What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-10-30 compared with 2024-08-01 · 175 added, 166 removed, 481 unchanged (41% 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 June 30, 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 September 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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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.

If low-carbon 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 continuing to evaluate and develop 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”).

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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.

However, given the current high-cost environment and limited resources, coupled with our outlook for moderating selling prices, we have elected to put the El Dorado expansion projects on hold for the current year.

We plan to reevaluate these projects in 2025 to determine our prospects of moving forward with one or more of them in the future.

• We have recently undertaken several smaller projects that we expect to enhance our profitability beginning in the fourth quarter of 2024.

These projects include:

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• 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 volumes also going to Europe and the U.S.

The ammonia from this facility is intended to be used as a clean fuel for power generation, a hydrogen carrier, an industrial chemical feedstock, and as a marine fuel in a variety of domestic and international markets.

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.

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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.

The project is expected to be completed and operational in 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 sequester approximately 400,000 to 500,000 metric tons of CO 2 per year in underground saline aquifers.

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The EPA recognized the application as complete in March 2023 and is currently in the review process.

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.

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

Higher Ammonia Prices and Lower Natural Gas Input Costs Partially Offset by Impact of Planned Turnaround of Pryor Facility

Third quarter results benefited from higher ammonia selling prices and lower natural gas feedstock costs relative to the third quarter of 2023.

Sales volumes of our products decreased in the third quarter of 2024 as compared to the same quarter of 2023 due to lower sales volumes of UAN and ammonia as a result of the Turnaround performed at our Pryor facility during the period.

Ammonia prices have strengthened over the past several months supported by a combination of global factors, including:

and West-of-Suez supply-demand dynamics driven by global supply disruptions;

geopolitical concerns over conflict in the Middle East leading to higher natural gas feedstock costs for European ammonia producers;

extended turnarounds, outages and limited spot availability across the Middle East, North Africa and Trinidad that have reduced global inventories;

ongoing disruptions in the Suez Canal limiting ammonia imports into Europe from the Middle East;

and the delayed startup of new production capacity in the U.S.

Gulf and export terminal in Russia.

We expect ammonia pricing to moderate in the fourth quarter of 2024 and into 2025 for a variety of reasons, including:

the anticipated start-up of new production capacity in both the U.S.

and internationally;

an increase in Russian exports;

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

Upside to our 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, ongoing gas curtailments in regions exporting ammonia, a lower interest rate environment and supportive weather dynamics.

an increase in energy prices;

a strengthening Chinese economy driving increased industrial market demand;

further delays in new production capacity coming online;

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.

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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.

With respect to trends in our agricultural markets, corn prices have rebounded from earlier in 2024 reflecting recent revisions by the U.S.

Department of Agriculture (“USDA”) for smaller than previously estimated U.S.

corn supplies and a modest decline in ending stocks;

increases in U.S.

corn exports and corn used for ethanol production;

and production challenges in international growing regions.

While currently above lows from earlier in 2024, corn prices sit below year-ago levels due largely to the impact on corn supply of the multi-year high U.S.

corn harvest in 2023.

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.

farmers planted approximately 90.7 million acres of corn during the Spring 2024 planting season, down from 2023, but at a level that would increase corn supplies.

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 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.

Department of Agriculture (“USDA”) estimates the U.S.

According to the World Agricultural Supply and Demand Estimates Report dated October 11, 2024 (“October Report”), farmers planted approximately 90.7 million acres of corn in 2024, down 4.1% compared to the 2023 planting season.

In addition, the USDA estimates the U.S.

ending stocks for the 2024 Harvest will be approximately 50.8 million metric tons, a 13.6% increase from the 2023 Harvest.

The USDA's expected yield for the 2024 Harvest is 183.8, up approximately 3.7% from a year ago.

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

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

(2024 Harvest)

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(2022 Harvest)

July Report (1)

October Report (1)

Area Planted (Million acres)

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World Ending Stocks (Million metric tons)

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

Information obtained from the October 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.

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.

calls for smaller supplies, larger exports, and reduced ending stocks .

Corn production is forecast up on increased yield.

Yield is increased to 183.8 bushels an acre, harvested area is unchanged and beginning stocks were lowered with total use raised slightly lowering ending stocks.

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

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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 stable despite persistent global economic challenges in the second quarter of 2024.

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.

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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.

Our LDAN and AN solution, which are primarily used as AN fuel oil and specialty emulsions for usage in the quarry and the construction industries, are used for metals mining and to a lesser extent, for coal.

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 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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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.

We historically have purchased natural gas either on the spot market, through forward purchase contracts, or a combination of both and we 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.

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The following table shows the volume of natural gas purchased and the average cost per MMBtu:

Three Months Ended

Three Months Ended September 30,

Natural gas volumes (MMBtu in millions)

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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, are 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, 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.

However, we planned a short plant outage in July 2024 to perform a catalyst change to get back to maximum production rates.

Our Pryor Facility has completed its scheduled full plant Turnaround which commenced during the third quarter of 2024.

Our Cherokee Facility commenced its scheduled ammonia plant Turnaround during the fourth quarter.

Following those Turnarounds, they are expected to be on a two-year and three-year ammonia plant Turnaround cycle, respectively

Ammonia Production

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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 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.

Consolidated Results of the Third Quarter of 2024

Our consolidated net sales for the third quarter of 2024 were $109.2 million compared to $114.3 million for the same period in 2023.

Our consolidated operating loss for the third quarter of 2024 was $24.4 million compared to operating loss of $9.5 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 Second Quarter

Items Affecting Comparability of Results of the Third Quarter

Selling Prices

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.

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.

For the third quarter of 2024, average selling prices for our ammonia increased while other pricing remained flat compared to the third quarter of 2023.

As discussed above under “Recent Business Developments,” prices have strengthened over the past several months supported by a combination of global factors, including:

tight supply-demand dynamics driven by global supply disruptions;

geopolitical concerns over conflict in the Middle East leading to higher natural gas feedstock costs;

extended turnarounds, outages and limited spot availability reducing global inventories;

ongoing disruptions in the Suez Canal limiting ammonia imports into Europe from the Middle East;

and the delayed startup of new production capacity in the U.S.

Gulf and export terminal in Russia.

Turnaround Activities (2024 only)

As discussed above, we performed major Turnaround activities at our Pryor Facility in the third quarter of 2024.

Additionally, we planned and executed a minor planned outage at our El Dorado Facility during July to change the catalyst in the ammonia plant to maximize production rates.

When such activities are performed, overall results are negatively impacted.

This impact includes lost contribution margin from lost sales, lost fixed cost absorption from lower production, and increased costs associated with repairs and maintenance.

In addition, Turnaround related costs may be incurred in periods earlier than the actual outage of the plant for activities such as planning and procurement of materials.

Plant, Property and Equipment Impairments

For the three months ended September 30, 2024 and 2023, we recorded impairments on assets the Company has or intends to abandon in the amount of $5.4 million and $0.2 million, respectively.

For the nine months ended September 30, 2024 and 2023, we recorded asset impairments of $6.8 million and $2.1 million, respectively.

These impairment losses are included in Other expense (income), net on our condensed consolidated statements of operations.

Results of Operations

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.

The following Results of Operations should be read in conjunction with our condensed consolidated financial statements for the three months ended September 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 June 30, 2024 Compared to Three Months Ended June 30, 2023

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

The following table contains certain financial information:

Three Months Ended

Three Months Ended September 30,

(Dollars In Thousands)

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Total net sales

Gross profit:

Gross (loss) profit:

Adjusted gross profit (1)

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Turnaround expense

Total gross profit

Total gross (loss)

Selling, general and administrative expense

Other expense (income), net

Operating income

Operating (loss)

Interest expense, net

Gain on extinguishment of debt

Non-operating other income, net

Provision for income taxes

Benefit for income taxes

Other information:

Gross profit percentage (3)

Gross loss percentage (3)

Adjusted gross profit percentage (3)

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

Three Months Ended

Three Months Ended September 30,

Product (tons sold)

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Urea ammonium nitrate (UAN)

Three Months Ended

Three Months Ended September 30,

Gross Average Selling Prices (price per ton)

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Urea ammonium nitrate (UAN)

Three Months Ended

Three Months Ended September 30,

Average Benchmark Prices (price per ton)

Tampa Ammonia Benchmark

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 products remains stable despite continued global economic challenges.

Net sales decreased during the third quarter of 2024 compared to the prior year period driven by the impact of lower volumes for UAN and ammonia, and to a lesser extent, lower selling prices for acids relative to the third quarter of 2023.

Also impacting sales volumes was the planned Turnaround activity completed during the third quarter at our Pryor Facility.

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

Demand for our industrial products is 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 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.

As noted in the table above, we recognized a gross loss of $7.9 million for the third quarter of 2024 compared to a gross loss of $3.4 million for the same period in 2023, or a $4.6 million increase.

Overall, our gross loss percentage was (7.3)% compared to a gross loss percentage of (3.0)% for the same period in 2023.

Our adjusted gross profit percentage increased to 22.9% for the third quarter of 2024 from 12.1% for the third quarter of 2023.

Our overall gross loss for the third quarter of 2024 is primarily lower compared to the same period of 2023 due to lower sales prices and overall volume for our products, planned Turnaround expenses and higher depreciation partially offset by lower natural gas costs.

Selling, General and Administrative

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.

Our SG&A expenses were $10.0 million for the third quarter of 2024, an increase of $1.5 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 insurance, depreciation and amortization and other miscellaneous expenses.

Interest Expense

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 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.

Interest expense for the third quarter of 2024 was $8.1 million compared to $7.2 million for the same period in 2023.

The increase primarily relates to the reversal of the previous judgment awarded to Global in the litigation discussed in Note 5 during the third quarter of 2023.

The increase was partially offset by reduced interest expense during the third quarter of 2024 as a result of the lower outstanding balances on our 6.25% Senior Secured Notes (due to recent repurchases) and on our Secured Financing due 2025 (due to repayments).

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.

Other expense (income), net during the third quarter of 2024 and 2023 primarily relates to impairment 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.

Non-operating other income, net for the third quarter of 2024 was $2.7 million compared to $3.7 million for the same period of 2023, primarily related to interest income earned during both periods from our short-term investments.

Benefit provision for Income Taxes

The benefit for income taxes for the third quarter of 2024 was $4.5 million and the benefit for income taxes for the same period of 2023 was $5.2 million.

The resulting effective tax rate for the third quarter of 2024 was 15.0% compared to 40.5% for the same period of 2023.

For the third quarter of 2024, the effective tax rate is lower than the statutory rate primarily due to change in valuation allowance and nondeductible compensation.

For the third quarter of 2023, the effective tax rate is greater than the statutory rate primarily due to the impact of state taxes, valuation allowances, and other discrete items.

See discussion in Note 7.

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

Nine Months Ended September 30, 2024 Compared to Nine Months Ended September 30, 2023

The following table contains certain financial information:

Six Months Ended

Nine Months Ended September 30,

(Dollars In Thousands)

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Selling, general and administrative expense

Other expense, net

Other expense (income), net

Operating income

2 unchanged sentences

Non-operating other income, net

Provision for income taxes

(Benefit) provision for income taxes

Net (loss) income

Other information:

8 unchanged sentences

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

Six Months Ended

Nine Months Ended September 30,

Product (tons sold)

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Urea ammonium nitrate (UAN)

Six Months Ended

Nine Months Ended September 30,

Gross Average Selling Prices (price per ton)

1 unchanged sentence

Urea ammonium nitrate (UAN)

Six Months Ended

Nine Months Ended September 30,

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.

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

As noted in the table above, we recognized a gross profit of $41.7 million for the first nine months of 2024 compared to $74.3 million for the same period in 2023, or a $32.6 million reduction.

Overall, our gross profit percentage was 10.8% compared to a gross profit percentage of 16.1% 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.

Our adjusted gross profit percentage was 29.7% for the first nine months of 2024 and compared to 27.3% for the same period in 2023.

Our overall gross profit for the first nine months of 2024 is lower compared to the same period of 2023 by overall lower sales prices for our products and higher planned Turnaround expenses 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.

Our SG&A expenses were $31.9 million for the first nine months of 2024, an increase of $4.1 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 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.

Interest expense for the first nine months of 2024 was $26.3 million compared to $31.2 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 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.

During the first nine months 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.

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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.

Other Expense (income), net

Other expense, net during the first nine months of 2024 and 2023 consists primarily of impairment 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.

Non-operating other income, net for the first nine months of 2024 was $9.1 million compared to $10.9 million for the same period of 2023, primarily related to interest income earned during both periods from our short-term investments.

(Benefit) provision for Income Taxes

The benefit for income taxes for the first nine months of 2024 was $2.6 million compared to the provision for income taxes of $3.6 million for the same period of 2023.

The resulting effective tax rate for the first nine months of 2024 was 20.5% compared to 9.8% for the same period of 2023.

For the first nine months of 2024, the effective tax rate is lower than the statutory rate primarily due to change in valuation allowance and nondeductible compensation, partially offset by state tax law changes.

For the nine months of 2023, the effective tax rate is less than the statutory rate primarily due to deferred benefits from state tax law changes, partially offset by state taxes.

See discussion in Note 7.

LIQUIDITY AND CAPITAL RESOURCES

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

The following table summarizes our cash flow activities for the nine months ended September 30:

(In Thousands)

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Net Cash Flow from Operating Activities

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 provided by operating activities was $82.6 million for the first nine months of 2024 compared to $120.5 million for the same period of 2023, a change of $37.9 million.

The decrease was primarily a result of a reduction in net sales, partially offset by lower cost of sales and lower cash interest paid.

Net Cash Flow from Investing Activities

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 used by investing activities was $18.4 million for the first nine months of 2024 compared to net cash provided of $21.5 million for the same period of 2023, a change of $39.9 million.

For the first nine months of 2024, the net cash used primarily relates to purchases of short-term investments of $190.6 million and expenditures for PP&E of $64.1 million partially offset by proceeds from short-term investments of $236.5 million.

For the first nine months of 2023, the net cash provided primarily relates to proceeds from short-term investments of $293.3 million, partially offset by purchases of short-term investments of $230.7 million and expenditures for PP&E of $41.0 million.

Net Cash Flow from 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.

Net cash used by financing activities was $123.0 million for the first nine months of 2024 compared to net cash used of $159.0 million for the same period of 2023, a change of $36.0 million.

For the first nine months of 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 $15.9 million and repurchases of $14.2 million of common stock.

For the first nine months of 2023, the net cash used primarily consists of repurchases of our 6.25% Senior Secured Notes of $114.3, payments on other long-term debt and short-term financing of $24.3 million and $20.4 million for the repurchases of common stock.

Capitalization

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:

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

September 30, 2024

December 31, 2023

(In Millions)

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(1) See discussion contained in Note 4.

(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.

(2) Debt issuance costs as of September 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 June 30, 2024, our Revolving Credit Facility was undrawn and had approximately $39.4 million of availability.

As of September 30, 2024, our Revolving Credit Facility was undrawn and had approximately $34 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 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.

As of September 30, 2024, we had approximately $199.4 million of cash and short-term investments.

From time to time, we may seek to deploy capital through common stock repurchases or the early redemption 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.

We believe that the combination of our cash and cash equivalents, 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

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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 June 30, 2024, no trigger event had occurred.

As of September 30, 2024, no trigger event had occurred.

Loan Agreements

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.

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

Revolving Credit Facility – At September 30, 2024, our Revolving Credit Facility was undrawn and had approximately $34 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 Six Months of 2024

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

Capital Expenditures – First Nine Months of 2024

For the first nine months of 2024, capital expenditures relating to PP&E were $64.1 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 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.

During the three months ended September 30, 2024, we did not repurchase any of our outstanding common stock.

During the nine months ended September 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 September 30, 2024.

The repurchase program may be suspended, terminated or modified at any time for any reason.

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.

During the three months ended September 30, 2024, we did not repurchase any of our Senior Secured Notes.

During the nine months ended September 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 $3.0 million for the first six months ended June 30, 2024 in connection with environmental projects.

As a result, our expenses were $4.0 million for the first nine months ended September 30, 2024 in connection with environmental projects.

For the remainder of 2024, we expect to incur expenses ranging from $0.8 million to $1.1 million in connection with additional environmental projects.

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These insurance bonds primarily represent guarantees of future performance of our subsidiaries.

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.

As of September 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 June 30, 2024, could change in the near term.

It is also reasonably possible that the estimates and assumptions utilized as of September 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 June 30, 2024, we had no embedded losses associated with sales commitments with firm sales prices.

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

Commodity Price Risk

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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.

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

Interest Rate Risk

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.

As of September 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 June 30, 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 June 30, 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 June 30, 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 September 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 September 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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• the execution and success of our advanced low-carbon ammonia initiatives;

• our expectations regarding future ammonia pricing;

• the result of our product and market diversification strategy;

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• adverse effects from regulatory policies, including tariffs;

• geopolitical concerns;

• volatility of natural gas prices;

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Ammonium nitrate.

The World Agricultural Supply and Demand Estimates Report dated April 11, 2024.

Accounting Standard Updates.

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A note in the accompanying notes to the condensed consolidated financial statements.

October Report

The World Agricultural Supply and Demand Estimates Report dated October 11, 2024.

The Oklahoma Department of Environmental Quality.

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United States Department of Agriculture.

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.

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 2022 and 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.

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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