LSB INDUSTRIES, INC. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following Management's Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with a review of the other Items included in this Form 10-Q and our March 31, 2021 condensed consolidated financial statements included elsewhere in this report. A reference to a “Note” relates to a note in the accompanying notes to the condensed consolidated financial statements. This MD&A reflects our operating results, unless otherwise noted. Certain statements contained in this MD&A may be deemed to be forward-looking statements. See “Special Note Regarding Forw ard-Looking Statements.” Overview General LSB is headquartered in Oklahoma City, Oklahoma and through its subsidiaries, manufactures and sells chemical products for the agricultural, mining, and industrial markets. We own and operate facilities in Cherokee, Alabama, El Dorado, Arkansas and Pryor, Oklahoma, and operate a facility on behalf of a global chemical company in Baytown, Texas. Our products are sold through distributors and directly to end customers primarily throughout the U.S. and parts of Mexico and Canada. Key Operating Initiatives for 2021 We believe our future results of operations and financial condition will depend significantly on our ability to successfully implement the following key initiatives: • Continue Focusing on Becoming a “Best in Class” Chemical Plant Operator with Respect to Safe, Reliable Operations that Produce the Highest Quality Products. ▪ We believe that high safety standards are critical and a precursor to improved plant performance. With that in mind, we have implemented and are currently managing enhanced safety programs at our facilities that focus on improving our safety culture, which will reduce risks and improve our safety performance. ▪ We have several initiatives underway that we believe will improve the overall reliability of our plants and allow us to produce more products for sale while lowering our cost of production. Those initiatives are focused on, operations excellence through enhancements in the operating procedure program, asset health monitoring optimization and asset care excellence maintenance programs, and product quality programs focused on providing products to the customer that meet the highest quality standards. • Continue Broadening the Distribution of our Products. To further leverage our plants current production capacity, we are continuing to expand the distribution of our industrial and mining products by partnering with customers to take product into different markets both within and outside the U.S. ▪ In October 2020, we announced a new long-term nitric acid supply contract with a customer. Under the agreement, we agreed to supply between 70,000 to 100,000 tons of nitric acid per year, with sales beginning in the first quarter of 2021. This contract advances our focus to leverage underutilized nitric acid production capacity at our El Dorado Facility. ▪ We also executed a new contract to capture and sell carbon dioxide out of our El Dorado Facility, where our customer is building a guest plant. We expect to begin sales under this agreement in the fourth quarter of 2021. ▪ Additionally, early in the second quarter of 2020, we completed a key storage project that is allowing us to further maximize our production of HDAN at our El Dorado Facility, which has, and we expect will continue to enable us to achieve higher production, a lower cost per ton and increased sales of that product during periods of more attractive pricing. • Development of a Strategy to Capitalize on Ammonia Opportunities in a Renewable Energy Focused Economy . As there is a heightened global focus on significantly increasing the use of renewable energy to reduce carbon emissions, we are currently developing a strategy to enter the market for low-carbon or no carbon ammonia, a rapidly emerging trend referred to as “blue-green ammonia.” Many studies have shown that ammonia is the best carrier for hydrogen, given higher energy content and relative ease of storage via hydrogen gas. Ammonia can also be used as zero carbon fuel in the maritime sector, a carbon free fertilizer and as a coal substitute in energy constrained countries. If ammonia were to be used for energy consumption globally, this would equate to five times the amount of current global annual production of ammonia, or approximately 50 times the current seaborne trade. We believe we are well-placed to partake in this opportunity given our ability to retrofit our existing plants rather than investing in greenfield projects, thereby reducing the time to market and the upfront capital expenditures, which will help the overall economics. • Improve Our Capital Structure and Overall Cost of Capital. We are actively seeking ways to improve our capital structure and reduce our overall cost of capital. We believe that continued improvement in operating performance combined with improving 22 fundamentals in the agriculture market and the continued economic recovery from the COVID-19 pandemic , will be a benefit in achieving those efforts. • Evaluate Acquisitions of Strategic Assets or Companies. We are evaluating opportunities to acquire strategic assets or companies, mergers with other companies and investment in additional production capacity where we believe those acquisitions, mergers or expansion of production capacity will enhance the value of the Company and provide appropriate returns. We may not successfully implement any or all of these initiatives. Even if we successfully implement the initiatives, they may not achieve the results that we expect or desire. Recent Business Developments Agricultural Spring Season Since the latter part of 2020, the corn market continues to experience positive indicators pushing corn prices to an eight-year high. Chinese demand for corn is strong as China continues to rebuild their swine population following the swine flu, which decimated the swine population several years ago. This demand for feed is expected to remain robust as China has moved to large institutional hog farms for which the demand for feed is significant. Secondly, approximately 40% of domestic corn demand comes from ethanol, an additive to gasoline, which has continued to rebound since the second quarter of 2020 as vaccines are rolled out, stay-at-home orders are lifted and demand for gasoline continues to improve. As corn prices increase, fertilizers generally follow suit as growers seek to apply more fertilizer to increase yields. Furthermore, farm income last year, aided by government subsidies, was at its highest levels since 2014, which further supports fertilizer pricing. Also, as discussed below, during February 2021, many areas of the U.S. experienced severe cold weather, negatively impacting the availability of natural gas while the demand for natural gas increased from electrical utilities, businesses and residents in certain regions of the country. These factors resulted in a shortage of natural gas, causing prices for the commodity to rise significantly and industrial users to be severely curtailed on their requirements. Many nitrogen producers were forced or elected to idle their plants. With the supply of nitrogen products in the U.S. tight prior to the cold weather, we believe that these recent widespread production disruptions, coupled with unplanned outages in the global market, have substantially reduced the available supply of nitrogen to the U.S. market and further increased the fertilizer pricing outlook in the near term. Overall, improvements in fertilizer demand and pricing are being somewhat tempered by higher natural gas costs thus far in 2021 as compared to 2020. See a more detailed discussion below under “Key Industry Factors.” February Weather Event, Natural Gas Curtailment and Settlement of Natural Gas Contracts On February 12, 2021, the Pryor Facility was taken out of service due to extreme cold weather that caused a surge in natural gas prices in the region, along with the curtailment of gas distribution by the operator of the pipeline that supplies natural gas to the facility. On February 21, 2021, this facility began a phased restart and the facility’s ammonia plant was in production shortly thereafter. Also, as a result of unprecedented cold weather conditions, on February 17, 2021, the primary natural gas supplier to our El Dorado Facility asserted a claim of force majeure and materially restricted the supply of gas to the facility. However, effective February 23, 2021, the force majeure was lifted, and the facility’s ammonia plant was in production shortly thereafter. As weather across the middle of the country improved and temperatures warmed, natural gas prices have normalized, and supply volumes have been restored to levels required for full operation of our facilities. Notably, our Cherokee Facility was not materially impacted by the extreme cold weather and related natural gas price and supply issues and operated at targeted levels throughout February. In order to mitigate a portion of the commodity price risk associated with natural gas, we periodically enter into natural gas forward contracts and volume purchase commitments that locked in the cost of certain volumes of natural gas. Prior to this weather event, we had both types of arrangements. During the first quarter of 2021, we settled all of our natural gas forward contracts and certain volume purchase commitments and recognized a realized gain of approximately $6.8 million, which is classified as a reduction to cost of sales. As a result of the settlement of these natural gas contracts, we were able to significantly mitigate the impact from lost production, lost sales and higher costs resulting from the impact of the natural gas shortage caused by the February cold weather event. Key Industry Factors Supply and Demand Agricultural Sales of our agricultural products were approximately 46% of our total net sales for the first quarter of 2021. The price at which our agricultural products are ultimately sold depends on numerous factors, including the supply and demand for nitrogen fertilizers which, 23 in turn, depends upon world grain demand and production levels, the cost and availability of transportation and storage, weather conditions, competitive pricing and the availability of imports. Additionally, expansions or upgrades of competitors’ facilities and international and domestic political and economic developments continue to play an important role in the global nitrogen fertilizer industry economics , including the impact from the Phase 1 trade agreement between the U.S . and China . These factors can affect, in addition to selling prices, the level of inventories in the market which can cause price volatility and a ffect product margins. From a farmer’s perspective, the demand for fertilizer is affected by the aggregate crop planting decisions and fertilizer application rate decisions of individual farmers. Individual farmers make planting decisions based largely on prospective profitability of a harvest, while the specific varieties and amounts of fertilizer they apply depend on factors such as their financial resources, soil conditions, weather patterns and the types of crops planted. Additionally, changes in corn prices, as well as soybean, cotton and wheat prices, can affect the number of acres of corn planted in a given year, and the number of acres planted will drive the level of nitrogen fertilizer consumption, likely affecting prices. The March 2021 USDA annual Prospective Planting report currently indicates farmers intend to plant 91 million acres of corn in 2021, slightly higher than in 2020, and certain industry sources maintain an estimated range of 91 to 93 million corn acres. As it relates to the 2021 Crop as noted in the table below, the USDA estimates the U.S. ending stocks to be approximately 34 million metric tons, a 29.7% decrease from a year ago. The following April 2021 estimates are associated with the corn market: 2021 Crop 2020 Crop 2019 Crop (2020 Harvest) (2019 Harvest) Percentage (2018 Harvest) Percentage April Report (1) April Report (1) Change (2) April Report (1) Change (3) U.S. Area Planted (Million acres) 90.8 89.7 1.2 % 88.9 2.1 % U.S. Yield per Acre (Bushels) 172.0 167.5 2.7 % 176.4 (2.5 %) U.S. Production (Million bushels) 14,182 13,620 4.1 % 14,340 (1.1 %) U.S. Ending Stocks (Million metric tons) 34.3 48.8 (29.7 %) 56.4 (39.2 %) World Ending Stocks (Million metric tons) 283.9 303.0 (6.3 %) 321.1 (11.6 %) 1. Information obtained from WASDE reports dated April 9, 2021 (“April Report”) for the 2020/2021 (“2021 Crop”), 2019/2020 (“2020 Crop”) and 2018/2019 (“2019 Crop”) corn marketing years. The marketing year is the twelve-month period during which a crop normally is marketed. For example, the marketing year for the current corn crop is from September 1 of the current year to August 31 of the next year. The year begins at the harvest and continues until just before harvest of the following year. 2. Represents the percentage change between the 2021 Crop amounts compared to the 2020 Crop amounts. 3. Represents the percentage change between the 2021 Crop amounts compared to the 2019 Crop amounts. From a demand perspective for 2021, since the USDA has significantly decreased ending corn stocks and only slightly increased the number corn acres to be planted, coupled with increasing export volumes primarily to China, drought conditions for certain areas in South America, favorable 2020 grower income and improving demand for ethanol, current and projected corn prices have elevated to prices not seen in eight years, which has had a positive impact on fertilizer demand and prices for the spring planting season. Most gasoline has 10% ethanol content. Ethanol is commonly made from corn and ethanol production is the largest user of U.S. corn, representing roughly 40% of total U.S. corn demand. The available U.S. supply of ammonia and other nitrogen products has tightened in 2021 to date, primarily as the result of higher demand for such products, in addition to the idling of many nitrogen plants in February 2021 due to the severe cold weather discussed above under “Recent Business Developments.” As a result of these factors discussed above, we have experienced a price rally for fertilizers over the last several months, which we expect will continue through the spring planting season. Industrial and Mining Sales of our industrial products were approximately 41% of our total net sales for the first quarter of 2021. Our industrial products sales volumes are dependent upon general economic conditions primarily in the housing, automotive, and paper industries. According to the American Chemistry Council, the U.S. economic indicators are improving and pointing towards continued improvement in the markets we serve. Our sales prices generally vary with the market price of ammonia or natural gas, as applicable, in our pricing arrangements with customers. Sales of our mining products were approximately 13% of our total net sales for the first quarter of 2021. Our mining products are LDAN and AN solution, which are primary 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. In our mining markets, our sales volumes are typically driven by 24 changes in the overall North American consumption levels of mining products that can be impacted by weather. Metals p rices continue to improve in 2021 as producers continue to extract as much as possible . This includes an increase in copper mining, driven primarily by demand for electric vehicles. For 2021, the EIA is projecting a 9% increase in U.S . coal production driven by a forecasted 39% increase in natural gas prices for electricity generators, making coal more competitive in the electric power sector. We believe our plants are well located to support the more stable quarry and construction industries and the metals mining industries . Farmer Economics The demand for fertilizer is affected by the aggregate crop planting decisions and fertilizer application rate decisions of individual farmers. Individual farmers make planting decisions based largely on prospective profitability of a harvest, while the specific varieties and amounts of fertilizer they apply depend on factors such as their financial resources, soil conditions, weather patterns and the types of crops planted. Natural Gas Prices Natural gas is the primary feedstock used to produce nitrogen fertilizers at our manufacturing facilities. In recent years, U.S. natural gas reserves have increased significantly due to, among other factors, advances in extracting shale gas, which has reduced and stabilized natural gas prices, providing North America with a cost advantage over certain imports. As a result, our competitive position and that of other North American nitrogen fertilizer producers has been positively affected. We historically have purchased natural gas either on the spot market, through forward purchase contracts, or a combination of both and have used forward purchase contracts to lock in pricing for a portion of our natural gas requirements. These forward purchase contracts are generally either fixed-price or index-price, short-term in nature and for a fixed supply quantity. We are able to purchase natural gas at competitive prices due to our connections to large distribution systems and their proximity to interstate pipeline systems. The following table shows the volume of natural gas we purchased and the average cost per MMBtu : Three Months Ended March 31, 2021 (1) 2020 Natural gas volumes (MMBtu in millions) 6.9 7.7 Natural gas average cost per MMBtu $ 3.15 $ 2.09 (1) The natural gas average cost excludes a gain of approximately $6.8 million associated with the settlements of natural gas contracts and volume purchase commitments discussed above under “ Recent Business Developments” Transportation Costs Costs for transporting nitrogen-based products can be significant relative to their selling price. For example, ammonia is a hazardous gas at ambient temperatures and must be transported in specialized equipment, which is more expensive than other forms of nitrogen fertilizers. In recent years, a significant amount of the ammonia consumed annually in the U.S. was imported. Therefore, nitrogen fertilizers prices in the U.S. are influenced by the cost to transport product from exporting countries, giving domestic producers who transport shorter distances an advantage. However, we continue to evaluate the recent rising costs of rail and truck freight domestically. Since the Magellan ammonia pipeline was permanently shut down in 2020, certain Oklahoma and Texas producers that relied on the pipeline to transport their ammonia are relying on other transportation modes, primarily trucks, but also rail and barge transport. As a result of increases in demand for trucks to transport ammonia, primarily during the spring and fall planting seasons, higher transportation costs have and could continue to impact our margins, if we were unable to fully pass through these costs to our customers. As a result, we continue to evaluate supply chain efficiencies to reduce or counter the impact of higher logistics costs. Key Operational Factors Facility Reliability Consistent, reliable and safe operations at our chemical plants are critical to our financial performance and results of operations. The financial effects of planned downtime at our plants, including Turnarounds (primarily associated with our ammonia plants), is mitigated through a diligent planning process that considers the availability of resources to perform the needed maintenance and other factors. Unplanned downtime of our plants typically results in lost contribution margin from lost sales of our products, lost fixed cost absorption from lower production of our products and increased costs related to repairs and maintenance. All Turnarounds result in lost contribution margin from lost sales of our products, lost fixed cost absorption from lower production of our products, and increased costs related to repairs and maintenance, which repair, and maintenance costs are expensed as incurred. 25 Our Cherokee Facility is currently on a three-year ammonia plant Turnaround cycle with t he next ammonia plant Turnaround planned in the third quarter o f 2021. Our El Dorado and Pryor Facilities are currently on a three-year ammonia plant Turnaround cycle with both currently scheduled for their next ammonia plant Turnarounds in the third quarter of 2022 . Ammonia Production Ammonia is the basic product used to produce all of our upgraded products. The ammonia production rates of our plants affect the total cost per ton of each product produced and the overall sales of our products. For 2021, we are targeting total ammonia production of approximately 830,000 tons to 850,000 tons despite a 30-day Turnaround at our Cherokee Facility, which will lower ammonia production during the third quarter by approximately 15,000 tons. We believe that our focus on continuous improvement in reliability as discussed in key operating initiatives will result in year over year improvement in ammonia production for 2021. Forward Sales Contracts We use forward sales of our fertilizer products to optimize our asset utilization, planning process and production scheduling. These sales are made by offering customers the opportunity to purchase product on a forward basis at prices and delivery dates that are agreed upon, with dates typically occurring within 12 months. We use this program to varying degrees during the year depending on market conditions and our view of changing price environments. Fixing the selling prices of our products months in advance of their ultimate delivery to customers typically causes our reported selling prices and margins to differ from spot market prices and margins available at the time of shipment. Consolidated Results of the First Quarter of 2021 Our consolidated net sales for the first quarter of 2021 were $98.1 million compared to $83.4 million for the same period in 2020. Our consolidated operating loss was $0.5 million compared to $7.0 million for the same period in 2020. The items impacting our operating results are discussed in more detail below and under “Results of Operations.” Items Affecting Comparability of Results of the First Quarter Selling Prices For the first quarter of 2021, average agricultural selling prices for our a mmonia increased 18% while UAN and HDAN selling prices increased slightly compared to the first quarter of 2020. As discussed above under “Forward Sales Contracts”, our selling prices were below spot market prices since most of these sales were pursuant to forward sales contracts during the first quarter of 2021. Ammonia prices have improved due to contracted inventory levels in North America driven by higher demand and from numerous plant outages caused primarily by the extreme cold weather event during February. For the first three months of 2021, average industrial selling prices for most of our products were higher compared to the same period of 2020, primarily driven by the $98 per metric ton increase in the Tampa Ammonia benchmark price, as many of our industrial contracts are indexed to the Tampa Ammonia benchmark price. As for our mining products, average selling prices for our products increased as mining activity improves in addition to certain of our mining contracts are linked to natural gas indexes and as the cost of natural gas increases, the pricing for these products increases accordingly. Settlement of Natural Gas Contracts As discussed above under “Recent Business Developments”, during the first quarter of 2021, we settled all of our natural gas forward contracts and certain volume purchase commitments and recognized a realized gain of approximately $6.8 million, which is classified as a reduction to cost of sales. As a result of the settlement of these natural gas contracts, we were able to significantly mitigate the impact from lost production, lost sales and higher costs resulting from the impact of the natural gas shortage caused by the February cold weather event. Legal Fees-Leidos For the first quarters of 2021 and 2020, certain legal fees were approximately $0.9 million and $3.3 million, respectively. These fees relate to claims we are pursuing against Leidos to recover damages and losses associated with the construction of the ammonia plant at the El Dorado Facility as discussed in footnote B of Note 5. Due to the impact from the COVID-19 pandemic, the trial date has been delayed. We are awaiting a new trial date. 26 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, 2021 and 2020 and accompanying notes and the discussions under “Overview” and “Liquidity and Capital Resources” included in this MD&A. We present the following information about our results of operations. Net sales to unaffiliated customers are reported in the condensed consolidated financial statements and gross profit represents net sales less cost of sales. Net sales are reported on a gross basis with the cost of freight being recorded in cost of sales. Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020 The following table contains certain financial information: Three Months Ended March 31, Percentage 2021 2020 Change Change (Dollars In Thousands) Net sales: Agricultural products $ 44,913 $ 41,458 $ 3,455 8 % Industrial and mining products 53,203 41,953 11,250 27 % Total net sales $ 98,116 $ 83,411 $ 14,705 18 % Gross profit: Adjusted gross profit (1) $ 24,939 $ 20,128 $ 4,811 24 % Depreciation and amortization (2) (16,739 ) (17,577 ) 838 (5 )% Turnaround expense (140 ) — (140 ) Total gross profit 8,060 2,551 5,509 216 % Selling, general and administrative expense 8,793 10,006 (1,213 ) (12 )% Other income, net (263 ) (468 ) 205 Operating loss (470 ) (6,987 ) 6,517 (93 )% Interest expense, net (3) 12,372 13,479 (1,107 ) (8 )% Non-operating other expense (income), net 395 (675 ) 1,070 Provision (benefit) for income taxes 42 (339 ) 381 Net loss $ (13,279 ) $ (19,452 ) $ 6,173 (32 )% Other information: Gross profit percentage (4) 8.2 % 3.1 % 5.1 % Adjusted gross profit percentage (4) 25.4 % 24.1 % 1.3 % Property, plant and equipment expenditures $ 6,133 $ 10,737 $ (4,604 ) (43 )% (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) The first quarters of 2021 and 2020 includes interest expense of $0.1 and $1.3 million associated with a litigation judgment discussed in footnote (B) of Note 5. (4) As a percentage of the total net sales. The following tables provide key operating metrics for the agricultural products: Three Months Ended March 31, Percentage Product (tons sold) 2021 2020 Change Change UAN 109,243 114,689 (5,446 ) (5 )% HDAN 76,162 65,874 10,288 16 % Ammonia 22,054 20,510 1,544 8 % Other 2,750 2,946 (196 ) (7 )% Total 210,209 204,019 6,190 3 % 27 Three Months Ended March 31, Percentage Gross Average Selling Prices (price per ton) 2021 2020 Change Change UAN $ 161 $ 161 $ — — % HDAN $ 237 $ 236 $ 1 — % Ammonia $ 288 $ 245 $ 43 18 % With respect to sales of industrial and mining products, the following table indicates key operating metrics of our major products: Three Months Ended March 31, Percentage Product (tons sold) 2021 2020 Change Change Ammonia 43,193 70,528 (27,335 ) (39 )% AN, Nitric Acid and Other 116,165 67,434 48,731 72 % Total 159,358 137,962 21,396 16 % Tampa Ammonia Benchmark (price per metric ton) $ 348 $ 250 $ 98 39 % Net Sales Agricultural product sales increased driven primarily by higher ammonia sales prices and higher sales volumes of HDAN and ammonia partially offset by lower UAN sales volumes resulting from the production interruption from the February weather event discussed under “Items Affecting Comparability of Results of the First Quarter.” Ammonia selling prices have increased as a result of increasing demand and tightening inventory levels. Industrial acids and other industrial product sales increased primarily from higher sales prices due primarily to higher Tampa Ammonia benchmark pricing and higher nitric acid sales volume due in part to sales beginning in 2021 pursuant to the new long-term nitric acid supply agreement. The average Tampa Ammonia pricing was approximately $98 per ton higher compared to the same period in 2020. This increase was partially offset by lower ammonia sales volume as more of this product was upgraded to other products, including agricultural and mining products. Mining products sales improved driven by both increased sales volumes and prices. Demand for mining products has improved, especially relating to metals mining as expanding electric vehicle market is driving the need for copper. Also, certain mining sales contracts are linked to natural gas indexes and as the cost of natural gas increases, the pricing for these products increase accordingly. Gross Profit As noted in the table above, we recognized a gross profit of $8.1 million for the first quarter of 2021 compared to $2.6 million for the same period in 2020, or a $5.5 million improvement. Overall, our gross profit percentage was 8.2% compared to 3.1% for the same period in 2020. Our adjusted gross profit percentage increased slightly to 25.4% for the first quarter of 2021 from 24.1% for the first quarter of 2020. The increase in gross profit was primarily driven by higher sales prices for our products coupled with increased sales volume of upgraded product including nitric acid and AN. The improvement in gross profit was partially offset by the net impact of the February weather disruption and overall higher average natural gas costs which averaged $3.15 per MMBtu for the first quarter of 2021 as compared to $2.09 per MMBtu for the first quarter of 2020. Selling, General and Administrative Our SG&A expenses were $8.8 million for the first quarter of 2021, a decrease of $1.2 million compared to the same period in 2020. The decrease was primarily driven by lower professional fees including legal fees associated with the legal matter discussed above under “Items Affecting Comparability of Results of the First Quarter” partially offset by an increase in short and long-term compensation incentives. Interest Expense, net Interest expense for the first quarter of 2021 was $12.4 million compared to $13.5 million for the same period in 2020. The decrease relates primarily to the interest expense incurred during the first quarter of 2020 associated with a litigation judgment discussed in footnote (B) of Note 5. 28 Provision ( B enefit ) for Income Taxes The provision for income taxes for the first quarter of 2021 was minimal compared to a benefit for income taxes $0.3 million for the same period in 2020. The resulting effective tax rate for the first quarter of 2020 was 2%. For the first quarters of 2021 and 2020, the effective tax rate is less than the statutory rate primarily due to the impact of the valuation allowance. Also see discussion in Note 7. LIQUIDITY AND CAPITAL RESOURCES The following table summarizes our cash flow activities for the three months ended March 31: 2021 2020 Change (In Thousands) Net cash flows from operating activities $ 12,711 $ (2,178 ) $ 14,889 Net cash flows from investing activities $ (5,935 ) $ (10,558 ) $ 4,623 Net cash flows from financing activities $ (8,808 ) $ 27,428 $ (36,236 ) Net Cash Flow from Operating Activities Net cash provided by operating activities was $12.7 million for the first quarter of 2021 compared to net cash used of $2.2 million for the same period of 2020, a change of $14.9 million. For the first quarter of 2021, the net cash provided is the result of a net loss of $13.3 million plus adjustments of $16.8 million for depreciation and amortization of PP&E less other adjustments of $0.4 million and net cash provided of $9.6 million primarily from our working capital. For the first quarter of 2020, the net cash used is the result of a net loss of $19.5 million plus adjustments of $17.6 million for depreciation and amortization of PP&E and other adjustments of $1.3 million and net cash used of $1.6 million primarily from our working capital. Net Cash Flow from Investing Activities Net cash used by investing activities was $5.9 million for the first quarter of 2021 compared to $10.6 million for the same period of 2020, a change of approximately $4.6 million. For the first quarters of 2021 and 2020, the net cash used relates primarily to expenditures for PP&E. Net Cash Flow from Financing Activities Net cash used by financing activities was $8.8 million for the first quarter of 2021 compared to net cash provided of $27.4 million for the same period of 2020, a change of $36.2 million. For the first quarter of 2021, the net cash used primarily consists of payments on other long-term debt and short-term financing. For the first quarter of 2020, the net cash provided primarily consists of proceeds of $30 million from our Working Capital Revolver Loan and proceeds of $2.6 million from other long-term debt partially offset by payments on other long-term debt and short-term financing of $5.1 million and payments of $0.1 million for other financing activities. 29 Capitalization The following is our total current cash, long-term debt, redeemable preferred stock and stockholders’ equity: March 31, December 31, 2021 2020 (In Millions) Cash and cash equivalents $ 14.2 $ 16.3 Long-term debt: Working Capital Revolver Loan $ — $ — Senior Secured Notes due 2023 435.0 435.0 Unsecured Loan Agreement due 2022 10.0 10.0 Secured Financing due 2023 10.0 10.7 Secured Loan Agreement due 2025 6.5 6.8 Secured Financing due 2025 27.6 28.6 Secured Promissory Note due 2021 — 1.2 Other 0.4 0.5 Unamortized discount and debt issuance costs (7.7 ) (8.6 ) Total long-term debt, including current portion, net $ 481.8 $ 484.2 Series E and F redeemable preferred stock (1) $ 282.1 $ 272.1 Total stockholders' equity $ 127.0 $ 149.6 (1) Liquidation preference of $287.5 million as of March 31, 2021 . We currently have a revolving credit facility, our Working Capital Revolver Loan, with a borrowing base of $65 million. As of March 31, 2021 , our Working Capital Revolver Loan was undrawn and had approximately $41.8 million of availability. For the full year of 2021, we expect capital expenditures to be approximately $30 million, which includes approximately $5 million for margin enhancement projects. The remaining capital spending is planned for reliability and maintenance capital projects. We believe that the combination of our cash on hand, the availability on our revolving credit facility, and our cash flow from operations will be sufficient to fund our anticipated liquidity needs for the next twelve months. Compliance with Long - Term Debt Covenants As discussed below in Note 4, the Working Capital Revolver Loan requires, among other things, that we meet certain financial covenants. The Working Capital Revolver Loan does not include financial covenant requirements unless a defined covenant trigger event has occurred and is continuing. As of March 31, 2021, no trigger event had occurred. Loan Agreements and Redeemable Preferred Stock Senior Secured Notes due 2023 – LSB has $435 million aggregate principal amount of the 9.625% Senior Secured Notes currently outstanding, as discussed in footnote (B) of Note 4. Interest is to be paid semiannually on May 1 st and November 1 st , maturing May 1, 2023. Unsecured Loan Agreement due 2022 – LSB is a party to an unsecured PPP loan with a lender pursuant to a new loan program through the SBA as the result of the PPP established by the CARES Act and amended by the Paycheck Protection Program Flexibility Act of 2020. We have used all or substantially all of the proceeds from the PPP loan for payroll, rent, utilities, and other specified costs that qualify for loan forgiveness. Under the current terms of the PPP loan , loan forgiveness applications are due within 10 months after the end of the loan forgiveness covered period, which period began on the date the PPP loan was disbursed and ends either eight weeks or 24 weeks after disbursement of the loan. In April 2021, we submitted the PPP loan forgiveness application to the lender. Once the SBA notifies the lender the amount of the loan which has been approved for forgiveness, the lender will determine the date that the equal monthly principal and interest payments will begin for the remaining loan balance, if any. As of March 31, 2021, the loan matures in April 2022, which term may be extended to April 2025 if mutually agreed to by the parties. As for the potential loan forgiveness, once the PPP loan is, wholly or partially, forgiven and a legal release is received, the liability would be reduced by the amount forgiven and a gain on extinguishment would be recorded. Secured Financing due 2023 – EDC is party to a secured financing arrangement with an affiliate of LSB Funding. Principal and interest are payable in 48 equal monthly installments with a final balloon payment of approximately $3 million due in June 2023. 30 Secured Loan Agreement due 2025 - EDC is party to a secured loan agreement with an affiliate of LSB Funding . P rincipal and interest are payable in 60 equal monthly installments through March 2025. Secured Financing due 2025 – EDA is party to a $30 million secured financing arrangement with an affiliate of LSB Funding. Principal and interest are payable in 60 equal monthly installments with a final balloon payment of approximately $5 million due in August 2025. Working Capital Revolver Loan – At March 31, 2021, our Working Capital Revolver Loan was undrawn and had approximately $41.8 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 .” Redemption of Series E Redeemable Preferred – At March 31, 2021 , there were 139,768 outstanding shares of Series E Redeemable Preferred and the aggregate liquidation preference (par value plus accrued dividends) was $287.5 million. A t any time on or after October 25, 2023 , each Series E holder has the right to elect to have such holder’s shares redeemed by us at a redemption price per share equal to the liquidation preference per share of $1,000 plus accrued and unpaid dividends plus the participation rights value (the “Liquidation Preference”). Additionally, at our option, we may redeem the Series E Redeemable Preferred at any time at a redemption price per share equal to the Liquidation Preference of such share as of the redemption date. Lastly, with receipt of (i) prior consent of the electing Series E holder or a majority of shares of Series E Redeemable Preferred and (ii) all other required approvals, including under any principal U.S. securities exchange on which our common stock is then listed for trading, we can redeem the Series E Redeemable Preferred by the issuance of shares of common stock having an aggregate common stock price equal to the amount of the aggregate Liquidation Preference of such shares being redeemed in shares of common stock in lieu of cash at the redemption date. In the event of liquidation, the Series E Redeemable Preferred is entitled to receive its Liquidation Preference before any such distribution of assets or proceeds is made to or set aside for the holders of our common stock and any other junior stock. In the event of a change of control, we must make an offer to purchase all of the shares of Series E Redeemable Preferred outstanding at the Liquidation Preference. Since carrying values of the redeemable preferred stocks are being increased by periodic accretions (including the amount for dividends earned but not yet declared or paid) using the interest method so that the carrying amount will equal the redemption value as of October 25, 2023, the earliest possible redemption date by the holder, this accretion has and will continue to affect income (loss) per common share. However, this accretion will change if the expected redemption date changes. Capital Expenditures – First Quarter of 2021 For the first quarter of 2021, capital expenditures relating to PP&E were $6.1 million. The capital expenditures were funded primarily from cash and working capital. See discussion above under “Capitalization” for our expected capital expenditures. Expenses Associated with Environmental Regulatory Compliance We are subject to specific federal and state environmental compliance laws, regulations and guidelines. As a result, we incurred expenses of $0.9 million during the first quarter of 2021 in connection with environmental projects. For the remainder of 2021, we expect to incur expenses ranging from $2.9 million to $3.3 million in connection with additional environmental projects. However, it is possible that the actual costs could be significantly different than our estimates. Dividends We have not paid cash dividends on our outstanding common stock in many years, and we do not currently anticipate paying cash dividends on our outstanding common stock in the near future. Dividends on the Series E Redeemable Preferred are cumulative and payable semi-annually (May 1 and November 1) in arrears at the annual rate of 14% of the liquidation value of $1,000 per share, but such annual rate increased to 14.5% beginning in April 2021 as discussed in Note 10. Each share of Series E Redeemable Preferred is entitled to receive a semi-annual dividend, only when declared by our Board. In addition, dividends in arrears at the dividend date, until paid, shall compound additional dividends at the annual rate. As of March 31, 2021, the semi-annual compounded dividend is approximately $136.29 per share for the current aggregate semi-annual dividend of $19.0 million. We also must declare a dividend on the Series E Redeemable Preferred on a pro rata basis with our common stock. As long as the Purchaser holds at least 10% of the Series E Redeemable Preferred, we may not declare dividends on our common stock and other preferred stocks unless and until dividends have been declared and paid on the Series E Redeemable Preferred for the then current dividend period in cash. As of March 31, 2021, the amount of accumulated dividends on the Series E Redeemable Preferred was approximately $147.7 million. 31 Dividends on the Series D 6% cumulative convertible Class C preferred stock (the “Series D Preferred”) and Series B 12% cumulative convertible Class C Preferred Stock (the “Series B Preferred”) are payable annually, only when declared by our Board, as follows: • $0.06 per share on our outstanding non-redeemable Series D Preferred for an aggregate dividend of $60,000, and • $12.00 per share on our outstanding non-redeemable Series B Preferred for an aggregate dividend of $240,000. As of March 31, 2021, the amount of accumulated dividends on the Series D Preferred and Series B Preferred totaled approximately $1.7 million. All shares of the Series D Preferred and Series B Preferred are owned by the Golsen Holders and an immediate family member. There are no optional or mandatory redemption rights with respect to the Series B Preferred or Series D Preferred. Seasonality We believe fertilizer products sold to the agricultural industry are seasonal, while sales into the industrial and mining sectors generally are less susceptible to seasonal fluctuations. The selling seasons for agricultural 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 agricultural products. As a result, we typically increase our inventory of fertilizer products prior to the beginning of each planting season in order to meet the demand for our products. In addition, the amount and timing of sales to the agricultural markets depend upon weather conditions and other circumstances beyond our control. Performance and Payment Bonds We are contingently liable to sureties in respect of insurance bonds issued by the sureties in connection with certain contracts entered into by subsidiaries in the normal course of business. These insurance bonds primarily represent guarantees of future performance of our subsidiaries. As of March 31, 2021, we have agreed to indemnify the sureties for payments , up to $9.7 million, made by them in respect of such bonds. These insurance bonds are expected to expire or be renewed later in 2021. New Accounting Pronouncements Refer to Note 1 for recently issued accounting standards. Critical Accounting Policies and Estimates See “Critical Accounting Policies and Estimates,” Item 7 of our 2020 Form 10-K. In addition, the preparation of financial statements requires us to make estimates and assumptions that affect the reported amount of assets, liabilities, revenues and expenses, and disclosures of contingencies and fair values, including, but not limited to, various environmental and legal matters , including matters discussed under footnote A and the lawsuit styled City of West, Texas vs. CF Industries, Inc., et al., discussed under “Other Pending, Threatened or Settled Litigation” of Note 5. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those differences are expected to be recovered or settled. We establish valuation allowances if we believe it is more-likely-than-not that some or all of deferred tax assets will not be realized. Significant judgment is applied in evaluating the need for and the magnitude of appropriate valuation allowances against deferred tax assets. The carrying values of the redeemable preferred stocks discussed in Note 8 are being increased by periodic accretions (recorded to retained earnings and included in determining income or loss per share) using the interest method so that the carrying amount will equal the redemption value as of October 25, 2023, the earliest possible redemption date by the holder. It is also reasonably possible that the estimates and assumptions utilized as of March 31, 2021 could change in the near term. Actual results could differ materially from these estimates and judgments, as additional information becomes known. Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K under the Exchange Act. 32