LSB INDUSTRIES, INC. 10-Q

Item 2. Management’s Discussion and Analysis o f 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, 2024 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 we manufacture and sell chemical products for the agricultural, mining and industrial markets. We own and operate three multi-plant 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 other parts of North America. Key Operating Initiatives for 2024 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 our Total Recordable Injury Rate was 0.33, a significant improvement from previous years. In 2024, 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 have been investing and plan to continue to invest additional capital at all three of our facilities during 2024 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 ammonia on-stream operating rate goal and increase our production volumes of downstream products. Progress towards these goals 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. In January of 2023, we took over direct distribution of our Pryor facility’s UAN production, and in July 2023 we did the same for our Cherokee facility’s UAN production, following several years of working with third parties to sell the product. We believe that this, combined with continued expansion of our customer relationships, the robust market analysis capabilities we have developed, and the establishment of in-market tank storage and distribution terminals, will make us more effective in identifying and capitalizing on the most profitable distribution opportunities for our products. Additionally, we are advancing several capital improvement projects with the intention of increasing our sales volumes of higher value downstream products resulting in improvements in our overall profit margins. • Development of Low Carbon Ammonia and Clean Energy Projects. The reduction of greenhouse gas emissions, particularly related to carbon dioxide, has been and we expect will increasingly become a global environmental priority. 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. Low-carbon ammonia can be used as a coal and natural gas substitute in power generation, a zero-carbon fuel in the maritime sector, and as a carbon free fertilizer. If ammonia were to be adopted for these and other energy needs globally, some studies have indicated that future demand could increase 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 low-carbon ammonia and other derivative products. These include a low-carbon ammonia project at our El Dorado facility in collaboration with Lapis Energy and a low-carbon ammonia project on the Houston Ship Channel in conjunction with INPEX Corporation (“INPEX”), Air Liquide Group (“Air Liquide”) and Vopak Exolum Houston LLC (f/k/a Vopak Moda Houston LLC), a joint venture between Royal Vopak and Exolum (“Vopak Exolum”). Low-carbon 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 power generation, marine, industrial, mining and agricultural customers seeking to reduce their carbon footprint and potentially capitalize on government incentives. 18 We believe we are well-positioned to capitalize on this opportunity and become a market leader given our potential to retrofit our existing plants, which we believe can reduce our time to market for low-carbon ammonia and also reduce the upfront capital expenditures necessary to enable us to produce this product. Additionally, we are collaborating with other energy-related companies to develop greenfield projects where we expect to mitigate risk through shared investment of capital as well as by negotiating potential offtake agreements from customers for the output of these plants. • Evaluate and Pursue Organic Capacity Expansion. We have been evaluating opportunities across all our facilities to increase production capacity through the implementation of several potential debottlenecking projects, particularly at our El Dorado facility. Initial feasibility studies have pointed to potentially attractive returns for some of these projects. However, given the current high-cost environment and limited resources, coupled with our outlook for moderating selling prices during 2024, we have elected to put the El Dorado expansion projects on hold for the current year and will reevaluate the prospects of moving forward with one or more of them in 2025. • We have several smaller, more near-term projects currently underway that we expect to enhance our profitability beginning in the second half of 2024 with relatively minimal capital investment. These projects include: ▪ Expansion of our urea capacity at our Pryor facility, to enable to use a portion of the facility’s ammonia output to upgrade to approximately 75,000 additional tons of UAN per year; ▪ Construction of 5,000 tons of additional nitric acid storage at our El Dorado facility to help us optimize our product sales mix; and ▪ Construction of additional AN solution storage and new AN solution rail loading capability at our El Dorado facility to significantly increase the volume of AN solution sales and increase product optionality at the site. • Evaluate Acquisitions of Strategic Assets or Companies. We may evaluate opportunities to acquire strategic assets or companies where we believe those acquisitions will enhance the value of the Company and provide attractive returns. We may consider 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 Advanced Low-Carbon Ammonia Initiatives In October 2023, we announced a collaboration with INPEX, Air Liquide and Vopak Exolum to conduct a pre-FEED for the development of a large-scale, low-carbon ammonia production and export project on the Houston Ship Channel. If the development proceeds, the project’s first phase is targeted to produce more than 1.1 million metric tons per year of low-carbon ammonia by early 2029, with options for future production expansions. The parties completed a feasibility study on the project during the first quarter of 2023 and the proposed facility’s location on the Houston Ship Channel, the second largest petrochemical corridor in the world, leverages existing infrastructure assets. Vopak Exolum has invested in storage and handling infrastructure for bulk liquid products and currently operates an ammonia terminal that includes storage tanks and a newbuild dock with multiple deep-water berths. The project also has access to utilities and would be near multiple pipelines that could supply raw materials like natural gas and water. The project partners will bring complementary expertise to the production, operation, storage and export for the advancement of low-carbon ammonia production in the US: • Air Liquide, a world leader in industrial gas production, and INPEX, Japan’s largest energy exploration and production company, would collaborate on low-carbon hydrogen production. Air Liquide would supply its Autothermal Reforming (“ATR”) technology, an ideal solution for large-scale hydrogen production projects, combined with its proprietary carbon capture technology. The combination of ATR technology with carbon capture aims to capture at least 95% of direct CO 2 emissions from hydrogen production with approximately 1.6 million metric tons per year of CO 2 captured and permanently sequestered from this project. Air Liquide would be responsible for onsite nitrogen and oxygen production, using its proprietary Air Separation Unit technology. • INPEX and LSB would collaborate on low-carbon ammonia production. We led the selection of KBR Inc. as the ammonia loop technology provider, and will lead the pre-FEED, engineering, procurement and construction of the facility. We would also be responsible for the day-to-day operation of the ammonia loop. • INPEX and LSB would sell the low-carbon ammonia and finalize off-take agreements with the numerous parties that have expressed interest and could also further partner in the project. The majority of the product would be used for power generation in Asia with some volumes going to Europe and the U.S. INPEX, with stakes in both hydrogen and ammonia 19 production, will likely be the largest investor in the overall project across the entire value chain, from production to export. • Vopak Exolum currently operates ammonia storage and handling infrastructure from its Very Large Gas Carriers-capable deepwater berth located in the deepest part of the Houston Ship Channel. Vopak Exolum will maintain its ownership of the existing infrastructure and plans to build additional storage capacity as required to handle the low-carbon ammonia production of the proposed new facility. In May 2023, we entered into a non-binding memorandum of understanding (the "MOU") with Amogy Inc. (“Amogy”) aimed at developing the adoption of low-carbon ammonia as a marine fuel, initially for the U.S. inland waterways transportation sector. Through joint efforts, we and Amogy will focus on advancing the understanding, utilization, and advocacy of low-carbon ammonia as a sustainable fuel. Pursuant to the MOU, the companies will collaborate on the evaluation and development of a pilot program that integrates our low-carbon ammonia and Amogy’s ammonia-to-power solution. Upon successful completion of the evaluation and pilot program, the companies expect to further collaborate at a larger-scale, including exploration of opportunities for development of an end-to-end supply chain of low-carbon ammonia and deployment of Amogy technology across multiple applications, including maritime vessels. The evaluation and pilot program includes potential engagement with other parties across the ammonia value chain. We will also collaborate on various advocacy, education, and outreach efforts regarding the use of ammonia as a fuel. In April 2022, we entered into an agreement with Lapis Energy to develop a project to capture and permanently sequester CO 2 at our El Dorado, Arkansas facility. Lapis, backed by Cresta Fund Management, a Dallas-based middle-market infrastructure investment firm, will invest the majority of the capital required for project development. The project is expected to be completed and operational by early 2026, subject to the approval of a Class VI permit, at which time CO 2 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 CO 2 per year in underground saline aquifers. The permanently sequestered CO 2 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 CO 2 captured and pay us a fee for each ton of CO 2 captured and permanently sequestered beginning in 2026. Once in operation, the sequestered CO 2 is expected to reduce our scope 1 GHG emissions by approximately 25% from current levels. In addition, sequestering more than 450,000 metric tons of CO 2 annually is expected to enable LSB to produce over 375,000 metric tons of low-carbon ammonia annually, a product that could potentially be sold at higher price levels than conventional ammonia. In February 2023, a key milestone was achieved in the advancement of our low-carbon 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 recognized the application as complete in March 2023 and is currently in the review process. Stronger Sales Volume Offset by Lower Product Selling Prices Sales volumes of our products increased in the first quarter of 2024 as compared to the same quarter of 2023. These favorable volume trends were driven, in part, by strong demand for fertilizers during the pre-plant and early Spring application seasons coupled with the success of our strategic commercial efforts, supported by stronger nitric acid and urea production at our facilities resulting from our plant reliability initiatives. The increase in sales volumes was more than offset by the impact of lower selling prices for our products relative to the first quarter of 2023. Nitrogen chemical prices declined from 2022 peak levels through much of 2023 due to a variety of domestic and international factors. One of the most significant of these factors was the decline in natural gas costs in Europe. Natural gas is the primary feedstock for the production of ammonia and a key driver of ammonia selling prices globally. During the second half of 2022 and first half of 2023, natural gas prices in Europe dropped as relatively warm winter temperatures reduced demand, which, combined with a rise in imports of liquified natural gas from the U.S., resulted in ample supply and high gas storage inventories. After having production largely curtailed for much of 2022 due to the high input costs, lower natural gas prices enabled a majority of European ammonia facilities to resume operations over the course of 2023, increasing global supply for nitrogen products. These gas supply dynamics persisted in the early part of 2024, keeping natural gas costs in Europe at levels similar to much of 2023. However, natural gas prices in Europe remain significantly higher than those in the U.S., making European operators the high cost, or marginal producers, of ammonia globally. A slowdown in Far East Asian industrial activity combined with lower demand for phosphate products also contributed to lower nitrogen prices during much of 2023 and the first quarter of 2024. Ammonia is a feedstock for various downstream chemicals that are produced in Asia, such as caprolactam and acrylonitrile, and markets for these products continue to be weak, resulting in reduced ammonia demand. Despite the pressures on nitrogen pricing, ammonia prices thus far in 2024 have been significantly above 2023 lows reached in July, supported by a combination of global factors, including: strong U.S. demand for nitrogen fertilizers in the fourth quarter of 2023 and first quarter of 2024, multiple unplanned production outages in the U.S. due to cold weather events, constrained ammonia imports into Europe from the Middle East due to the disruption of shipping through the Suez canal, and the delayed start-up of new production capacity. We believe ammonia pricing could moderate over the balance of 2024 for a variety of reasons, including: the start-up of new production capacity during the second half of the year, an increase in Russian exports during the second half of the year, and 20 continued depressed demand for nitrogen products from the global industrial sector, particularly in Asia. Upside to our 2024 pricing expectations could be driven by a variety of factors, including: an increase in energy prices, a strengthening Chinese economy driving increased industrial market demand, further delays in new production capacity coming online and supportive weather dynamics. The USDA’s National Agricultural Statistics Service recently announced that the results of its producer survey revealed that U.S. farmers intend to plant approximately 90 million acres of corn in 2024, down 5% from 2023. Despite the year-over-year decline, we believe this level of plantings should continue to support strong demand for fertilizers over the balance of the planting season. Looking ahead, we believe corn futures prices are at levels that would suggest that farmers will be incentivized to optimize fertilizer application in late 2024 and early 2025 to maximize yields next year. Despite global economic challenges, demand for our industrial and mining products is stable. Nitric acid demand has been healthy, reflecting the resilience of the U.S. economy. Demand for AN for use in mining applications is steady due, in part, to strong prices for metals including gold and copper, as well as continued attractive market fundamentals for quarrying and aggregate production relating to infrastructure construction. While some degree of economic uncertainty persists, we believe that we have a meaningful degree of downside protection in our industrial and mining business given our diverse customer base, 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 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. 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 including farm economics, weather 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 World Agricultural Supply and Demand Estimates Report dated April 11, 2024 (“April Report”), farmers planted approximately 94.6 million acres of corn in 2023, up 7.3% compared to the 2022 planting season. In addition, the U.S. Department of Agriculture (“USDA”) estimates the U.S. ending stocks for the 2023 Harvest will be approximately 53.9 million metric tons, a 55.8% increase from the 2022 Harvest. The USDA's expected yield for the 2023 Harvest is 177.3, up approximately 2.2% from a year ago. The following April 2024 estimates are associated with the corn market: 2024 Crop 2023 Crop 2022 Crop (2023 Harvest) (2022 Harvest) Percentage (2021 Harvest) Percentage April Report (1) April Report (1) Change (2) April Report (1) Change (3) U.S. Area Planted (Million acres) 94.6 88.2 7.3 % 92.9 1.8 % U.S. Yield per Acre (Bushels) 177.3 173.4 2.2 % 176.7 0.3 % U.S. Production (Million bushels) 15,342 13,651 12.4 % 15,018 2.2 % U.S. Ending Stocks (Million metric tons) 53.9 34.6 55.8 % 35.0 54.0 % World Ending Stocks (Million metric tons) 318.3 302.2 5.3 % 310.8 2.4 % 1. Information obtained from the April Report for the 2023/2024 ("2024 Crop"), 2022/2023 (“2023 Crop”) and 2021/2022 (“2022 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 2024 Crop amounts compared to the 2023 Crop amounts. 3. Represents the percentage change between the 2024 Crop amounts compared to the 2022 Crop amounts. The current USDA corn outlook for the U.S. is for reduced supplies, lower food, seed, and industrial use and larger ending stocks. Corn production for the 2024 Crop is forecast at 15.3 billion bushels, up 12.4% over the 2023 Crop. From a demand perspective, corn 21 prices continue to be close to the 10-year averages, which we expect to incentivize farmers to optimize fertilizer applications during the first half of 2024 in order to maximize yields. 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 in the first quarter of 2024. Nitric acid demand is stable as the demand impacts of high inflation in the U.S. have 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 robust due to attractive market fundamentals for quarrying and aggregate production and U.S. metals. While economic concerns persist for 2024, 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 purchased and the average cost per MMBtu: Three Months Ended March 31, 2024 2023 Natural gas volumes (MMBtu in millions) 7.2 7.4 Natural gas average cost per MMBtu $ 2.33 $ 5.66 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 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 with the next ammonia plant Turnaround planned in the fourth quarter of 2024. Our El Dorado Facility is currently on a three-year ammonia plant Turnaround cycle with the next ammonia plant Turnaround planned in the third quarter of 2025. Our Pryor Facility is currently on a two-year ammonia plant Turnaround cycle with the next ammonia plant Turnaround planned in the third quarter of 2024. 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 2024, we are targeting total ammonia production of approximately 790,000 tons to 810,000 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 2024 Our consolidated net sales for the first quarter of 2024 were $138.2 million compared to $181.0 million for the same period in 2023. Our consolidated operating income for the first quarter of 2024 was $11.3 million compared to operating income of $30.5 million for the same period in 2023. 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 2024, average selling prices for our key products decreased compared to the first quarter of 2023. As discussed above under “Recent Business Developments,” declining European natural gas prices resulted in ammonia production costs in Europe declining substantially, translating into increased global supply and lower selling prices for ammonia and ammonia derivative fertilizers. For the first quarter of 2024, average industrial selling prices for our products were also lower compared to the same period of 2023, primarily driven by the $262 per metric ton decrease in the Tampa Ammonia benchmark price, as many of our industrial contracts are indexed to the Tampa Ammonia benchmark price. 23 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, 2024 and 2023 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 March 31, 2024 Compared to Three Months Ended March 31, 2023 The following table contains certain financial information: Three Months Ended March 31, Percentage 2024 2023 Change Change (Dollars In Thousands) Net sales: AN & Nitric Acid $ 48,435 $ 58,272 $ (9,837 ) (17 )% Urea ammonium nitrate (UAN) 41,192 46,590 (5,398 ) (12 )% Ammonia 39,530 63,415 (23,885 ) (38 )% Other 9,047 12,687 (3,640 ) (29 )% Total net sales $ 138,204 $ 180,964 $ (42,760 ) (24 )% Gross profit: Adjusted gross profit (1) $ 40,287 $ 59,015 $ (18,728 ) (32 )% Depreciation and amortization (2) (17,094 ) (17,416 ) 322 (2 )% Turnaround expense (915 ) 6 (921 ) N/M Total gross profit 22,278 41,605 (19,327 ) (46 )% Selling, general and administrative expense 10,294 9,867 427 4 % Other expense, net 724 1,203 (479 ) (40 )% Operating income 11,260 30,535 (19,275 ) (63 )% Interest expense, net 9,729 12,212 (2,483 ) (20 )% Gain on extinguishment of debt (1,134 ) — (1,134 ) Non-operating other income, net (3,561 ) (3,476 ) (85 ) 2 % Provision for income taxes 603 5,898 (5,295 ) (90 )% Net income $ 5,623 $ 15,901 $ (10,278 ) (65 )% Other information: Gross profit percentage (3) 16.1 % 23.0 % (6.9 )% Adjusted gross profit percentage (3) 29.2 % 32.6 % (3.4 )% Property, plant and equipment expenditures $ 18,287 $ 18,437 $ (150 ) _____________________________ N/M-Not meaningful. (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 March 31, Percentage Product (tons sold) 2024 2023 Change Change AN & Nitric Acid 128,801 122,745 6,056 5 % Urea ammonium nitrate (UAN) 134,933 113,026 21,907 19 % Ammonia 94,831 88,997 5,834 7 % Total 358,565 324,768 33,797 10 % 24 Three Months Ended March 31, Percentage Gross Average Selling Prices (price per ton) 2024 2023 Change Change AN & Nitric Acid $ 376 $ 475 $ (99 ) (21 )% Urea ammonium nitrate (UAN) $ 305 $ 412 $ (107 ) (26 )% Ammonia $ 417 $ 713 $ (296 ) (42 )% Three Months Ended March 31, Percentage Average Benchmark Prices (price per ton) 2024 2023 Change Change Tampa Ammonia Benchmark $ 466 $ 728 $ (262 ) (36 )% NOLA UAN $ 251 $ 318 $ (67 ) (21 )% Net Sales Net sales of our primary products decreased during the first quarter of 2024 compared to the prior year period driven by the impact of lower selling prices relative to the first quarter of 2023 for all of our products. Partially offsetting weaker pricing was an increase in sales volume driven by strong demand for fertilizers enhanced by our strategic commercial efforts. Additionally, we benefited from a healthy increase in downstream production volumes. Demand for our industrial and mining products remains stable despite continued global economic challenges. 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 $22.3 million for the first quarter of 2024 compared to $41.6 million for the same period in 2023, or a $19.3 million reduction. Overall, our gross profit percentage was 16.1% compared to a gross profit percentage of 23.0% for the same period in 2023. Our adjusted gross profit percentage decreased to 29.2% for the first quarter of 2024 from 32.6% for the first quarter of 2023. The decrease in gross profit was primarily driven by lower sales prices for our products partially offset by higher sales volumes and lower natural gas costs. Selling, General and Administrative Our SG&A expenses were $10.3 million for the first quarter of 2024, an increase of $0.4 million compared to the same period in 2023. The net increase was primarily driven by increases in payroll related items partially offset by a reduction in expense relating to professional fees, insurance and other miscellaneous expenses. Interest Expense Interest expense for the first quarter of 2024 was $9.7 million compared to $12.2 million for the same period in 2023. The decrease primarily relates to reduced interest expense as a result of the repurchase of our 6.25% Senior Secured Notes made during beginning in the second quarter of 2023 and during March of 2024. Gain on Extinguishment of Debt During the first quarter of 2024, we repurchased $32.9 million of our Senior Secured Notes through open market transactions for approximately $31.3 million. As a result, we recognized a gain on extinguishment of debt, net of issuance costs, of approximately $1.1 million. Other Expense, net Other expense, net during the first quarter of 2024 and 2023 primarily relates to impairment and asset disposal expense partially offset by short-term rental income. Non-operating Other Income, net Non-operating other income, net for the first quarter of 2024 was $3.6 million compared to $3.5 million for the same period of 2023, primarily related to interest income earned during both periods from our short-term investments. Provision for Income Taxes The provision for income taxes for the first quarter of 2024 was $0.6 million compared to $5.9 million for the same period of 2023. The resulting effective tax rate for the first quarter of 2024 was 9.7% compared to 27.1% for the same period of 2023. For the first quarter of 2024, the effective tax rate is lower than the statutory rate primarily due to nondeductible compensation and state taxes. For 25 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. See discussion in Note 7. LIQUIDITY AND CAPITAL RESOURCES The following table summarizes our cash flow activities for the three months ended March 31: 2024 2023 Change (In Thousands) Net cash flows from operating activities $ 24,107 $ 59,247 $ (35,140 ) Net cash flows from investing activities $ 47,902 $ (63,379 ) $ 111,281 Net cash flows from financing activities $ (44,518 ) $ (10,688 ) $ (33,830 ) Net Cash Flow from Operating Activities Net cash provided by operating activities was $24.1 million for the first three months ended 2024 compared to $59.2 million for the same period of 2023, a change of $35.1 million. The decrease was primarily a result of a reduction in net sales partially offset by lower cost of sales, working capital changes and higher interest income from short-term investments. Net Cash Flow from Investing Activities Net cash provided by investing activities was $47.9 million for the first three months ended 2024 compared to net cash used of $63.4 million for the same period of 2023, a change of $111.3 million. For the first three months ended 2024, the net cash provided primarily relates to proceeds from short-term investments of $100.9 million, partially offset by purchases of short-term investments of $34.7 million and expenditures for PP&E of $18.3 million. For the first three months ended 2023, the net cash used primarily relates to 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. Net Cash Flow from Financing Activities Net cash used by financing activities was $44.5 million for the first three months ended 2024 compared to net cash used of $10.7 million for the same period of 2023, a change of $33.8 million. For the first three months ended 2024, the net cash used primarily consists of repurchases of our 6.25% Senior Secured Notes of $31.3 million, payments on other long-term debt and short-term financing of $5.8 million and payments of $7.2 million for the purchase of treasury stock. For the first three months ended 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. 26 Capitalization The following is our total cash and cash equivalents, short-term investments, long-term debt and stockholders’ equity as of March 31, 2024 and December 31, 2023, respectively: March 31, December 31, 2024 2023 (In Millions) Cash and cash equivalents $ 126.0 $ 98.5 Short-term investments 139.2 207.4 Total cash, cash equivalents and short-term investments $ 265.2 $ 305.9 Long-term debt: Revolving Credit Facility $ — $ — Senior Secured Notes due 2028 (1) 542.1 575.0 Secured Financing due 2025 12.8 14.1 Finance Leases 2.2 1.0 Unamortized debt issuance costs (2) (7.5 ) (8.4 ) Total long-term debt, including current portion, net $ 549.6 $ 581.7 Total stockholders' equity $ 518.2 $ 518.3 (1) See discussion contained in Note 4. (2) Debt issuance costs as of March 31, 2024 and December 31, 2023 of approximately $0.7 million and $0.5 million, respectively, relating to our Revolving Credit Facility are not included in Unamortized debt issuance cost. They are included in our condensed consolidated balance sheet in Intangible and other assets, net. We currently have a revolving credit facility pursuant to that credit agreement, dated December 21, 2023, between us and the lenders identified on the signature pages thereof and JPMorgan Chase Bank, N.A, as administrative agent (the “Revolving Credit Facility”), with a borrowing base up to an initial maximum of $75 million, with an option to increase the maximum by an additional $25 million (which amount is uncommitted). Availability under the Revolving Credit Facility is subject to a borrowing base and an availability block of $7.5 million which is applied against the $75 million initially reducing the maximum (which can be removed by us at our sole discretion, subject to the satisfaction of certain conditions). The Revolving Credit Facility provides for a sub-facility for the issuance of letters of credit in an aggregate amount not to exceed $10 million, with the outstanding amount of any such letters of credit reducing availability for borrowings. As of March 31, 2024, our Revolving Credit Facility was undrawn and had approximately $45.4 million of availability. See Note 4 for further discussion on the facility. For the full year of 2024, we expect capital expenditures to be approximately $60 million to $80 million. This capital spending is primarily 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. As of March 31, 2024, we had approximately $265.2 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. 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. Compliance with Long - Term Debt Covenants As discussed in Note 4, the Revolving Credit Facility requires, among other things, that we meet a financial covenant. The Revolving Credit Facility does not include financial covenant requirements unless a defined covenant trigger event has occurred and is continuing. As of March 31, 2024, no trigger event had occurred. Loan Agreements Senior Secured Notes due 2028 – LSB has $542 million aggregate principal amount of the 6.25% Senior Secured Notes outstanding as of March 31, 2024. Interest is to be paid semiannually in arrears on May 15 th and October 15 th , maturing October 15, 2028. Secured Financing due 2025 – We are a 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. 27 Revolving Credit Facility – At March 31, 2024, our Revolving Credit Facility was undrawn and had approximately $45.4 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.” Finance leases – Our finance leases consist primarily of leases on railcars. Most of our railcar leases are classified as operating leases. Capital Expenditures – First Quarter 2024 For the first quarter of 2024, capital expenditures relating to PP&E were $18.3 million. The capital expenditures were funded primarily from cash and working capital. See discussion above under “Capitalization” for our expected capital expenditures. Equity and debt repurchases In May 2023, our Board authorized a $150 million stock repurchase program. The program is intended as a means to maximize shareholder value by returning capital to shareholders. Under the repurchase program, we are authorized to purchase shares from time to time through open market or privately negotiated transactions. Such purchases may be made pursuant to Rule 10b5-1 plans or other means as determined by our management and in accordance with the requirements of the SEC. The repurchase program does not obligate us to purchase any particular number or type of securities. During the first quarter ended March 31, 2024, we repurchased approximately 0.7 million shares of common stock at an average cost of $7.82 per share for a total of approximately $5.4 million. Total repurchase authority remaining under the repurchase program was $116 million as of March 31, 2024. The repurchase program may be suspended, terminated or modified at any time for any reason. During the first quarter ended March 31, 2024, we repurchased approximately $32.9 million in principal value of our Senior Secured Notes for approximately $31.3 million. The debt repurchase was intended as a means to deleverage our balance sheet and reduce future interest costs while maintaining a balanced capital allocation strategy that provides an appropriate level of liquidity to fund our operations and future growth opportunities. 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 $1.3 million for the first three months ended March 31, 2024 in connection with environmental projects. For the remainder of 2024, we expect to incur expenses ranging from $2.8 million to $3.2 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 agricultural 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 agricultural 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, 2024, we have agreed to indemnify the sureties for payments, up to $9.7 million, made by them in respect of such bonds. All of these insurance bonds are expected to expire or be renewed in 2024. 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 2023 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 28 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, 2024, 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. Item 3. Quantitative and Qualitat ive Disclosures about Market Risk General Our results of operations and operating cash flows are impacted by changes in market prices of ammonia and natural gas and changes in market interest rates. Forward Sales Commitments Risk Periodically, we enter into forward firm sales commitments for products to be delivered in future periods. As a result, we could be exposed to embedded losses should our product costs exceed the firm sales prices at the end of a reporting period. At March 31, 2024, we had no embedded losses associated with sales commitments with firm sales prices. Commodity Price Risk A substantial portion of our products and raw materials are commodities whose prices fluctuate as market supply and demand fundamentals change. Since we are exposed to commodity price risk, we periodically enter into contracts to purchase natural gas for anticipated production needs to manage risk related to changes in prices of natural gas commodities. Generally, these contracts are considered normal purchases because they provide for the purchase of natural gas that will be delivered in quantities expected to be used over a reasonable period of time in the normal course of business, these contracts are exempt from the accounting and reporting requirements relating to derivatives. At March 31, 2024, we had no outstanding natural gas contracts which are accounted for on a mark-to-market basis. Interest Rate Risk Generally, we are exposed to variable interest rate risk with respect to our Revolving Credit Facility. As of March 31, 2024, we had no outstanding borrowings on this credit facility and no other variable rate borrowings. We currently do not hedge our interest rate risk associated with our variable interest loan. Item 4. Control s 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, 2024. 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, 2024, 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, 2024, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 29 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain statements contained within this report may be deemed “Forward-Looking Statements.” within the meaning of U.S. federal securities laws. 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, many of which are difficult to predict or outside of the Company’s control, which could cause actual results and performance of the Company to differ materially from those expressed in, or implied or projected by, such statements. Any such Forward-Looking Statements are not guarantees of future performance. The words “believe,” “expect,” “anticipate,” “intend,” “plan,” “may,” “could,” and similar expressions identify Forward-Looking Statements. Any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, many of which are difficult to predict and are generally outside the Company’s control, that could cause actual results to differ materially from those expressed in, or implied of projected by, such forward-looking statements. Forward-Looking Statements contained herein, and the associated risks, uncertainties, assumptions and other important factors 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; • our ability to successfully leverage our existing business platform and portfolio of assets to produce low carbon products and execute our strategy to become a leader in the energy transition in the chemical industry; • 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; • the 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; • production volumes 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; • our beliefs regarding our estimates and contingencies with respect claims and legal actions in the ordinary course of our business and their effect on our business, financial condition, results of operations or cash flows; • annual natural gas requirements; • the development of the market and demand for low-carbon ammonia; • 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 impact of our repurchase program on our stock price and cash reserves: • 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; 30 • 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; • 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; • changes in competition; • 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, 2023. Given these uncertainties, all parties are cautioned not to place undue reliance on such Forward-Looking Statements. Except to the extent required by law, 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. 31 The following is a list of terms used in this report. ADEQ - The Arkansas Department of Environmental Quality. AN - Ammonium nitrate. April Report - The World Agricultural Supply and Demand Estimates Report dated April 11, 2024. ASUs - Accounting Standard Updates. ATR - AutoThermal Reforming. 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. (now merged into LSB Chemical, L.L.C. a subsidiary of LSB Industries, Inc.). EDC - El Dorado Chemical Company (now merged into LSB Chemical, L.L.C. a subsidiary of LSB Industries, Inc.). 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. FEED - Front end engineering design. Global - Global Industrial, Inc., a subcontractor asserting mechanics liens for work rendered to the Company. 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. 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. MD&A - Management’s Discussion and Analysis of Financial Condition and Results of Operations. MMBtu - Million British thermal units. MOU - Memorandum of understanding. Note - A note in the accompanying notes to the condensed consolidated financial statements. ODEQ - The Oklahoma Department of Environmental Quality. 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 2025 - A secured financing arrangement between EDA and an affiliate of Eldridge which matures in August 2025. Senior Secured Notes - The senior secured notes issued on October 14, 2021 and the senior secured notes issued March 8, 2022, taken together both due on October 15, 2028 with a stated interest rates of 6.25% maturing in October 2028. 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. U.S. GAAP - U.S. Generally Accepted Accounting Principles. USDA - United States Department of Agriculture. 32 West Fertilizer - West Fertilizer Company. Revolving Credit Facility - Our secured revolving credit facility pursuant to that credit agreement, dated December 21, 2023, between us and the lenders identified on the signature pages thereof and JPMorgan Chase Bank, N.A, as administrative agent. 2022 Crop - Corn crop marketing year (September 1 - August 31), which began in 2021 and ended 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. 2024 Crop - Corn crop marketing year (September 1 - August 31), which began in 2023 and will end in 2024 and primarily relates to corn planted and harvested in 2023. 33 PART II OTHER INFORMATION