What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-08-01 compared with 2024-04-30 · 218 added, 127 removed, 429 unchanged (45% of the section changed)

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.

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 June 30, 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.

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See “Special Note Regarding Forward-Looking Statements.”

LSB is headquartered in Oklahoma City, Oklahoma and we manufacture and sell chemical products for the agricultural, mining and industrial markets.

LSB is headquartered in Oklahoma City, Oklahoma and we manufacture and sell chemical products for the agricultural, industrial and mining 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.

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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.

▪ We have multiple initiatives underway focused on continuing to improve the reliability of our plants as we advance towards our ammonia on-stream operating rate target and increase our production volumes of ammonia and other downstream products.

Progress towards these targets 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.

• Continue Optimization and Increase the Breadth of Distribution of our Product Mix.

We have initiatives underway to increase the distribution of our products within our industrial end markets, among other product mix optimization strategies.

We believe that these initiatives and strategies, 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, while making our financial results more stable and predictable.

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.

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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;

▪ 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;

▪ Construction of 5,000 tons of additional nitric acid storage at our El Dorado facility to help us optimize our product sales mix;

▪ 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.

• Evaluate Acquisitions of Strategic Assets or Companies.

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Advanced Low-Carbon Ammonia Initiatives

In May 2024, we announced an agreement to supply up to 150,000 short tons per year of low carbon ammonium nitrate solution (“ANS”) to Freeport Minerals Corporation (“Freeport”).

LSB will supply the ANS from its El Dorado, Arkansas facility for 5 years commencing January 1, 2025, with a phasing in of the low carbon contracted volume.

Freeport intends to use the low carbon ANS purchased from LSB for its United States copper mining operations.

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.

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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.

Air Liquide would also 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.

LSB 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.

LSB 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

production, will likely be the largest investor in the overall project across the entire value chain, from production to export.

The majority of the product would be used for power generation in Asia with volumes also going to Europe and the U.S.

INPEX, with stakes in both hydrogen and ammonia 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.

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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.

In April 2022, we entered into an agreement with Lapis Energy to develop a project to capture and 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.

Once operational, the project at the El Dorado site will initially capture and sequester approximately 400,000 to 500,000 metric tons of CO 2 per year in underground saline aquifers.

The 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 sequestered.

Lapis, as the majority owner of the carbon capture and sequestration equipment, will earn the 45Q tax credits and will pay us a fee for each ton of CO 2 captured and sequestered beginning in 2026.

Once in operation, the sequestered CO 2 is expected to reduce LSB’s overall scope 1 GHG emissions by approximately 25% from current levels.

In addition, sequestering approximately 400,000 to 500,000 metric tons of CO 2 annually is expected to enable LSB to produce approximately 305,000 to 380,000 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.

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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.

Lower Natural Gas Input Costs Offset by Modestly Lower Selling Prices and Weather-Effected Sales Volume Declines

Second quarter results benefited from lower natural gas feedstock costs relative to the second quarter of 2023.

Selling prices were down compared to the prior year second quarter;

however, the impact of year-over-year pricing declines was significantly smaller than it had been in the previous five quarters due, in part, to a stabilization of supply-demand dynamics.

Sales volumes of our products decreased in the second quarter of 2024 as compared to the same quarter of 2023 as a result of lower sales volumes of HDAN resulting from wet weather in key markets for this product in late May and June, in addition to timing of agricultural ammonia demand, which was heavier than average in the first quarter of 2024, translating into lower orders during the second quarter.

Nitrogen chemical prices declined from 2022 peak levels through much of 2023 due to a variety of domestic and international factors.

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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.

These gas supply dynamics persisted in the first half 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.

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 half of 2024.

Ammonia is a feedstock for various downstream chemicals that are produced in Asia, such as polyurethane, 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 lows reached in July 2023, supported by a combination of global factors, including:

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.

demand for nitrogen fertilizers in the fourth quarter of 2023 and

first half of 2024;

multiple unplanned production outages in the U.S.

due to cold weather events;

constraints in global supply do to an extended turnaround at a large Saudi Arabian facility and natural gas curtailments in Trinidad and Egypt;

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

continued depressed demand for nitrogen products from the global industrial sector, particularly in Asia.

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 continued muted 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.

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.

an increase in energy prices, a strengthening Chinese economy driving increased industrial market demand, further delays in new production capacity coming online, ongoing gas curtailments in regions exporting ammonia, a lower interest rate environment and supportive weather dynamics.

Demand for our industrial products is stable despite persistent global economic challenges.

Nitric acid demand has been steady, reflecting the strength of the U.S.

economy and robust consumer spending levels.

Demand for AN for use in mining applications has been bolstered by positive exposure to copper, gold and iron ore, as well as continued attractive market fundamentals for 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 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.

With respect to trends in our agricultural markets, corn prices have declined since early 2023 due largely to rising stocks-to-use ratios.

The increased corn supply reflects lower demand from large corn consuming countries, such as China, and increased global competition from other corn producing nations, along with a multi-year high U.S.

corn harvest in 2023, among other factors.

Additionally, the USDA is currently estimating that U.S.

farmers planted approximately 91.5 million acres of corn during the Spring 2024 planting season, down slightly from 2023, but at a level that would further increase corn supplies.

Recently, weather trends in certain corn growing regions of the U.S.

have been such that 2024 corn yields could be adversely affected, which could translate into stronger corn prices later this year.

See a more detailed discussion below under “Key Industry Factors.”

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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.

According to the World Agricultural Supply and Demand Estimates Report dated July 12, 2024 (“July Report”), farmers planted approximately 91.5 million acres of corn in 2024, down 3.3% compared to the 2023 planting season.

In addition, the U.S.

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The USDA's expected yield for the 2024 Harvest is 181.0, up approximately 2.1% from a year ago.

The following April 2024 estimates are associated with the corn market:

The following July 2024 estimates are associated with the corn market:

(2024 Harvest)

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(2022 Harvest)

April Report (1)

July Report (1)

Area Planted (Million acres)

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World Ending Stocks (Million metric tons)

Information obtained from the April Report for the 2023/2024 ("2024 Crop"), 2022/2023 (“2023 Crop”) and 2021/2022 (“2022 Crop”) corn marketing years.

Information obtained from the July Report for the 2024/2025 ("2025 Crop"), 2023/2024 (“2024 Crop”) and 2022/2023 (“2023 Crop”) corn marketing years.

The marketing year is the twelve-month period during which a crop normally is marketed.

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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

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

calls for larger supplies, greater domestic use and exports, and lower ending stocks.

Corn production is forecast up on greater planted and harvested area from the USDA June Acreage Report.

Yield is unchanged at 181 bushels an acre, and ending stocks are down.

From a demand perspective, corn prices have declined since early 2023 due largely to rising stocks-to-use ratios.

Industrial 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.

Demand for our industrial products has remained stable despite persistent global economic challenges in the second quarter of 2024.

Nitric acid demand has been steady, reflecting the strength of the U.S.

economy and robust consumer spending levels.

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.

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.

While some degree of economic uncertainty persists for 2024, we believe that we have a meaningful degree of downside protection in our industrial 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.

Natural Gas Prices

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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.

The financial effects of planned downtime at our plants, including Turnarounds, are 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.

All Turnarounds result in lost contribution margin, lost fixed cost absorption and increased repair and maintenance costs, which are expensed as incurred.

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.

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.

Ammonia Production

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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.

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 90 days.

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.

Consolidated Results of the Second Quarter of 2024

Our consolidated net sales for the second quarter of 2024 were $140.1 million compared to $165.8 million for the same period in 2023.

Our consolidated operating income for the second quarter of 2024 was $14.4 million compared to operating income of $27.5 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

Items Affecting Comparability of Results of the Second Quarter

Selling Prices

For the first quarter of 2024, average selling prices for our key products decreased compared to the first quarter of 2023.

For the second quarter of 2024, average selling prices for our key products decreased compared to the second quarter of 2023, however, the impact of year-over-year pricing declines was significantly smaller than it had been in the previous five quarters due, in part, to a stabilization of supply-demand dynamics.

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.

Gain on Extinguishment of Senior Secured Notes

During the second quarter of 2024 we repurchased $63.7 million in principal amount of our Senior Secured Notes for approximately $60.9 million.

Including our write-off of the associated remaining portion of unamortized debt issuance costs, we recognized a gain on extinguishment of approximately $1.9 million.

During the second quarter of 2023 we repurchased $125 million in principal amount of our Senior Secured Notes for approximately $114.3 million.

Including our write-off of the associated remaining portion of unamortized debt issuance costs, we recognized a gain on extinguishment of approximately $8.6 million.

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.

The following Results of Operations should be read in conjunction with our condensed consolidated financial statements for the three months ended June 30, 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.

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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

Three Months Ended June 30, 2024 Compared to Three Months Ended June 30, 2023

The following table contains certain financial information:

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Selling, general and administrative expense

Other expense, net

Other expense (income), net

Operating income

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(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:

The following tables provide key operating metrics for the fertilizer and major industrial products:

Three Months Ended

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Tampa Ammonia Benchmark

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.

Net sales of our primary products decreased during the second quarter of 2024 compared to the prior year period driven by the impact of lower selling prices for acids and UAN and lower volumes for acids and ammonia relative to the second quarter of 2023.

Also impacting sales volumes was lower sales volumes of HDAN resulting from wet weather in key markets for this product in late May and June, in addition to timing of agricultural ammonia demand, which was heavier than average in the first quarter of 2024, translating into lower orders during the second quarter.

Partially offsetting this decrease was improved pricing for ammonia and increased UAN sales volumes.

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.

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.

Demand for our industrial products remains stable despite continued global economic challenges.

In some cases, our contractual agreements with industrial customers 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.

As noted in the table above, we recognized a gross profit of $27.4 million for the second quarter of 2024 compared to $36.0 million for the same period in 2023, or an $8.6 million reduction.

Overall, our gross profit percentage was 19.6% compared to a gross profit percentage of 21.7% 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.

Our adjusted gross profit percentage increased to 35.4% for the second quarter of 2024 from 31.9% for the second quarter of 2023.

Our overall gross profit for the second quarter of 2024 is primarily lower compared to the same period of 2023 due to overall lower sales prices and volume for our products, turnaround expenses and higher depreciation partially offset by 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.

Our SG&A expenses were $11.5 million for the second quarter of 2024, an increase of $2.1 million compared to the same period in 2023.

The net increase was primarily driven by increases in professional fees and payroll related items partially offset by a reduction in depreciation and amortization 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.

Interest expense for the second quarter of 2024 was $8.4 million compared to $11.8 million for the same period in 2023.

The decrease primarily relates to reduced interest expense as a result of the lower outstanding balance on our 6.25% Senior Secured Notes as a result of recent repurchases along with a lower outstanding principal balance our Secured Financing due 2025 as a result of repayments.

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.

During the second quarter of 2024, we repurchased $63.7 million of our Senior Secured Notes through open market transactions for approximately $60.9 million.

As a result, we recognized a gain on extinguishment of debt, net of issuance costs, of approximately $1.9 million.

During the second quarter of 2023 we repurchased $125 million of our Senior Secured Notes through open market transactions for approximately $114.3 million.

As a result, we recognized a gain on extinguishment of debt net of issuance costs of approximately $8.6 million.

Other Expense (income), net

Other expense (income), net during the second quarter of 2024 and 2023 primarily relates to losses from disposal or abandonment of assets no longer being used in operations offset by short-term rental income from railcar subleases.

The losses were higher and rental income was lower in the current quarter compared to the prior year quarter.

Non-operating Other Income, net

Non-operating other income, net for the second quarter of 2024 was $2.9 million compared to $3.8 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 second quarter of 2024 was $1.3 million compared to $3.0 million for the same period of 2023.

The resulting effective tax rate for the second quarter of 2024 was 11.6% compared to 10.6% for the same period of 2023.

For the second quarter of 2024, the effective tax rate is lower than the statutory rate primarily due to nondeductible compensation and deferred benefits from state tax law changes.

For the second quarter of 2023, the effective tax rate is less than the statutory rate primarily due to deferred benefits from state tax law changes.

See discussion in Note 7.

Six Months Ended June 30, 2024 Compared to Six Months Ended June 30, 2023

The following table contains certain financial information:

Six Months Ended

(Dollars In Thousands)

AN & Nitric Acid

Urea ammonium nitrate (UAN)

Total net sales

Gross profit:

Adjusted gross profit (1)

Depreciation and amortization (2)

Turnaround expense

Total gross profit

Selling, general and administrative expense

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.

Operating income

Interest expense, net

Gain on extinguishment of debt

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.

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.

Other information:

Gross profit percentage (3)

Adjusted gross profit percentage (3)

Property, plant and equipment expenditures

_____________________________

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 products:

Six Months Ended

Product (tons sold)

AN & Nitric Acid

Urea ammonium nitrate (UAN)

Six Months Ended

Gross Average Selling Prices (price per ton)

AN & Nitric Acid

Urea ammonium nitrate (UAN)

Six Months Ended

Average Benchmark Prices (price per ton)

Tampa Ammonia Benchmark

Net sales of our primary products decreased during the first half of 2024 compared to the prior year period driven by the impact of lower selling prices relative to the first half of 2023 for all of our products and lower sales volumes for acid products and ammonia.

Partially offsetting weaker pricing was an increase in UAN 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.

As noted in the table above, we recognized a gross profit of $49.7 million for the first half of 2024 compared to $77.6 million for the same period in 2023, or a $27.9 million reduction.

Overall, our gross profit percentage was 17.9% compared to a gross profit percentage of 22.4% for the same period in 2023.

Our adjusted gross profit percentage was 32.3% for the first half of 2024 and 2023.

Our overall gross profit for the first half of 2024 is lower compared to the same period of 2023 by overall lower sales prices for our products, turnaround expenses and higher depreciation partially offset by lower natural gas costs.

Selling, General and Administrative

Our SG&A expenses were $21.8 million for the first half of 2024, an increase of $2.5 million compared to the same period in 2023.

The net increase was primarily driven by increases in professional fees and payroll related items partially offset by a reduction in expense relating to insurance, other miscellaneous expenses and depreciation and amortization expenses.

Interest Expense

Interest expense for the first half of 2024 was $18.1 million compared to $24.0 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 beginning in the second quarter of 2023 and during 2024 along with a lower outstanding principal balance our Secured Financing due 2025.

Gain on Extinguishment of Debt

During the first half of 2024, we repurchased $96.6 million of our Senior Secured Notes through open market transactions for approximately $92.2 million.

As a result, we recognized a gain on extinguishment of debt, net of issuance costs, of approximately $3.0 million.

During the first half of 2023, we repurchased $125.0 million of our Senior Secured Notes through open market transactions for approximately $114.3 million.

As a result, we recognized a gain on extinguishment of debt, net of issuance costs, of approximately $8.6 million.

Other Expense, net

Other expense, net during the first half of 2024 and 2023 consists primarily of losses from disposal or abandonment of assets no longer being used in operations partially offset by short-term rental income from railcar subleases.

The losses were higher and rental income was lower in the current year compared to the prior year.

Non-operating Other Income, net

Non-operating other income, net for the first half of 2024 was $6.5 million compared to $7.2 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 half of 2024 was $1.9 million compared to $8.9 million for the same period of 2023.

The resulting effective tax rate for the first half 2024 was 10.9% compared to 17.8% for the same period of 2023.

For the first half of 2024, the effective tax rate is lower than the statutory rate primarily due to nondeductible compensation and deferred benefits from state tax law changes.

For the first half of 2023, the effective tax rate is less than the statutory rate primarily due to deferred benefits from state tax law changes.

See discussion in Note 7.

LIQUIDITY AND CAPITAL RESOURCES

The following table summarizes our cash flow activities for the three months ended March 31:

The following table summarizes our cash flow activities for the six months ended June 30:

(In Thousands)

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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 provided by operating activities was $65.5 million for the first six months ended 2024 compared to $102.9 million for the same period of 2023, a change of $37.5 million.

The decrease was primarily a result of a reduction in net sales, working capital changes and reduced interest income from short-term investments and partially offset by lower cost of sales.

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 provided by investing activities was $168.8 million for the first six months ended 2024 compared to net cash provided of $30.2 million for the same period of 2023, a change of $138.6 million.

For the first six months ended 2024, the net cash provided primarily relates to proceeds from short-term investments of $236.5 million, partially offset by purchases of short-term investments of $34.7 million and expenditures for PP&E of $33.0 million.

For the first six months ended 2023, the net cash provided primarily relates to proceeds from short-term investments of $264.2 million, partially offset by purchases of short-term investments of $201.7 million and expenditures for PP&E of $32.3 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.

Net cash used by financing activities was $119.0 million for the first six months ended 2024 compared to net cash used of $151.9 million for the same period of 2023, a change of $32.9 million.

For the first six months ended 2024, the net cash used primarily consists of repurchases of our 6.25% Senior Secured Notes of $92.2 million, payments on other long-term debt and short-term financing of $11.8 million and repurchases of $14.2 million of common stock.

For the first six months ended 2023, the net cash used primarily consists of repurchases of our 6.25% Senior Secured Notes of $114.3 million, payments on other long-term debt and short-term financing of $17.8 million and repurchases of $19.8 million of common stock.

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:

The following is our total cash and cash equivalents, short-term investments, long-term debt and stockholders’ equity as of June 30, 2024 and December 31, 2023, respectively:

(In Millions)

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(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.

(2) Debt issuance costs as of June 30, 2024 and December 31, 2023 of approximately $0.8 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.

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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.

As of June 30, 2024, our Revolving Credit Facility was undrawn and had approximately $39.4 million of availability.

See Note 4 for further discussion on the facility.

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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.

As of June 30, 2024, we had approximately $216.3 million of cash.

From time to time, we may seek to deploy capital through additional share repurchases or the retirement or purchase of outstanding debt.

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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.

As of June 30, 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.

Senior Secured Notes due 2028 – LSB has $478.4 million aggregate principal amount of the 6.25% Senior Secured Notes outstanding as of June 30, 2024.

Interest is to be paid semiannually in arrears on May 15 th and October 15 th , maturing October 15, 2028.

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Principal and interest are payable in 60 equal monthly installments with a final balloon payment of approximately $5 million due in August 2025.

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.

Revolving Credit Facility – At June 30, 2024, our Revolving Credit Facility was undrawn and had approximately $39.4 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.”

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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.

Capital Expenditures – First Six Months of 2024

For the first six months of 2024, capital expenditures relating to PP&E were $33.0 million.

The capital expenditures were funded primarily from cash and working capital.

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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.

During the three months ended June 30, 2024, we repurchased approximately 0.8 million shares of common stock at an average cost of $8.40 per share for a total of approximately $6.7 million.

During the six months ended June 30, 2024, we repurchased approximately 1.5 million shares of common stock at an average cost of $8.13 per share for a total of approximately $12.1 million.

Total repurchase authority remaining under the repurchase program was approximately $109 million as of June 30, 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.

During the three months ended June 30, 2024, we repurchased $63.7 million in principal amount of our Senior Secured Notes for approximately $60.9 million and during the six months ended June 30, 2024, we repurchased $96.6 million in principal amount of our Senior Secured Notes for approximately $92.2 million.

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.

As a result, our expenses were $3.0 million for the first six months ended June 30, 2024 in connection with environmental projects.

For the remainder of 2024, we expect to incur expenses ranging from $1.8 million to $2.2 million in connection with additional environmental projects.

However, it is possible that the actual costs could be significantly different than our estimates.

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.

We believe fertilizer products sold to the agricultural industry are seasonal, while sales into the industrial 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.

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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.

As of June 30, 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.

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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.

It is also reasonably possible that the estimates and assumptions utilized as of June 30, 2024, could change in the near term.

Actual results could differ materially from these estimates and judgments, as additional information becomes known.

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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.

At June 30, 2024, we had no embedded losses associated with sales commitments with firm sales prices.

Commodity Price Risk

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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.

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, and as such, are exempt from derivative accounting requirements.

At June 30, 2024, we had no outstanding natural gas contracts which are subject to derivative accounting requirements.

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 may be exposed to variable interest rate risk with respect to our Revolving Credit Facility when there are outstanding borrowings.

As of June 30, 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.

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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.

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 June 30, 2024.

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 June 30, 2024, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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• 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 outlook for the industrial end markets;

• the availability of raw materials;

• our ability to broaden the distribution of our products, including our ability to leverage our nitric acid production capacity at our El Dorado Facility;

• our ongoing initiatives to increase the distribution of our products within our industrial end markets;

• the execution and success of our advanced low-carbon ammonia initiatives;

• the result of our product and market diversification strategy;

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• expenses in connection with environmental projects;

• the effect of litigation and other contingencies;

• the effect of litigation and other contingencies, including the potential financial penalties associated with the NOV from ADEQ regarding wastewater discharges from our El Dorado Facility;

• the increase in interest expense;

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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.

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.

Corn crop marketing year (September 1 - August 31), which began in 2022 and will ended in 2023 and primarily relates to corn planted and harvested in 2022.

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.

2 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis