New Notes, taken together due on October 15, 2028 with a stated interest rate of 6.25%. |
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SG&A |
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Selling, general and administrative expense. |
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Ton |
- |
A unit of weight equal to 2,000 pounds. |
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Turnaround |
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A planned major maintenance activity. |
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UAN |
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Urea ammonium nitrate. |
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U.S. |
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United States. |
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U.S. GAAP |
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U.S. Generally Accepted Accounting Principles. |
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USDA |
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United States Department of Agriculture. |
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WASDE |
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World Agricultural Supply and Demand Estimates Report. |
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West Fertilizer |
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West Fertilizer Company. |
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Working Capital Revolver Loan |
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Our secured revolving credit facility. |
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2005 Agreement |
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A death benefit agreement with Jack E. Golsen. |
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2021 Crop |
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Corn crop marketing year (September 1 - August 31), which began in 2020 and ended in 2021 and primarily relates to corn planted and harvested in 2020. |
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2022 Crop |
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Corn crop marketing year (September 1 - August 31), which began in 2021 and will end in 2022 and primarily relates to corn planted and harvested in 2021. |
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2023 Crop |
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Corn crop marketing year (September 1 - August 31), which began in 2022 and will end in 2023 and primarily relates to corn planted and harvested in 2022. |
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