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 March 31, 2023 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 our subsidiaries, we manufacture and sell 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, Canada and the Caribbean.
Key Operating Initiatives for 2023
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 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. In 2023 we remain focused on our efforts to further the progress we have made with our safety programs to move closer to attaining zero injuries. We plan to continue to invest additional capital at all three of our facilities during 2023 to build upon the success we have had in implementing enhanced safety programs during the last several years.
▪We have multiple initiatives currently underway focused on continuing to improve the reliability of our plants as we advance towards our 95% on-stream operating rate goal. Progress towards this goal would enable us to produce greater volumes of product for sale while lowering our unit cost of production thereby increasing our overall profitability. 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 2022, we were successful in improving upon the production capacity of our plants, particularly through Turnarounds at two of our facilities. 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. In January of 2023, we took over direct distribution of our Pryor facility’s UAN production following several years of working with a third party to sell the product. We believe that this, combined with continued expansion of our customer relationships and the robust market analysis capabilities we have developed, will make us more effective in identifying and capitalizing on the most profitable distribution opportunities for our products. Additionally, we will continue to progress several capital improvement projects during 2023 that are related to our storage and distribution capabilities which we believe will assist us in improving our overall margins.
•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. 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.
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. The resulting low carbon emission product, 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.
17
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 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 our facilities to increase production capacity through the implementation of several potential debottlenecking projects. Our initial calculations suggest that these projects could potentially represent significant incremental annual profitability using an assumed mid-market pricing for Tampa Ammonia, UAN and natural gas. We have engaged third party engineering firms to conduct feasibility studies on several potential projects at our El Dorado site. We expect to receive the results of these studies by mid-year 2023. If the proposed projects meet our return criteria, we would expect to make recommendations to our Board to move forward and engage an engineering firm to conduct the front end engineering design ("FEED") process. We estimate the FEED process will take nine to twelve months to complete. Upon completion of the FEED process, we expect to again review the projects in relation to the outlook for our product end markets and the overall economy and make a decision as to which products to pursue.
•Pursue Acquisitions of Strategic Assets or Companies. We are continuously evaluating 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 a potential debottlenecking project 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 February 2023, we achieved a key milestone in the advancement of our blue ammonia project at El Dorado by filing a pre-construction Class VI permit application with the U.S. Environmental Protection Agency (the “EPA”). The EPA accepted our application in March 2023.
In May 2022 we entered into agreements with Thyssenkrupp Uhde USA, LLC and Bloom Energy Corporation, (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 completed a feasibility study to convert a small portion of Pryor’s existing conventional or “grey” ammonia capacity into green ammonia. We continue to work with several engineering, procurement and construction firms for other designs and cost estimates. Once a project design is selected and Board approval is granted, the project will move forward into the FEED, detailed engineering and construction. 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.
Lower Product Selling Prices Partially Offset by Stronger Sales Volume
Sales volumes of our products increased in the first quarter of 2023 as compared to the same quarter of 2022. This was driven largely by stronger ammonia production at our facilities, reflecting investments we have made in plant reliability over the past several years. With respect to our first quarter 2023 profitability, higher sales volumes were more than offset by the impact of lower selling prices relative to the first quarter of 2022.
A key factor in the decline in nitrogen fertilizer prices over the past eight months is the decline in natural gas costs in Europe. Natural gas is the primary feedstock for the production of ammonia. Natural gas prices in Europe have dropped due to a reduction in demand primarily related to warmer than expected temperatures throughout Europe this past winter and a reduction in industrial demand. The lower natural gas costs have enabled numerous European ammonia facilities to resume operations, increasing global supply for nitrogen products. With that said, natural gas costs in Europe remain significantly higher than those in the U.S. and European operators remain the high cost, or marginal producers, with production costs substantially higher than those in the U.S.
18
In addition to the lower production costs for European producers as compared to a year ago, the decline in fertilizer prices reflects the impact of a delayed spring fertilizer application in many corn growing regions of the U.S. due to cold and wet weather. Nitrogen prices have also been pressured by lower demand for ammonia from Asian industrial markets as well as from phosphate producers.
Despite these factors, nitrogen pricing remains at attractive levels and appears to have stabilized with potential for improvement as 2023 progresses, given an increasingly favorable demand outlook.
We expect favorable U.S. corn market dynamics to continue to provide support for stronger fertilizer pricing as 2023 progresses. Current U.S. corn stock/use ratios sit near multi-year lows due, in part, to the impact of dry conditions in South America, the Western U.S. and parts of Europe on global corn supplies. As a result, corn prices remain significantly above 10-year averages which, combined with lower input costs relative to last year, should incentivize farmers to plant additional acres and maximize yield through the current planting season. Recent U.S. Department of Agriculture (“USDA”) reports indicate that U.S. corn acreage planted in the 2022-2023 planting season was approximately 88.6 million acres, lower than the 2021-2022 estimated plantings of 93.3 million acres. As a result of the reduction in acres planted for the 2022-2023 season and the impact on global corn stocks which remain below usage levels, we believe that acres planted for the 2023-2024 season could increase to approximately 92 million acres, which we expect to drive increased demand for fertilizers.
Our industrial business has been robust and demand for our products is steady. Nitric acid demand is stable as the demand impacts of high inflation in the U.S. has been offset by global producers shifting production from international facilities to their U.S. operations in order to take advantage of lower domestic input costs. Demand for AN for use in mining applications is robust due to attractive market fundamentals for quarrying and aggregate production and U.S. metals. While economic concerns persist for 2023, we believe 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.
Key Industry Factors
Supply and Demand
Fertilizer
The price at which our agricultural 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, including the impact from the Phase 1 trade agreement between the U.S. and China. 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 April 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 34 million metric tons, a 2.6% decrease from the 2021 Harvest. The USDA also lowered the expected yield for the 2022 Harvest, down approximately 2% from a year ago.
The following April 2023 estimates are associated with the corn market:
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|
|
|
|
|
|
|
|
|
2023 Crop |
|
|
2022 Crop |
|
|
|
|
2021 Crop |
|
|
|
|
|
|
(2022 Harvest) |
|
|
(2021 Harvest) |
|
|
Percentage |
|
(2020 Harvest) |
|
|
Percentage |
|
|
|
April Report (1) |
|
|
April Report (1) |
|
|
Change (2) |
|
April 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) |
|
|
173.3 |
|
|
|
176.7 |
|
|
|
(1.9 |
%) |
|
171.4 |
|
|
|
1.1 |
% |
U.S. Production (Million bushels) |
|
|
13,730 |
|
|
|
15,074 |
|
|
|
(8.9 |
%) |
|
14,111 |
|
|
|
(2.7 |
%) |
U.S. Ending Stocks (Million metric tons) |
|
|
34.1 |
|
|
|
35.0 |
|
|
|
(2.6 |
%) |
|
31.4 |
|
|
|
8.6 |
% |
World Ending Stocks (Million metric tons) |
|
|
295.3 |
|
|
|
306.9 |
|
|
|
(3.8 |
%) |
|
292.8 |
|
|
|
0.9 |
% |
1.Information obtained from WASDE report dated April 11, 2023 (“April 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
19
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 the U.S. is for reductions to imports and food, seed, and industrial (FSI) use, with unchanged ending stocks. Corn imports were lowered 10 million bushels and feed and residual use was left unchanged. FSI was lowered 10 million bushels reflecting cuts to corn used for glucose and dextrose and starch. With supply and use falling by the same amount, ending stocks are unchanged. From a demand perspective, corn prices remain well above historical 5-year averages and remain significantly higher than $4 per bushel, the level that we believe represents a key threshold as it relates to favorable farmer economics.
Industrial and Mining Products
Our industrial products sales volumes are dependent upon general economic conditions, primarily in the housing, automotive and paper industries. Demand for our industrial products has remained steady. Nitric acid demand is stable as the demand impacts of high inflation in the U.S. has been offset by global producers shifting production from international facilities to their U.S. operations in order to take advantage of lower domestic input costs. 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. Demand for AN for use in mining applications is solid due to attractive market fundamentals for quarrying and aggregate production and U.S. metals.
While economic concerns persist for 2023, we believe that for both our industrial and mining products 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.
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, short-term in nature 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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|
|
March 31, |
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|
|
2023 |
|
|
2022 |
|
Natural gas volumes (MMBtu in millions) |
|
|
7.4 |
|
|
|
7.2 |
|
Natural gas average cost per MMBtu |
|
$ |
5.66 |
|
|
$ |
4.74 |
|
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 are 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
20
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 completed its scheduled ammonia plant Turnaround during the fourth quarter of 2022. Our El Dorado Facility and our Pryor Facility are now on a three-year and two-year ammonia plant Turnaround cycle, respectively.
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 2023, we are targeting total ammonia production of approximately 830,000 tons to 850,000 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 First Quarter of 2023
Our consolidated net sales for the first quarter of 2023 were $181.0 million compared to $199.0 million for the same period in 2022. Our consolidated operating income for the first quarter of 2023 was $30.5 million compared to $80.0 million for the same period in 2022. The items impacting our operating results are discussed in more detail below and under “Results of Operations.”
Items Affecting Comparability of Results of the First Quarter
Selling Prices
For the first quarter of 2023, average selling prices for our key products decreased compared to the first quarter of 2022. As discussed above under “Recent Business Developments,” declining European natural gas prices resulting in ammonia production costs in Europe declining substantially, translating into lower selling prices for ammonia and ammonia derivative fertilizers.
For the first quarter of 2023, average industrial selling prices for most of our products were also lower compared to the same period of 2022, primarily driven by the $478 per metric ton decrease in the Tampa Ammonia benchmark price, as many of our industrial contracts are indexed to the Tampa Ammonia benchmark price.
Results of Operations
The following Results of Operations should be read in conjunction with our condensed consolidated financial statements for the three months ended March 31, 2023 and 2022 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.
21
Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022
The following table contains certain financial information:
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|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
March 31, |
|
|
|
|
|
Percentage |
|
|
|
2023 |
|
|
2022 |
|
|
Change |
|
|
Change |
|
|
|
(Dollars In Thousands) |
|
|
|
|
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
AN & Nitric Acid |
|
$ |
58,272 |
|
|
$ |
71,800 |
|
|
$ |
(13,528 |
) |
|
|
(19 |
)% |
Urea ammonium nitrate (UAN) |
|
|
46,590 |
|
|
|
56,569 |
|
|
|
(9,979 |
) |
|
|
(18 |
)% |
Ammonia |
|
|
63,415 |
|
|
|
59,342 |
|
|
|
4,073 |
|
|
|
7 |
% |
Other |
|
|
12,687 |
|
|
|
11,270 |
|
|
|
1,417 |
|
|
|
13 |
% |
Total net sales |
|
$ |
180,964 |
|
|
$ |
198,981 |
|
|
$ |
(18,017 |
) |
|
|
(9 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit: |
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted gross profit (1) |
|
$ |
59,015 |
|
|
$ |
110,418 |
|
|
$ |
(51,403 |
) |
|
|
(47 |
)% |
Depreciation and amortization (2) |
|
|
(17,416 |
) |
|
|
(17,157 |
) |
|
|
(259 |
) |
|
|
2 |
% |
Turnaround expense |
|
|
6 |
|
|
|
(2,531 |
) |
|
|
2,537 |
|
|
|
(100 |
)% |
Total gross profit |
|
|
41,605 |
|
|
|
90,730 |
|
|
|
(49,125 |
) |
|
|
(54 |
)% |
Selling, general and administrative expense |
|
|
9,867 |
|
|
|
10,935 |
|
|
|
(1,068 |
) |
|
|
(10 |
%) |
Other expense (income), net |
|
|
1,203 |
|
|
|
(176 |
) |
|
|
1,379 |
|
|
|
|
Operating income |
|
|
30,535 |
|
|
|
79,971 |
|
|
|
(49,436 |
) |
|
|
(62 |
)% |
Interest expense, net |
|
|
12,212 |
|
|
|
9,955 |
|
|
|
2,257 |
|
|
|
23 |
% |
Non-operating other expense (income), net |
|
|
(3,476 |
) |
|
|
135 |
|
|
|
(3,611 |
) |
|
|
|
Provision for income taxes |
|
|
5,898 |
|
|
|
11,115 |
|
|
|
(5,217 |
) |
|
|
(47 |
)% |
Net income |
|
$ |
15,901 |
|
|
$ |
58,766 |
|
|
$ |
(42,865 |
) |
|
|
73 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other information: |
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit percentage (3) |
|
|
23.0 |
% |
|
|
45.6 |
% |
|
|
(22.6 |
)% |
|
|
|
Adjusted gross profit percentage (3) |
|
|
32.6 |
% |
|
|
55.5 |
% |
|
|
(22.9 |
)% |
|
|
|
Property, plant and equipment expenditures |
|
$ |
18,437 |
|
|
$ |
8,254 |
|
|
$ |
10,183 |
|
|
|
|
(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:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
March 31, |
|
|
|
|
|
Percentage |
|
Product (tons sold) |
|
2023 |
|
|
2022 |
|
|
Change |
|
|
Change |
|
AN & Nitric Acid |
|
|
122,745 |
|
|
|
144,517 |
|
|
|
(21,772 |
) |
|
|
(15 |
)% |
Urea ammonium nitrate (UAN) |
|
|
113,026 |
|
|
|
100,153 |
|
|
|
12,873 |
|
|
|
13 |
% |
Ammonia |
|
|
88,997 |
|
|
|
60,725 |
|
|
|
28,272 |
|
|
|
47 |
% |
Total |
|
|
324,768 |
|
|
|
305,395 |
|
|
|
19,373 |
|
|
|
6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
March 31, |
|
|
|
|
|
Percentage |
|
Gross Average Selling Prices (price per ton) |
|
2023 |
|
|
2022 |
|
|
Change |
|
|
Change |
|
AN & Nitric Acid |
|
$ |
475 |
|
|
$ |
497 |
|
|
$ |
(22 |
) |
|
|
(4 |
)% |
Urea ammonium nitrate (UAN) |
|
$ |
412 |
|
|
$ |
565 |
|
|
$ |
(153 |
) |
|
|
(27 |
)% |
Ammonia |
|
$ |
713 |
|
|
$ |
977 |
|
|
$ |
(264 |
) |
|
|
(27 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
March 31, |
|
|
|
|
|
Percentage |
|
Average Benchmark Prices (price per ton) |
|
2023 |
|
|
2022 |
|
|
Change |
|
|
Change |
|
Tampa Ammonia Benchmark |
|
$ |
728 |
|
|
$ |
1,206 |
|
|
$ |
(478 |
) |
|
|
(40 |
)% |
NOLA UAN |
|
$ |
318 |
|
|
$ |
569 |
|
|
$ |
(251 |
) |
|
|
(44 |
)% |
22
Net Sales
Net sales of our primary products decreased during the first quarter of 2023 compared to the prior year period driven by the impact of lower selling prices relative to the first quarter of 2022 for all of our products. Partially offsetting weaker pricing was an increase in sales volume of ammonia driven largely by stronger production at our facilities, reflecting the investments made in plant reliability over the past several years.
Demand for our industrial and mining products remains strong 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.
Gross Profit
As noted in the table above, we recognized a gross profit of $41.6 million for the first quarter of 2023 compared to $90.7 million for the same period in 2022, or a $49.1 million reduction. Overall, our gross profit percentage was 23.0% compared to 45.6% for the same period in 2022. Our adjusted gross profit percentage decreased to 32.6% for the first quarter of 2023 from 55.5% for the first quarter of 2022.
The decrease in gross profit was primarily driven by lower sales prices for our products partially offset by higher sales volumes of our ammonia and UAN products. Gross profit was also negatively impacted by higher overall average natural gas costs, both in our beginning inventory and inventory produced during the first quarter of 2023 which averaged $5.66 per MMBtu for 2023 as compared to $4.74 per MMBtu for 2022.
Selling, General and Administrative
Our SG&A expenses were $9.9 million for the first quarter of 2023, a decrease of $1.1 million compared to the same period in 2022. The net decrease was primarily driven by approximately $2.4 million of expense relating to nonrecurring transaction fees incurred and other professional fees during the first quarter of 2022 partially offset by a $1.3 million increase in payroll related expense for the first quarter of 2023.
Other Expense (Income), net
Other expense incurred during the first quarter of 2023 primarily relates to losses incurred on the disposal of assets.
Interest Expense
Interest expense for the first quarter of 2023 was $12.2 million compared to $10.0 million for the same period of 2022. The increase relates to the issuance of $200 million of 6.25% Senior Secured Notes during March of 2022 which were outstanding during the entire first quarter of 2023.
Non-operating Other Expense (Income), net
Non-operating other income for the first quarter of 2023 was $3.5 million primarily relating to interest income from our short-term investments. Non-operating other expense was minimal for the first quarter of 2022.
Provision for Income Taxes
The provision for income taxes for the first quarter of 2023 was $5.9 million compared to $11.1 million for the same period of 2022. The resulting effective tax rate for the first quarter of 2023 was 27.1% compared to 15.9% for the same period of 2022. For the first quarter of 2023, the effective tax rate is greater than the statutory rate primarily due to the impact of state taxes including state valuation allowances on certain newly generated state tax attributes. For the first quarter of 2022 the effective tax rate was lower than the statutory rate primarily due to the impact of the valuation allowances. See discussion in Note 7.
LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes our cash flow activities for the three months ended March 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2023 |
|
|
2022 |
|
|
Change |
|
|
|
(In Thousands) |
|
Net cash flows from operating activities |
|
$ |
59,247 |
|
|
$ |
85,492 |
|
|
$ |
(26,245 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash flows from investing activities |
|
$ |
(63,379 |
) |
|
$ |
(97,514 |
) |
|
$ |
34,135 |
|
|
|
|
|
|
|
|
|
|
|
Net cash flows from financing activities |
|
$ |
(10,688 |
) |
|
$ |
184,177 |
|
|
$ |
(194,865 |
) |
23
Net Cash Flow from Operating Activities
Net cash provided by operating activities was $59.2 million for the first three months of 2023 compared to $85.5 million for the same period of 2022, a change of $26.2 million.
For the first three months of 2023, the net cash provided is the result of net income of $15.9 million plus adjustments of $17.4 million for depreciation and amortization of PP&E, $5.6 million for deferred taxes, other adjustments of $1.9 million and cash provided of $18.4 million primarily from our working capital.
For the first quarter of 2022, the net cash provided is the result of net income of $58.8 million plus adjustments of $17.2 million for depreciation and amortization of PP&E, $10.8 million for deferred taxes and other adjustments of $1.7 million and net cash used of $3.0 million primarily from our working capital.
Net Cash Flow from Investing Activities
Net cash used by investing activities was $63.4 million for the first three months of 2023 compared to $97.5 million for the same period of 2022, a change of $34.1 million.
For the first three months of 2023, the net cash used primarily relates purchases of short-term investments of $133.7 million and expenditures for PP&E of $18.4 million, partially offset by proceeds from short-term investments of $88.7 million.
For the first quarter of 2022, the net cash used primarily relates purchases of short-term investments of $89.3 million and expenditures for PP&E.
Net Cash Flow from Financing Activities
Net cash used by financing activities was $10.7 million for the first three months of 2023 compared to net cash provided of $184.2 million for the same period of 2022, a change of $194.9 million.
For the first three months of 2023, the net cash used primarily consists of payments on other long-term debt and short-term financing of $8.2 million and payments of $2.5 million for other financing activities.
For the first quarter of 2022, the net cash provided primarily consists of proceeds of $200 million from the New Notes partially offset by payments on other long-term debt and short-term financing of $9.7 million, payments of $4.1 million for equity and debt-related cost and $2.0 million for other financing activities.
Capitalization
The following is our total current cash, short-term investments, long-term debt and stockholders’ equity:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2023 |
|
|
2022 |
|
|
|
(In Millions) |
|
Cash and cash equivalents |
|
$ |
48.9 |
|
|
$ |
63.8 |
|
|
|
|
|
|
|
|
Short-term investments |
|
|
376.9 |
|
|
|
330.6 |
|
Total cash, cash equivalents and short-term investments |
|
$ |
425.8 |
|
|
$ |
394.4 |
|
Long-term debt: |
|
|
|
|
|
|
Working Capital Revolver Loan |
|
$ |
— |
|
|
$ |
— |
|
Senior Secured Notes due 2028 (1) |
|
|
700.0 |
|
|
|
700.0 |
|
Secured Financing due 2023 |
|
|
3.3 |
|
|
|
4.2 |
|
Secured Financing due 2025 |
|
|
18.0 |
|
|
|
19.3 |
|
Other |
|
|
1.1 |
|
|
|
1.1 |
|
Unamortized debt issuance costs |
|
|
(11.8 |
) |
|
|
(12.3 |
) |
Total long-term debt, including current portion, net |
|
$ |
710.6 |
|
|
$ |
712.3 |
|
Total stockholders' equity |
|
$ |
530.0 |
|
|
$ |
515.9 |
|
(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 March 31, 2023, our Working Capital Revolver Loan was undrawn and had approximately $62.3 million of availability.
For the full year of 2023, we expect capital expenditures to be approximately $60 million to $80 million. This capital spending is primarily planned for reliability and maintenance capital projects.
24
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.
As of March 31, 2023, we have approximately $426 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 March 31, 2023, 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. Interest is to be paid semiannually in arrears on May 15th and October 15th, maturing October 15, 2028.
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. The final balloon payment was repaid in April 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.
Working Capital Revolver Loan – At March 31, 2023, our Working Capital Revolver Loan was undrawn and had approximately $62.3 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 Quarter 2023
For the first quarter of 2023, capital expenditures relating to PP&E were $18.4 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 $1.1 million for the first quarter of 2023 in connection with environmental projects. For the remainder of 2023, we expect to incur expenses ranging from $3.1 million to $3.5 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 March 31, 2023, 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 2023-2024.
New Accounting Pronouncements
Refer to Note 1 for recently issued accounting standards.
25
Critical Accounting Policies and Estimates
See “Critical Accounting Policies and Estimates,” Item 7 of our 2022 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 March 31, 2023 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.
26
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 March 31, 2023. 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 March 31, 2023, at the reasonable assurance level. There were no changes to our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) during the quarter ended March 31, 2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
27
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:
•our ability to invest in projects that will generate the best returns for our stockholders;
•our future liquidity outlook;
•the outlook of our chemical products and related markets;
•the amount, timing and effect on the nitrogen market from current 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;
•the result of our product and market diversification strategy;
•changes in domestic fertilizer production;
•the increasing output and capacity of our existing 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;
•the effects of the ongoing COVID-19 pandemic and related response; 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 general economic conditions, both domestic and foreign;
•material reductions in revenues;
•material changes in interest rates;
•our ability to collect in a timely manner a material amount of receivables;
•increased competitive pressures;
•adverse effects of increases in prices of raw materials;
28
•changes in federal, state and local laws and regulations, or in the interpretation of such laws and regulations;
•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;
•increases in cost to maintain internal controls over financial reporting;
•changes in operating strategy or development plans;
•an inability to fund the working capital and expansion of our businesses;
•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;
•price increases resulting from increased inflation;
•weather conditions, including the effects of climate change;
•increases in imported agricultural products;
•global supply chain disruptions;
•other factors described in the MD&A contained in this report; and
•other factors described in “Risk Factors” in our Form 10-K for the year ended December 31, 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.
29
The following is a list of terms used in this report.
|
|
|
ADEQ |
- |
The Arkansas Department of Environmental Quality. |
|
|
|
AN |
- |
Ammonium nitrate. |
|
|
|
ASU |
- |
Accounting Standard Update. |
|
|
|
CAO |
- |
A consent administrative order. |
|
|
|
Cherokee Facility |
- |
Our chemical production facility located in Cherokee, Alabama. |
|
|
|
Chevron |
- |
Chevron Environmental Management Company. |
|
|
|
COVID-19 |
- |
The novel coronavirus disease of 2019. |
|
|
|
EDA |
- |
El Dorado Ammonia L.L.C. |
|
|
|
EDC |
- |
El Dorado Chemical Company. |
|
|
|
El Dorado Facility |
- |
Our chemical production facility located in El Dorado, Arkansas. |
|
|
|
Eldridge |
- |
Eldridge Industries, L.L.C. |
|
|
|
Environmental and Health Laws |
- |
Numerous federal, state and local environmental, health and safety laws. |
|
|
|
EUC |
- |
Environmental Use Control. |
|
|
|
FASB |
- |
Financial Accounting Standards Board. |
|
|
|
Financial Covenant |
- |
Certain springing financial covenants associated with the working capital revolver loan. |
|
|
|
Global |
- |
Global Industrial, Inc., a subcontractor asserting mechanics liens for work rendered to LSB and EDC. |
|
|
|
Hallowell Facility |
- |
A chemical facility previously owned by two of our subsidiaries located in Kansas. |
|
|
|
HDAN |
- |
High density ammonium nitrate prills used in the agricultural industry. |
|
|
|
Indenture |
- |
The agreement governing the 6.25% senior secured notes. |
|
|
|
IRS |
- |
Internal Revenue Service. |
|
|
|
KDHE |
- |
The Kansas Department of Health and Environment. |
|
|
|
LDAN |
- |
Low density ammonium nitrate prills used in the mining industry. |
|
|
|
Leidos |
- |
Leidos Constructors L.L.C. |
|
|
|
LSB |
- |
LSB Industries, Inc. |
|
|
|
Maximum Revolver Amount |
- |
The maximum amount of outstanding advances available under our Working Capital Revolver Loan. |
|
|
|
MD&A |
- |
Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
|
|
|
New Notes |
- |
The senior secured notes issued March 8, 2022 with an interest rate of 6.25%, which mature in October 2028. |
|
|
|
Note |
- |
A note in the accompanying notes to the condensed consolidated financial statements. |
|
|
|
Notes |
- |
The senior secured notes issued on October 14, 2021 with an interest rate of 6.25%, which mature in October 2028. |
|
|
|
ODEQ |
- |
The Oklahoma Department of Environmental Quality. |
|
|
|
PCC |
- |
Pryor Chemical Company. |
|
|
|
PP&E |
- |
Plant, property and equipment. |
|
|
|
Pryor Facility |
- |
Our chemical production facility located in Pryor, Oklahoma. |
|
|
|
SEC |
- |
The U.S. Securities and Exchange Commission. |
|
|
|
Secured Financing due 2023 |
- |
A secured financing arrangement between EDC and an affiliate of Eldridge which matures in June 2023. |
|
|
|
Secured Financing due 2025 |
- |
A secured financing arrangement between EDA and an affiliate of Eldridge which matures in August 2025. |
|
|
|
Senior Secured Notes |
- |
The Notes and New Notes, taken together due on October 15, 2028 with a stated interest rate of 6.25%. |
|
|
|
SG&A |
- |
Selling, general and administrative expense. |
|
|
|
Ton |
- |
A unit of weight equal to 2,000 pounds. |
|
|
|
Turnaround |
- |
A planned major maintenance activity. |
|
|
|
UAN |
- |
Urea ammonium nitrate. |
|
|
|
U.S. |
- |
United States. |
|
|
|
30
|
|
|
U.S. GAAP |
- |
U.S. Generally Accepted Accounting Principles. |
|
|
|
USDA |
- |
United States Department of Agriculture. |
|
|
|
WASDE |
- |
World Agricultural Supply and Demand Estimates Report. |
|
|
|
West Fertilizer |
- |
West Fertilizer Company. |
|
|
|
Working Capital Revolver Loan |
- |
Our secured revolving credit facility. |
|
|
|
2021 Crop |
- |
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. |
|
|
|
2022 Crop |
- |
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. |
|
|
|
2023 Crop |
- |
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. |
31