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 June 30, 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 January 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. In July 2021, we signed a definitive agreement with LSB Funding (the “Holder”), an affiliate of Eldridge, to exchange the shares of LSB Series E and Series F Redeemable Preferred Stock held by the Holder for shares of LSB common stock. We believe the exchange will relieve the Company and our common 23 stockholders from the expensive, compounding burden of the preferred stock dividend, improving the current capital structure and, when combined with favorable credit markets, may enable us to refinance our senior secured notes on more favorable terms than our current senior secured notes. Additionally, we believe that consummation of the exchange transaction would provide us with the financial flexibility needed to grow our business organically and through strategic mergers and acquisitions, while maintaining our significant federal net operating losses. Please refer to “Recent Business Developments” below for further information . • 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 Continued Improvement in Product Sales Driven by several supply and demand factors, selling prices for all of our major products improved during the second quarter of 2021 compared to the same quarter of 2020. As for our agricultural business, corn prices reached an eight-year during the first half of 2021 and we are benefiting from strong farmer economics. Chinese demand for corn continues to be 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. In addition, domestic corn demand to produce ethanol continues 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 increased, pricing for fertilizers followed suit as growers sought to apply more fertilizer to increase yields. Also entering into the second quarter of 2021, the supply of nitrogen products in the U.S. was tight due to winter storm Uri and the resultant severe cold weather experienced in many areas of the U.S. that caused many nitrogen producers to idle their plants during February 2021. Additionally, wet weather across the Midwest and Southern Plains regions in May has resulted in the spring planting season extending into July and that combined with other factors discussed above has led to continued strong pricing thus far in July that is expected to continue throughout 2021 and into 2022. However, improvements in fertilizer demand and pricing are being somewhat tempered by higher natural gas costs thus far in 2021 as compared to 2020. As for our industrial and mining products, selling prices continued to improve as the supply of ammonia remained tight due to strong global demand, curtailed regional supply from the winter storm Uri, numerous global unplanned outages and lower than expected product imports. As a result, the Tampa Ammonia benchmark price increased, which in turn, increased our selling prices as many of our industrial contracts are indexed to this benchmark price. In addition, sales of nitric acid increased pursuant to the new long-term nitric acid supply contract discussed above. Also, demand for our mining products continued to improve due to increased mining activities. See a more detailed discussion below under “Key Industry Factors.” PPP Loan Forgiven In April 2020, we entered into a federally guaranteed PPP loan for $10 million 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 PPP Flexibility Act of 2020. We have used all of the proceeds from the PPP loan for payroll, rent, utilities, and other specified costs that qualify for loan forgiveness. In April 2021, we submitted the PPP loan forgiveness application to the lender. In June 2021, the PPP loan was fully forgiven by the SBA and lender. As a result, we recognized a gain on extinguishment of debt of $10 million for the second quarter of 2021. Planned Exchange Transaction and Special Common Stock Dividend On July 19, 2021, we entered into a Securities Exchange Agreement (the “Exchange Agreement”) with LSB Funding LLC (the “Holder”), an affiliate of Eldridge, to exchange the shares of Series E and Series F Redeemable Preferred Stock held by it for shares of our common stock. Under the terms of the Exchange Agreement, LSB would exchange, at the closing, approximately $300 million of preferred stock held by Eldridge into an equivalent value of our common stock based on an exchange price of $6.16, which is equal to the 30-day volume weighted average price as of the date of the Exchange Agreement. In connection with the transaction, our common stockholders will receive a special dividend in the form of 0.30 shares of our common stock for every share owned as of the record date and any such amount received by the Holder will reduce the exchange consideration otherwise payable under the Exchange Agreement. Completion of the exchange transaction is subject to a number of customary closing conditions, including receipt of stockholder approval from the holders of a majority of the shares of our outstanding common stock not held by Eldridge or any of its affiliates. We expect to file a preliminary proxy for a special meeting of stockholders and deliver additional information related to the special 24 meeting to stockholders in the near term . Results of the stockholder vote will be tabulated at the s pecial m eeting of s tockholders expected to be held in the third quarter of 2021. Key Industry Factors Supply and Demand Agricultural Sales of our agricultural products were approximately 47% of our total net sales for the second 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, in turn, depends upon world grain demand and production levels, the cost and availability of transportation and storage, weather conditions, competitive pricing and the availability of imports. Additionally, expansions or upgrades of competitors’ facilities and international and domestic political and economic developments continue to play an important role in the global nitrogen fertilizer industry economics, including the impact from the Phase 1 trade agreement between the U.S. and China. These factors can affect, in addition to selling prices, the level of inventories in the market which can cause price volatility and affect product margins. From a farmer’s perspective, the demand for fertilizer is affected by the aggregate crop planting decisions and fertilizer application rate decisions of individual farmers. Individual farmers make planting decisions based largely on prospective profitability of a harvest, while the specific varieties and amounts of fertilizer they apply depend on factors such as their financial resources, soil conditions, weather patterns and the types of crops planted. Additionally, changes in corn prices, as well as soybean, cotton and wheat prices, can affect the number of acres of corn planted in a given year, and the number of acres planted will drive the level of nitrogen fertilizer consumption, likely affecting prices. According to the June 2021 USDA annual Acreage Report, farmers intend to plant 93 million acres of corn in 2021, up 2 percent compared to the 2020 planting season. As it relates to the 2022 Crop as noted in the table below, the USDA estimates the U.S. ending stocks will be approximately 36 million metric tons, a 32% increase from the current estimate for the 2021 Crop. The UDSA also is estimating a record yield for the 2022 Crop up approximately 4% from a year ago. The following July 2021 estimates are associated with the corn market: 2022 Crop 2021 Crop 2020 Crop (2021 Harvest) (2020 Harvest) Percentage (2019 Harvest) Percentage July Report (1) July Report (1) Change (2) July Report (1) Change (3) U.S. Area Planted (Million acres) 92.7 90.8 2.1 % 89.7 3.3 % U.S. Yield per Acre (Bushels) 179.5 172.0 4.4 % 167.5 7.2 % U.S. Production (Million bushels) 15,165 14,182 6.9 % 13,620 11.3 % U.S. Ending Stocks (Million metric tons) 36.4 27.5 32.4 % 48.8 (25.4 %) World Ending Stocks (Million metric tons) 291.2 279.9 4.0 % 305.5 (4.7 %) 1. Information obtained from WASDE reports dated July 12, 2021 (“July Report”) for the 2021/2022 (“2022 Crop”), 2020/2021 (“2021 Crop”) and 2019/2020 (“2020 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 2022 Crop amounts compared to the 2021 Crop amounts. 3. Represents the percentage change between the 2022 Crop amounts compared to the 2020 Crop amounts. From a demand perspective for 2021, since the USDA has significantly decreased ending corn stocks for the 2021 Crop 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 and the western U.S., ethanol use returning to pre-pandemic levels and favorable 2020 grower income, corn prices during the second quarter elevated to prices not seen in eight years and projected corn prices for the remainder of 2021 continue to be strong compared to the second half of 2020, which has had a positive impact on fertilizer demand and prices. Most gasoline has 10% ethanol content. Ethanol is commonly made from corn and ethanol production is the largest user of U.S. corn, currently representing roughly 35% 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 and ongoing industry downtime increases cause by “hard” plant shutdowns and the lingering problems of that event. 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 for the remainder of 2021, compared to the same period of 2020. 25 I ndustrial and Mining Sales of our industrial products were approximately 43% of our total net sales for the second 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 10% of our total net sales for the second 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 changes in the overall North American consumption levels of mining products that can be impacted by weather. Metals prices continue to improve in 2021 as producers continue to extract as much as possible. This improvement includes an increase in copper mining, driven primarily by demand for electric vehicles. We believe ou r plants are well located to support the more stable quarry and construction industries and the metals mining industries. 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 June 30, 2021 2020 Natural gas volumes (MMBtu in millions) 7.5 7.4 Natural gas average cost per MMBtu $ 2.78 $ 1.81 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. 26 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 810,000 tons to 830,000 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 Second Quarter of 2021 Our consolidated net sales for the second quarter of 2021 were $140.7 million compared to $105.0 million for the same period in 2020. Our consolidated operating income was $26.5 million compared to $10.7 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 Second Quarter Selling Prices For the second quarter of 2021, average agricultural selling prices for our a mmonia, UAN and HDAN increased 60%, 50% and 20%, respectively, compared to the second quarter of 2020. As discussed above under “Recent Business Developments,” increased demand, higher corn prices and tighter supplies of nitrogen products contributed to the improved pricing. For the second quarter of 2021, average industrial selling prices for most of our products were higher compared to the same period of 2020, primarily driven by the $311 per metric ton increase in the Tampa Ammonia benchmark price, as many of our industrial contracts are indexed to the Tampa Ammonia benchmark price. Gain on Extinguishment of Debt – PPP Loan Forgiven (2021 only) As discussed above under “Recent Business Developments,” in June 2021, the PPP loan was fully forgiven by the SBA and lender. As a result, we recognized a gain on extinguishment of debt of $10 million during the second quarter of 2021. Settlements with Certain Vendors (2020 only) During the second quarter of 2020, EDC and certain vendors mediated settlements for EDC to recover certain costs associated with a nitric acid plant at our El Dorado Facility. The construction of this plant was completed and began production in 2016. As a result, a recovery from these settlements was recognized, which included approximately $5.7 million classified as a reduction to cost of sales. Results of Operations The following Results of Operations should be read in conjunction with our condensed consolidated financial statements for the three and six months ended June 30, 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. 27 Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020 The following table contains certain financial information: Three Months Ended June 30, Percentage 2021 2020 Change Change (Dollars In Thousands) Net sales: Agricultural products $ 66,508 $ 64,997 $ 1,511 2 % Industrial and mining products 74,188 40,036 34,152 85 % Total net sales $ 140,696 $ 105,033 $ 35,663 34 % Gross profit: Adjusted gross profit (1) $ 52,656 $ 30,328 $ 22,328 74 % Depreciation and amortization (2) (16,941 ) (16,960 ) 19 — % Turnaround expense (707 ) (11 ) (696 ) Recovery from settlements with certain vendors (3) — 5,664 (5,664 ) Total gross profit 35,008 19,021 15,987 84 % Selling, general and administrative expense 8,545 8,504 41 — % Other expense (income), net 6 (167 ) 173 Operating income 26,457 10,684 15,773 148 % Interest expense, net 12,290 12,476 (186 ) (1 )% Gain on extinguishment of debt (10,000 ) — (10,000 ) Non-operating other expense (income), net 745 (128 ) 873 Benefit for income taxes (248 ) (1,299 ) 1,051 Net income (loss) $ 23,670 $ (365 ) $ 24,035 Other information: Gross profit percentage (4) 24.9 % 18.1 % 6.8 % Adjusted gross profit percentage (4) 37.4 % 28.9 % 8.5 % Property, plant and equipment expenditures $ 8,716 $ 7,216 $ 1,500 21 % (1) Represents a non-GAAP measure since the amount excludes unallocated depreciation, amortization, Turnaround expenses and a recovery from settlements. (2) Represents amount classified as cost of sales. (3) See discussion above under “Items Affecting Comparability of Results of the Second Quarter.” (4) As a percentage of the total net sales. The following tables provide key operating metrics for the agricultural products: Three Months Ended June 30, Percentage Product (tons sold) 2021 2020 Change Change UAN 121,995 111,860 10,135 9 % HDAN 76,539 128,018 (51,479 ) (40 )% Ammonia 17,038 28,383 (11,345 ) (40 )% Other 6,628 9,257 (2,629 ) (28 )% Total 222,200 277,518 (55,318 ) (20 )% Three Months Ended June 30, Percentage Gross Average Selling Prices (price per ton) 2021 2020 Change Change UAN $ 245 $ 163 $ 82 50 % HDAN $ 314 $ 261 $ 53 20 % Ammonia $ 408 $ 255 $ 153 60 % 28 With respect to sales of i ndustrial and mining p roducts, the following table indicate s key operating metrics of our major products: Three Months Ended June 30, Percentage Product (tons sold) 2021 2020 Change Change Ammonia 67,503 62,108 5,395 9 % AN, Nitric Acid and Other 118,327 72,990 45,337 62 % Total 185,830 135,098 50,732 38 % Tampa Ammonia Benchmark (price per metric ton) $ 545 $ 234 $ 311 133 % Net Sales Net sales of our agricultural products increased during the second quarter of 2021 compared to the prior year period driven by stronger pricing for UAN, ammonia and HDAN. Partially offsetting the benefit of stronger pricing was the lingering impact from winter storm Uri in February 2021. Our El Dorado and Pryor Facilities were shut down as our natural gas supply was curtailed during the very cold weather conditions that were experienced throughout the central U.S. These shutdowns, resulted in a drawdown of inventory, particularly of HDAN, given increased sales during the first quarter of 2021, reducing our inventory available for sale in the second quarter of 2021. Also depressing agricultural volumes during the second quarter of 2021 was the impact of wet weather across the Southern Plains throughout much of May delaying the application of fertilizer products. As a result, we are seeing an extension of the season into July given early season weather issues. Agricultural sales were also impacted by a shift in product mix as we continue our focus on the industrial products business. Net sales of our industrial and mining products increased as a result of higher pricing related to a rise in the Tampa ammonia benchmark price, to which many of our industrial contracts are tied. Also benefitting industrial sales was the ramp up of a new nitric acid offtake agreement along with the continued recovery of demand from several key end markets including automotive, home building quarry and construction, precious metals mining and power generation, which have now exceeded pre-pandemic demand levels . Gross Profit As noted in the table above, we recognized a gross profit of $35 million for the second quarter of 2021 compared to $19 million for the same period in 2020, or a $16 million improvement. Overall, our gross profit percentage was 24.9% compared to 18.1% for the same period in 2020. Our adjusted gross profit percentage increased to 37.4% for the second quarter of 2021 from 28.9% for the second 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 industrial and mining products and UAN partially offset by lower volumes of HDAN. The improvement in gross profit was partially offset by overall higher average natural gas costs which averaged $2.78 per MMBtu for the second quarter of 2021 as compared to $1.81 per MMBtu for the second quarter of 2020. The second quarter of 2020 also included settlements with certain vendors resulting in a recovery of approximately $5.7 million. Gain on Extinguishment of Debt – PPP Loan Forgiven As discussed above under “Recent Business Developments,” in June 2021, the PPP loan was fully forgiven by the SBA and lender. As a result, we recognized a gain on extinguishment of debt of $10 million for the second quarter of 2021. Benefit for Income Taxes The benefit for income taxes for the second quarter of 2021 was $0.2 million compared to $1.3 million for the same period of 2020. For both periods, the effective tax rate is less than the statutory rate primarily due to the impact of the PPP loan forgiveness, state tax law changes and valuation allowances. Also see discussion in Note 7. 29 Six Months Ended June 30, 2021 Compared to Six Month Ended June 30, 2020 The following table contains certain financial information: Six Months Ended June 30, Percentage 2021 2020 Change Change (Dollars In Thousands) Net sales: Agricultural products $ 111,421 $ 106,455 $ 4,966 5 % Industrial and mining products 127,391 81,989 45,402 55 % Total net sales $ 238,812 $ 188,444 $ 50,368 27 % Gross profit: Adjusted gross profit by market (1) $ 77,596 $ 50,456 $ 27,140 54 % Depreciation and amortization (2) (33,681 ) (34,537 ) 856 (2 )% Turnaround expense (847 ) (11 ) (836 ) Recovery from settlements with certain vendors (3) — 5,664 (5,664 ) Total gross profit 43,068 21,572 21,496 100 % Selling, general and administrative expense 17,338 18,510 (1,172 ) (6 )% Other expense, net (257 ) (635 ) 378 Operating income 25,987 3,697 22,290 603 % Interest expense, net 24,662 25,955 (1,293 ) (5 )% Gain on extinguishment of debt (10,000 ) — (10,000 ) Non-operating other expense (income), net 1,140 (803 ) 1,943 Benefit for income taxes (206 ) (1,638 ) 1,432 Net income (loss) $ 10,391 $ (19,817 ) $ 30,208 152 % Other information: Gross profit percentage (4) 18.0 % 11.4 % 6.6 % Adjusted gross profit percentage (4) 32.5 % 26.8 % 5.7 % Property, plant and equipment expenditures $ 14,849 $ 17,953 $ (3,104 ) (17 )% (1) Represents a non-GAAP measure since the amount excludes unallocated depreciation, amortization, Turnaround expenses, and a recovery from settlements. (2) Represents amount classified as cost of sales. (3) See discussion above under “Items Affecting Comparability of Results of the Second Quarter.” (4) As a percentage of the total net sales. The following tables provide key operating metrics for the agricultural products: Six Months Ended June 30, Percentage Product (tons sold) 2021 2020 Change Change UAN 231,238 226,549 4,689 2 % HDAN 152,701 193,892 (41,191 ) (21 )% Ammonia 39,092 48,893 (9,801 ) (20 )% Other 9,378 12,203 (2,825 ) (23 )% Total 432,409 481,537 (49,128 ) (10 )% Six Months Ended June 30, Percentage Gross Average Selling Prices (price per ton) 2021 2020 Change Change UAN $ 206 $ 162 $ 44 27 % HDAN $ 275 $ 253 $ 22 9 % Ammonia $ 341 $ 251 $ 90 36 % 30 With respect to sales of industrial and mining products, the following table indicates key operating metrics of our major products: Six Months Ended June 30, Percentage Product (tons sold) 2021 2020 Change Change Ammonia 110,696 132,636 (21,940 ) (17 )% AN, Nitric Acid and Other 234,492 140,424 94,068 67 % Total 345,188 273,060 72,128 26 % Tampa Ammonia Benchmark (price per metric ton) $ 447 $ 242 $ 205 85 % Net Sales Agricultural product sales increased driven primarily by higher sales prices for all of our agricultural products and improved UAN sales volumes partially offset by lower sales volumes of HDAN and ammonia resulting from and lower production, including ammonia, due to the February 2021 weather event), the impact of wet weather across the Southern Plains throughout much of May, which delayed the application of fertilizer products, and product mix shifts to our industrial and mining products. As discussed above under “Recent Business Developments,” increased demand, higher corn prices and tighter supplies of nitrogen products contributed to the improved pricing. 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, and product mix shifts. The average Tampa Ammonia pricing was approximately $205 per ton higher compared to the same period in 2020. Mining products sales improved driven by primarily from increased sales volumes. 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 $43.1 million for the first six months of 2021 compared to $21.6 million for the same period in 2020, or a $21.5 million improvement. Overall, our gross profit percentage was 18.0% compared to 11.4% for the same period in 2020. Our adjusted gross profit percentage increased to 32.5% for the first six months of 2021 from 28.6% for the first six months of 2020. The increase in gross profit was primarily driven by higher sales prices for our products coupled with increased sales volume of upgraded industrial and mining products and UAN partially offset by lower volumes of HDAN. 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 $2.96 per MMBtu for the first six months of 2021 as compared to $1.95 per MMBtu for the same period of 2020. The first six months of 2020 also included settlements with certain vendors resulting in a recovery of approximately $5.7 million. Selling, General and Administrative Our SG&A expenses were $17.3 million for the first six months of 2021, a decrease of $1.2 million compared to the same period in 2020. The net decrease was primarily driven by lower professional fees, including lower legal fees of $2.9 million associated with claims we are pursuing against Leidos, partially offset by an increase in short and long-term compensation incentives of $2.0 million. Interest Expense, net Interest expense for the first half of 2021 was $24.7 million compared to $26.0 million for the same period in 2020. The decrease relates primarily to the interest expense incurred during the first six months of 2020 associated with a litigation judgment discussed in footnote (B) of Note 5. Gain on Extinguishment of Debt – PPP Loan Forgiven As discussed above under “Recent Business Developments,” in June 2021, the PPP loan was fully forgiven by the SBA and lender. As a result, we recognized a gain on extinguishment of debt of $10 million for the second quarter of 2021. Non-operating Other Expense (Income), net Non-operating other expense for the first half of 2021 was $1.1 million compared to non-operating income of $0.8 million for the same period in 2020 or a change of $1.9 million. This change primarily relates to the change in fair value of the embedded derivative included in the Series E Preferred. 31 Benefit for Income Taxes The benefit for income taxes for the first six months of 2021 was $0.2 million compared to $1.6 million for the same period in 2020. For both periods, the effective tax rate is less than the statutory rate primarily due to the impact of the PPP loan forgiveness, state tax law changes and valuation allowances. Also see discussion in Note 7. LIQUIDITY AND CAPITAL RESOURCES The following table summarizes our cash flow activities for the six months ended June 30: 2021 2020 Change (In Thousands) Net cash flows from operating activities $ 30,581 $ 19,376 $ 11,205 Net cash flows from investing activities $ (14,549 ) $ (17,654 ) $ 3,105 Net cash flows from financing activities $ (14,671 ) $ 32,000 $ (46,671 ) Net Cash Flow from Operating Activities Net cash provided by operating activities was $30.6 million for first half of 2021 compared to $19.4 million for the same period of 2020, a change of $11.2 million. For the first half of 2021, the net cash provided is the result of net income of $10.4 million plus adjustments of $33.7 million for depreciation and amortization of PP&E, other adjustments of $2.6 million less $10.0 million for a gain on extinguishment of debt, and net cash used of $6.1 million primarily from our working capital. For the first half of 2020, the net cash provided is the result of a net loss of $19.8 million plus adjustments of $34.6 million for depreciation and amortization of PP&E and other adjustments of $2.1 million and net cash provided of $2.5 million primarily from our working capital. Net Cash Flow from Investing Activities Net cash used by investing activities was $14.5 million for the first half of 2021 compared to $17.7 million for the same period of 2020, a change of $3.1 million. For the first half 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 $14.7 million for the first half of 2021 compared to net cash provided of $32.0 million for the same period of 2020, a change of $46.7 million. For the first half of 2021, the net cash used primarily consists of payments on other long-term debt and short-term financing. For the first half of 2020, the net cash provided primarily consists of proceeds of $30 million from our Working Capital Revolver Loan and proceeds of $12.6 million from other long-term debt partially offset by payments on other long-term debt and short-term financing of $10.5 million and payments of $0.1 million for other financing activities. 32 Capitalization The following is our total current cash, long-term debt, redeemable preferred stock and stockholders’ equity: June 30, December 31, 2021 2020 (In Millions) Cash and cash equivalents $ 17.6 $ 16.3 Long-term debt: Working Capital Revolver Loan $ — $ — Senior Secured Notes due 2023 435.0 435.0 Secured Financing due 2023 9.2 10.7 Secured Loan Agreement due 2025 6.2 6.8 Secured Financing due 2025 26.5 28.6 Unsecured Loan Agreement due 2022 — 10.0 Secured Promissory Note due 2021 — 1.2 Other 0.4 0.5 Unamortized discount and debt issuance costs (6.8 ) (8.6 ) Total long-term debt, including current portion, net $ 470.5 $ 484.2 Series E and F redeemable preferred stock (1) $ 292.8 $ 272.1 Total stockholders' equity $ 141.0 $ 149.6 (1) Liquidation preference of $297.7 million as of June 30, 2021 . See discussion above under “Recent Business Developments - Planned Exchange Transaction and Special Common Stock Dividend.” We currently have a revolving credit facility, our Working Capital Revolver Loan, with a borrowing base of $65 million. As of June 30, 2021 , our Working Capital Revolver Loan was undrawn and had approximately $50.3 million of availability. For the full year of 2021, we expect capital expenditures to be approximately $30 million to $35 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 June 30, 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. 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. Secured Loan Agreement due 2025 - EDC is party to a secured loan agreement with an affiliate of LSB Funding. Principal 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 June 30, 2021, our Working Capital Revolver Loan was undrawn and had approximately $50.3 million of availability , based on our eligible collateral, less outstanding letters of credit as of that date. Also see discussion above under “Compliance with Long-Term Debt Covenants .” 33 Series E Redeemable Preferred – At June 30, 2021 , there were 139 ,768 outstanding shares of Series E Redeemable Preferred and the aggregate liquidation preference (par value plus accrued dividends) was $ 2 97 . 7 million. See discussion above under “Recent Business Developments - Planned Exchange Transaction and Special Common Stock Dividend.” Capital Expenditures – First Six Months of 2021 For the first half of 2021, capital expenditures relating to PP&E were $14.8 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 $1.7 million during the first six months of 2021 in connection with environmental projects. For the remainder of 2021, we expect to incur expenses ranging from $1.9 million to $2.2 million in connection with additional environmental projects. However, it is possible that the actual costs could be significantly different than our estimates. Dividends See discussion above under “Recent Business Developments - Planned Exchange Transaction and Special Common Stock Dividend.” 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 14.5% of the liquidation value of $1,000 per share, but such annual rate will increase to 15.0% beginning in April 2022 and to 16% beginning in April 2023 as discussed in Note 8. 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 June 30, 2021, the semi-annual compounded dividend is approximately $150.84 per share for the current aggregate semi-annual dividend of $21.1 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 June 30, 2021, the amount of accumulated dividends on the Series E Redeemable Preferred was approximately $157.9 million. 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 June 30, 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 June 30, 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. 34 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 June 30, 2021 could change in the near term. Actual results could differ materially from these estimates and judgments, as additional information becomes known. See discussion above under “Recent Business Developments - Planned Exchange Transaction and Special Common Stock Dividend.” 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. 35 Item 3 . Quantitative and Qualitat ive Disclosures about Market Risk General Our results of operations and operating cash flows are impacted by changes in market prices of ammonia and natural gas and changes in market interest rates. Forward Sales Commitments Risk Periodically, we enter into forward firm sales commitments for products to be delivered in future periods. As a result, we could be exposed to embedded losses should our product costs exceed the firm sales prices at the end of a reporting period. At June 30, 2021, we had no embedded losses associated with sales commitments with firm sales prices. Commodity Price Risk A substantial portion of our products and raw materials are commodities whose prices fluctuate as market supply and demand fundamentals change. S ince we are exposed to commodity price risk, we periodically enter into contracts to purchase natural gas for anticipated production needs to manage risk related to changes in prices of natural gas commodities. Generally, these contracts are considered normal purchases because they provide for the purchase of natural gas that will be delivered in quantities expected to be used over a reasonable period of time in the normal course of business, these contracts are exempt from the accounting and reporting requirements relating to derivatives. At June 30, 2021, we had no outstanding natural gas contracts, which are accounted for on a mark-to-market basis. Interest Rate Risk Generally, we are exposed to variable interest rate risk with respect to our revolving credit facility . As of June 30, 2021, 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.