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, 2022 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 Covestro 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 2022 We expect our future results of operations and financial condition to benefit from following key initiatives: • Investing to improve Environmental, Health & Safety and Reliability at our Facilities to further our Progress Towards Becoming a “Best in Class” Chemical Plant Operator while Supplying our Customers with Products of the Highest Quality. ▪ We believe that our operational progress over the past several years represents proof that high safety standards not only enable us to protect what matters, which is the well-being of our employees, but also translates into improved plant performance. With that in mind, in 2022 we remain acutely focused on our efforts to further the progress we’ve made in creating a high performing safety culture as we advance the safety programs, we have underway and implement new ones. Additionally, we intend to invest additional capital at all three of our facilities to further promote safe and reliable operations in order to build upon the success we have had in implementing enhanced safety programs during the last three years. ▪ We have several initiatives currently underway focused on continuing to improve the reliability of our plants which we expect will enable us to produce greater volumes of product for sale while lowering our unit cost of production and increasing our overall profitability. These initiatives are focused on operations excellence through enhancements in leadership at certain of our facilities, bolstering our operating procedures, leveraging the technology investments we’ve made to improve the optimization of our asset health monitoring and asset care maintenance programs. Additionally, our product quality program continues to focus on providing products to our customers that meet our quality standards. • Continue Broadening the Distribution and Optimization of our Product Mix. Over the course of 2021 we were successful in improving upon the production capacity of our plants, and we plan to continue to expand the distribution of our products by partnering with customers to take product into different markets while also focusing on opportunities to upgrade our margins through the optimization of our product mix. ▪ In the first quarter of 2021, we commenced a new long-term nitric acid supply contract with a customer under which we agreed to supply between 70,000 and 100,000 tons of nitric acid per year. We progressively ramped the volume of product supplied to the customer over the course of 2021, and in 2022, we will recognize a full year of sales under this agreement, which we expect will put us in a sold-out position for nitric acid at our El Dorado facility and will achieve our objective of exhausting our production capacity for this product. The initial contract term extends through 2027 and includes automatic one-year renewals, subject to certain termination rights in favor of each party. ▪ We are targeting $10 million to $15 million of capital improvement projects for 2022 focused on margin enhancement opportunities related to our storage and distribution capabilities. Additionally, we are evaluating opportunities to upgrade more of the ammonia we produce into higher value downstream products that could enable us to capture additional margin. We also believe we have opportunities to increase our production volume of certain products through debottlenecking projects and intend to analyze the opportunities for potential returns from these types of investments. • Development and Implementation of a Strategy to Capitalize on Low Carbon Ammonia and Clean Energy Opportunities . The reduction of greenhouse gas emissions, particularly related to carbon dioxide, has been, and we expect will increasingly become a global environmental priority as part of efforts to stem the harmful effects of climate change. There is increasing evidence from a variety of industry studies to indicate that ammonia can play a significant role in making meaningful progress towards this objective. As a result, we are currently evaluating and developing projects that could enable us to become a producer and marketer of blue and green ammonia and other derivative products. Blue ammonia is produced using natural gas and conventional processes but includes an additional stage where the carbon dioxide emissions are captured and permanently stored in deep underground rock formations, resulting in a low carbon emission product that, we believe, can be sold at a premium to agricultural, industrial, 18 mining, power generation and marine customers seeking to reduce their carbon footprint and potentially capitalize on government incentives. Green ammonia is ammonia produced using renewable energy to power electrolyzers that extract hydrogen from water, resulting in zero-carbon production of ammonia , which we believe can also be sold at a premium to a variety of customers and industries around the world . Ammonia has continued to emerge as one of the more viable alternatives to serve as a hydrogen-based energy source for a variety of applications due to its higher energy density and ease of storage relative to hydrogen gas. Blue and green ammonia can be used as zero carbon fuel in the maritime sector, as a carbon free fertilizer and as a coal substitute in power generation. If ammonia were to be adopted for these and other energy needs globally, some studies have indicated that future demand could increase significantly from current levels of global annual production of ammonia. We believe we are well-positioned to capitalize on this opportunity and become a market leader given our potential to retrofit our existing plants rather than needing to invest entirely in greenfield projects, which we believe can reduce our time to market for this product and also reduce the upfront capital expenditures necessary to enable us to produce this product, thereby enhancing the economic attractiveness for us to such investments. • Evaluate and Pursue Organic Capacity Expansion. We are evaluating opportunities across all of our facilities to increase production capacity through the implementation of several potential debottlenecking projects. Our initial calculations suggest that, assuming mid-market pricing assumptions for Tampa ammonia, UAN and natural gas, these projects could potentially represent significant incremental annual profitability. • Pursue Acquisitions of Strategic Assets or Companies. We are actively engaged in evaluating and pursuing various opportunities to acquire strategic assets or companies, where we believe those acquisitions will enhance the value of the Company and provide attractive returns. We evaluate assets and companies that can provide us with geographic expansion, extend an existing product line, add one or more new product lines, leverage our existing ammonia production capabilities, or complement our existing business lines, among other accretive opportunities. Recent Business Developments Exchange Transaction and Special Common Stock Dividend On September 27, 2021, we closed a Securities Exchange Transaction (the “Exchange Transaction”) with LSB Funding LLC (the “Holder”), an affiliate of Eldridge, in which we exchanged the shares of Series E and Series F Redeemable Preferred Stock held by the Holder for shares of our common stock. In summary, we exchanged the approximately $310 million liquidation preference of preferred stock held by the Holder into our common stock based on an exchange price of $6.16, which was equal to the 30-day volume weighted average price as of the date of the Exchange Agreement. However, the exchange consideration paid under the Exchange Agreement was reduced by approximately 1.2 million shares, which shares were included in the Special Dividend and received by the Holder. In connection with the transaction, on October 8, 2021, our common stockholders, including the Holder, received the Special Dividend in the form of 0.30 shares of our common stock for every share owned as of the September 24, 2021, the Special Dividend record date. The main benefit of the exchange is that it relieved our Company and our common stockholders from the expensive, compounding burden of the preferred stock dividend, simplifying and creating more flexibility with our capital structure. Reduced Cost of Capital through Debt Refinancing The Exchange Transaction discussed above prompted the major credit rating agencies, Moody’s and S&P, to upgrade their credit ratings on our debt, which combined with the favorable credit markets, enabled us to complete a refinancing of our senior notes on significantly improved terms, reducing our cost of capital, bolstering our liquidity and extending the maturity of our debt. More specifically, on October 14, 2021, we closed on an offering of $500 million of senior secured notes due 2028, bearing an interest rate of 6.25%, which we used to redeem our $435 million of 9.625% senior notes that were due to mature in 2023, with the balance being used to enhance the liquidity of our balance sheet and for general corporate purposes. In February and March of 2022, we received additional credit upgrades from S&P and Moody’s, respectively, after which we completed an offering of $200 million of senior secured notes due 2028, bearing an interest rate of 6.25%. The proceeds from this “tack on” offering in combination with the enhanced liquidity we attained through our October 2021 offering along with our current level of strong cash flow provide us with ample capital for use in pursuing and investing in the Key Operating Initiatives summarized above. Continued Improvement in Product Sales Selling prices for all of our major products continued to increase during the first quarter of 2022 as compared to the same quarter of 2021 driven by a combination of supply and demand factors. The strong corn prices over the past year have been driven, in part, by a rebound in the production of ethanol, a gasoline additive that represents approximately 40% of total U.S. corn use annually, as miles driven have returned to near pre-pandemic levels. Also supporting the strong corn pricing over the past year has been Chinese demand for corn for use as feed for swine as part of the nation’s efforts to rebuild its swine production in the wake of a virus that dramatically reduced its swine population several years ago. This demand for feed is expected to remain robust as China has moved to large institutional hog farms which consume significant quantities of corn. Globally, corn supplies have been constrained by drought conditions in South America and the Western U.S., which has served to further bolster corn prices. Early forecasts point to U.S. corn 19 acreage to be planted in the 2022-2023 planting season to be approximately 90 million acres, modestly lower than the 2021-2022 estimate of 93.4 million acres, but still at a very healthy level to support strong demand for fertilizers. In addition to strong corn pricing, which has prompted farmers to increase fertilizer purchases to maximize yields, a series of supply related factors that unfolded over the course of 2021 have served to create a global shortage of ammonia, driving the strong increase in the prices for nitrogen products that has persisted into 2022. Constraints to ammonia production began in February 2021 as winter storm Uri and the resultant severe cold weather experienced in many areas of the U.S. caused many nitrogen producers to idle their plants resulting in a tightening in the supply of nitrogen products headed into the spring planting season. Constraining supply further, during the third quarter of 2021 a number of ammonia facilities underwent turnarounds that were originally scheduled for third quarter of 2020 but were postponed due to the COVID-19 pandemic. Additionally, in late August, Hurricane Ida, a Category 4 storm caused production along the U.S. Gulf coast to be shut down for a period of time, further reducing production. Also supporting the strength in fertilizer prices has been the significant increase in the cost of natural gas, the primary feedstock for production of ammonia, which has prompted various producers to cease operations of some facilities, particularly in Europe where natural gas prices had surged to more than $30 per MM Btu by late 2021, and through the first quarter of 2022 averaged $33 per MMBtu, rendering some ammonia plants uneconomical to operate. The resultant decrease in global production of ammonia has fueled further strength in nitrogen-based fertilizer prices, which have thus far materially outstripped the impact to production costs of rising natural gas prices in the U.S. The factors discussed above have led to continued strong pricing into the first quarter of 2022, which we expect to support continued favorable pricing levels over the balance of the year. These factors combined to serve as the foundation for the global ammonia market dynamic that our industry is now experiencing thus far in 2022, in which demand exceeds available supply. Further contributing to increased fertilizer prices has been the impact of the Russian invasion of Ukraine. Ukraine is one of the world’s largest exporters of corn and the current unstable geopolitical situation is expected to disrupt the nation’s corn production and exports in 2022 and 2023; a concern that appears to be reflected in corn futures prices which currently sit at their highest prices in recent years. With respect to global nitrogen supply, Russia has historically been one of the top exporters of ammonia worldwide. Current economic sanctions against Russia by numerous countries around the world have further reduced the supply of ammonia flowing into the global fertilizer market, resulting in rising prices. Finally, the war in Ukraine has resulted in continued high prices for natural gas in Europe, which imports more than 40% of its gas from Russia, making ammonia production even more uneconomical for European ammonia producers. On top of the dynamics already resulting in elevated nitrogen prices entering 2022, Russia’s aggression toward Ukraine is likely to have impacts on the global ammonia market far beyond when the conflict ends. As for our industrial products, selling prices have increased as the supply of ammonia remains tight due to the aforementioned factors. As a result, the Tampa Ammonia benchmark price remains at record high levels, which has translated into higher selling prices for our products as many of our industrial contracts are indexed to this benchmark price. Demand trends for the industrial products we sell, primarily nitric acid and ammonia, have remained robust despite disruptions to certain end markets, such as auto manufacturing which has been constrained due to a shortage of microprocessors, as activity in other markets, such as homebuilding and power generation has remained strong. In addition, our sales of nitric acid increased steadily throughout 2021 pursuant to the new long-term nitric acid supply contract discussed above. Demand for our products from mining end-markets continues to improve as quarry and construction activity has been elevated due to robust levels of residential, commercial and civil infrastructure buildout along with strong demand for precious metals, including expectations for rising copper production to support the growing domestic production of electric vehicles. See a more detailed discussion below under “Key Industry Factors.” Key Industry Factors Supply and Demand Fertilizer The price at which our fertilizer 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. 20 The March 2022 USDA annual Prospective Planting report currently indicates farmers intend to plant 89.5 million acres of corn in 2022, down 4% from 202 1, and certain industry sources maintain an estimate of approximately 90 million corn acres . In addition, the USDA estimates the U.S. ending stocks for the 2022 Crop as noted in the table below, will be approximately 3 7 million metric tons, a 16.6 % increase from the 2021 Crop . The UDSA also is estimating a record yield for the 2022 Crop, up approximately 3.3 % from a year ago . The following April 2022 estimates are associated with the corn market: 2022 Crop 2021 Crop 2020 Crop (2021 Harvest) (2020 Harvest) Percentage (2019 Harvest) Percentage April Report (1) April Report (1) Change (2) April Report (1) Change (3) U.S. Area Planted (Million acres) 93.4 90.7 3.0 % 89.7 4.1 % U.S. Yield per Acre (Bushels) 177.0 171.4 3.3 % 167.5 5.7 % U.S. Production (Million bushels) 15,115 14,111 7.1 % 13,620 11.0 % U.S. Ending Stocks (Million metric tons) 36.6 31.4 16.6 % 48.8 (25.0 %) World Ending Stocks (Million metric tons) 305.5 292.2 4.6 % 306.4 (0.3 %) 1. Information obtained from WASDE reports dated April 12, 2022 (“April 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. The current USDA corn outlook for the U.S. did not change production, food, seed and industrial use and unchanged ending stocks. Domestic corn demand to produce ethanol has rebounded to pre-pandemic levels as the continued roll-out of vaccines has allowed for the re-opening of the vast majority of the U.S. economy, promoting increased mobility and a return to historical levels of gasoline consumption. Most gasoline has 10% ethanol content. The Biden administration announced t he Environmental Protection Agency would issue an emergency waiver from the Clean Air Act that will permit the sale of gasoline that is 15 percent ethanol, 5 percent more than the typical blend, from June 1 to Sept. 15. Ethanol is commonly made from corn and ethanol production is the largest user of U.S. corn, currently representing approximately 40% of total U.S. corn demand. Industrial and Mining Products 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. Our mining products are LDAN and AN solution, which are primarily used as AN fuel oil and specialty emulsions for usage in the quarry and the construction industries, for metals mining, and to a lesser extent, for coal. Demand for our products from mining end-markets continues to improve as quarry and construction activity has been elevated due to robust levels of residential, commercial and civil infrastructure buildout along with strong demand for precious metals, including expectations for rising copper production to support the growing domestic production of electric vehicles. 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, 2022 2021 Natural gas volumes (MMBtu in millions) 7.2 6.9 21 Natural gas average cost per MMBtu $ 4.74 $ 3.15 Transportation Costs Costs for transporting nitrogen-based products can be significant relative to their selling price. We continue to evaluate the recent rising costs of freight domestically. As a result of increases in demand for available rail, truck and barge options to transport product, primarily during the spring and fall planting seasons, higher transportation costs have and could continue to impact our margins, if we were unable to fully pass through these costs to our customers. Additionally, continued truck driver shortages could impact our ability to fulfill customer demand. As a result, we continue to evaluate supply chain efficiencies to reduce or counter the impact of higher logistics costs. Key Operational Factors Facility Reliability Consistent, reliable and safe operations at our chemical plants are critical to our financial performance and results of operations. The financial effects of planned downtime at our plants, including Turnarounds (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. Our Cherokee Facility is currently on a three-year ammonia plant Turnaround cycle completing with t he next ammonia plant Turnaround planned in the third quarter of 2024. Our El Dorado and Pryor Facilities are both currently scheduled for their next ammonia plant Turnarounds during the third quarter of 2022. Following those Turnarounds, they will be on a three-year and two-year ammonia plant Turnaround cycle, respectively. 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 2022, we are targeting total ammonia production of approximately 770,000 tons to 790,000 tons despite Turnarounds at our Pryor and El Dorado Facilities, which will lower ammonia production during the third quarter by approximately 55,000 to 65,000 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 2022. 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 2022 Our consolidated net sales for the first quarter of 2022 were $199.0 million compared to $98.1 million for the same period in 2021. Our consolidated operating income for the first quarter of 2022 was $80.0 million compared to an operating loss of $0.5 million for the same period in 2021. 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 2022, average selling prices for our key products increased approximately 85% to more than 200% compared to the first quarter of 2021. As discussed above under “Recent Busin ess Developments,” increased demand, higher corn prices and tighter supplies of nitrogen products contributed to the improved pricing. For the first quarter of 2022, average industrial selling prices for most of our products were also higher compared to the same period of 2021, primarily driven by the $858 per metric ton increase in the Tampa Ammonia benchmark price, as many of our industrial contracts are indexed to the Tampa Ammonia benchmark price. 22 Settlement of Natural Gas Contracts 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 was 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 2021 cold weather event. 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, 2022 and 2021 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, 2022 Compared to Three Months Ended March 31, 2021 The following table contains certain financial information: Three Months Ended March 31, Percentage 2022 2021 Change Change (Dollars In Thousands) Net sales: AN & Nitric Acid $ 71,800 $ 49,837 21,963 44 % Urea ammonium nitrate (UAN) 56,569 17,638 38,931 221 % Ammonia 59,342 21,165 38,177 180 % Other 11,270 9,476 1,794 19 % Total net sales $ 198,981 $ 98,116 $ 100,865 103 % Gross profit: Adjusted gross profit (1) 110,418 24,939 85,479 343 % Depreciation and amortization (2) (17,157 ) (16,739 ) (418 ) 2 % Turnaround expense (2,531 ) (140 ) (2,391 ) Total gross profit 90,730 8,060 82,670 Selling, general and administrative expense 10,935 8,793 2,142 24 % Other income, net (176 ) (263 ) 87 Operating income (loss) 79,971 (470 ) 80,441 Interest expense, net 9,955 12,372 (2,417 ) (20 )% Non-operating other expense, net 135 395 (260 ) Provision for income taxes 11,115 42 11,073 Net income (loss) $ 58,766 $ (13,279 ) $ 72,045 543 % Other information: Gross profit percentage (3) 45.6 % 8.2 % 37.4 % Adjusted gross profit percentage (3) 55.5 % 25.4 % 30.1 % Property, plant and equipment expenditures $ 8,254 $ 6,133 $ 2,121 35 % (1) Represents a non-GAAP measure since the amount excludes unallocated depreciation, amortization and Turnaround expenses. (2) Represents amount classified as cost of sales. (3) As a percentage of the total net sales. 23 The following tables provide key operating metrics for the fertilizer and major industrial and mining products: Three Months Ended March 31, Percentage Product (tons sold) 2022 2021 Change Change AN & Nitric Acid 144,517 186,282 (41,765 ) (22 )% Urea ammonium nitrate (UAN) 100,153 109,243 (9,090 ) (8 )% Ammonia 60,725 65,247 (4,522 ) (7 )% Total 305,395 360,772 (55,377 ) (15 )% Three Months Ended March 31, Percentage Gross Average Selling Prices (price per ton) 2022 2021 Change Change AN & Nitric Acid $ 497 $ 268 $ 229 85 % Urea ammonium nitrate (UAN) $ 565 $ 161 $ 404 251 % Ammonia $ 977 $ 324 $ 653 202 % Three Months Ended March 31, Percentage 2022 2021 Change Change Average Benchmark Prices (price per ton) Tampa Ammonia Benchmark $ 1,206 $ 348 $ 858 247 % UAN Southern Plains $ 595 $ 241 $ 354 147 % Net Sales Net sales of our primary products increased during the first quarter of 2022 compared to the prior year period driven by stronger pricing for all of our products. Partially offsetting the benefit of stronger pricing was lower sales volumes for fertilizer products including UAN, AN and ammonia caused by wet weather delaying the planting season. AN sales were also impacted by a shift in product mix as we optimize our sales of nitric acid. Historically, we have built inventory of HDAN used for fertilizer in the second half of the year, to sell in season, during the first six months of the following year. Due to a shift in product mix to nitric acid volumes beginning in the first quarter of 2021, which are more ratable, we did not have significant inventory build of AN over the latter half of 2021 to sell during the fertilizer season in 2022. Demand for our industrial and mining products has been strong as quarry and construction activity has been elevated due to robust levels of residential, commercial and civil infrastructure buildout along with strong demand for precious metals, including expectations for rising copper production to support the growing domestic production of electric vehicles. 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 $90.7 million for the first quarter of 2022 compared $8.1 million for the same period in 2022, or an $82.6 million improvement. Overall, our gross profit percentage was 45.6% compared to 8.2% for the same period in 2021. Our adjusted gross profit percentage increased to 55.5% for the first quarter of 2022 from 25.4% for the first quarter of 2021. The increase in gross profit was primarily driven by higher sales prices for our products partially offset by lower volumes of our agricultural products. Also, during the first quarter of 2021 gross profit was negatively impact by the February 2021 weather disruption, winter storm Uri. The improvement in gross profit was also partially offset by overall higher average natural gas costs, which averaged $4.74 per MMBtu for 2022 as compared to $3.15 per MMBtu for 2021. Selling, General and Administrative Our SG&A expenses were $10.9 million for the first quarter of 2022, an increase of $2.1 million compared to the same period in 2021. The net increase was primarily driven by approximately $2.2 million of expense relating to nonrecurring transaction fees partially offset by lower long-term and short-term incentive compensation incentives. 24 Interest Expense Interest expense for the first quarter of 2022 was $10.0 million compared to $12.4 million for the same period of 2021. The decrease relates primarily to lower interest expense incurred from the new senior secured notes held during the first quarter of 2022 which carry an interest rate of 6.25% compared to the same period in 2021 which the old senior secured notes interest rate was 9.625%. Provision for Income Taxes The provision for income taxes for the first quarter of 2022 was $11.1 million and was minimal for the same period in 2021. The resulting effective tax rate for the first quarter of 2022 was 15.9%. For the first quarters of 2022 and 2021, 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: 2022 2021 Change (In Thousands) Net cash flows from operating activities $ 85,492 $ 12,711 $ 72,781 Net cash flows from investing activities $ (97,514 ) $ (5,935 ) $ (91,579 ) Net cash flows from financing activities $ 184,177 $ (8,808 ) $ 192,985 Net Cash Flow from Operating Activities Net cash provided by operating activities was $85.5 million for first quarter of 2022 compared to $12.7 million for the same period of 2021, a change of $72.8 million. For the first quarter of 2022, the net cash provided is the result of a net income of $58.8 million plus adjustments of $17.2 million for depreciation and amortization of PP&E, $10.8 million for deferred taxes and other adjustments of $1.7 million and net cash used of $3.0 million primarily from our working capital. 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. Net Cash Flow from Investing Activities Net cash used by investing activities was $97.5 million for the first quarter 2022 compared to $5.9 million for the same period of 2021, a change of $91.6 million. For the first quarters of 2022, the net cash used primarily relates purchases of short-term investments of $89.3 million and expenditures for PP&E. For the first quarter of 2021, the net cash used relates primarily to expenditures for PP&E. Net Cash Flow from Financing Activities Net cash provided by financing activities was $184.2 million for the first quarter of 2022 compared to net cash used of $8.8 million for the same period of 2021, a change of $193.0 million. For the first quarter of 2022, the net cash provided primarily consists of proceeds of $200 million from the New Notes partially offset by payments on other long-term debt and short-term financing of $9.7 million, payments of $4.1 million for equity and debt-related cost and $2.0 million for other financing activities. For the first quarter of 2021, the net cash used primarily consists of payments on other long-term debt and short-term financing. 25 C apitalization The following is our total current cash, long-term debt and stockholders’ equity: March 31, December 31, 2022 2021 (In Millions) Cash and cash equivalents $ 254.3 $ 82.1 Long-term debt: Working Capital Revolver Loan $ — $ — Senior Secured Notes due 2028 (1) 700.0 500.0 Secured Financing due 2023 6.9 7.7 Secured Financing due 2025 23.2 24.0 Secured Loan Agreement due 2025 — 5.3 Other 0.3 0.3 Unamortized discount and debt issuance costs (13.9 ) (9.7 ) Total long-term debt, including current portion, net $ 716.5 $ 527.6 Total stockholders' equity $ 518.2 $ 460.5 (1) See discussion contained in Note 4. We currently have a revolving credit facility, our Working Capital Revolver Loan, with a borrowing base of $65 million. As of March 31, 2022, our Working Capital Revolver Loan was undrawn and had approximately $62.4 million of availability. For the full year of 2022, we expect capital expenditures to be approximately $65 million, which includes approximately $15 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 5, 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, 2022, no trigger event had occurred. Loan Agreements Senior Secured Notes due 2028 – LSB has $700 million aggregate principal amount of the 6.25% Senior Secured Notes currently outstanding, including the $200 million associated with the New Notes as discussed in footnote (B) of Note 5. Interest is to be paid semiannually on May 15 th and October 15 th , maturing October 15, 2028. As a result of the financing transactions, our interest expense has increased and is expected to increase compared to 2021. The proceeds from the issuance of the New Notes were used to pay related transaction expenses, with the remainder intended to be used to pursue strategic acquisition opportunities, to fund organic growth, and for general corporate purposes. 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 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, 2022, our Working Capital Revolver Loan was undrawn and had approximately $62.4 million of availability , based on our eligible collateral, less outstanding letters of credit as of that date. Also see discussion above under “Compliance with Long-Term Debt Covenants .” Capital Expenditures – First Quarter of 2022 For the first quarter of 2022, capital expenditures relating to PP&E were $8.3 million. The capital expenditures were funded primarily from cash and working capital. See discussion above under “Capitalization” for our expected capital expenditures. 26 Expenses Associated with Environmental Regulatory Compliance We are subject to specific federal and state environmental compliance laws, regulations and guidelines. As a result, our expenses were minimal during the first quarter of 2022 in connection with environmental projects. For the remainder of 2022, we expect to incur expenses ranging from $0.7 million to $0.9 million in connection with additional environmental projects. However, it is possible that the actual costs could be significantly different than our estimates. Seasonality We believe fertilizer products sold to the fertilizer industry are seasonal, while sales into the industrial and mining sectors generally are less susceptible to seasonal fluctuations. The selling seasons for fertilizer products are primarily during the spring and fall planting seasons, which typically extend from March through June and from September through November in the geographical markets where we distribute the majority of our fertilizer products. As a result, we typically increase our inventory of fertilizer products prior to the beginning of each planting season in order to meet the demand for our products. In addition, the amount and timing of sales to the fertilizer 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, 2022, we have agreed to indemnify the sureties for payments , up to $9.7 million, ma de by them in respect of such bonds. These insurance bonds are expected to expire or be renewed later in 2022. New Accounting Pronouncements Refer to Note 1 for recently issued accounting standards. 27 Critical Accounting Policies and Estimates See “Critical Accounting Policies and Estimates,” Item 7 of our 2021 Form 10-K. In addition, the preparation of financial statements requires us to make estimates and assumptions that affect the reported amount of assets, liabilities, revenues and expenses, and disclosures of contingencies and fair values, including, but not limited to, various environmental and legal matters , including matters discussed under footnote A of Note 5. Income Taxes - Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those differences are expected to be recovered or settled. We establish valuation allowances if we believe it is more-likely-than-not that some or all of deferred tax assets will not be realized. Significant judgment is applied in evaluating the need for and the magnitude of appropriate valuation allowances against deferred tax assets. It is also reasonably possible that the estimates and assumptions utilized as of March 31, 2022 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. 28