What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-07-28 compared with 2022-05-04 · 194 added, 114 removed, 219 unchanged (58% of the section changed)

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.

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, 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.

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Key Operating Initiatives for 2022

We expect our future results of operations and financial condition to benefit from following key initiatives:

We expect our future results of operations and financial condition to benefit from the 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.

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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 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.

These initiatives are focused on operational excellence through enhancements in leadership at certain of our facilities, bolstering our operating procedures, leveraging the technology investments we have 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.

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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.

Additionally, we are evaluating several capital improvement projects for 2022 focused on margin enhancement opportunities related to our storage and distribution capabilities.

Development and Implementation of a Strategy to Capitalize on Low Carbon Ammonia and Clean Energy Opportunities.

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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.

mining, power generation and marine customers seeking to reduce their carbon footprint and potentially capitalize on government incentives.

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, 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.

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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.

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.

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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.

Following our September 2021 preferred stock exchange transaction, in October 2021 we received credit upgrades by Moody’s and S&P and proceeded to complete a senior secured notes offering of $500 million of 6.25% which we used to refinance or existing higher cost debt and add liquidity to our balance sheet.

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.

Signed Agreements for Low and No Carbon Ammonia Projects

In April 2022 we entered into an agreement with Lapis Energy to develop a project to capture and permanently sequester CO 2 at our El Dorado, Arkansas facility.

Lapis, backed by Cresta Fund Management, a Dallas-based middle-market infrastructure investment firm, will make 100% of the capital investment required for the project development.

The project is expected to be completed by 2025, subject to the approval of a Class VI permit, at which time CO 2 injections are expected to begin.

Once operational, the project at the El Dorado site will initially capture and permanently sequester more than 450,000 metric tons of CO 2 per year in underground saline aquifers, with the potential to increase this quantity based on potential debottlenecking projects at the facility.

The permanently sequestered CO 2 generated from the facility’s ammonia production is expected to qualify for federal tax credits under Internal Revenue Code Section 45Q, which are currently $50 per metric ton of CO 2 captured beginning in 2026, but under evaluation by Congress to increase the 45Q tax credit to $85 per metric ton of CO 2 .

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

In addition, sequestering more than 450,000 metric tons of CO 2 annually is expected to enable LSB to produce over 375,000 metric tons of blue ammonia annually, a product that could potentially be sold at higher price levels than conventional ammonia.

In May 2022 we entered into agreements with Thyssenkrupp Uhde USA, LLC and Bloom Energy, (NYSE:BE) to develop a project to produce approximately 30,000 metric tons of zero-carbon or “green” ammonia per year at our Pryor, Oklahoma facility.

Thyssenkrupp Uhde will develop the engineering design to convert a small portion of Pryor’s existing conventional or “grey” ammonia capacity into green ammonia.

Pending results of the feasibility study currently underway and subsequent board approval, the project is planned to be constructed in two phases:

first with Bloom supplying a 10-megawatt solid oxide electrolyzer, followed by the installation of an additional 20-megawatt alkaline electrolyzer unit, which we plan to source from a leading manufacturer.

Bloom will own, operate and maintain the solid oxide electrolyzer.

The green hydrogen produced from the electrolyzers as part of the ammonia production process could qualify for federal incentive programs such as the production and investment tax credits under evaluation by Congress.

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.

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.

Selling prices for all of our major products were higher for the second quarter of 2022 as compared to the same quarter of 2021 driven by a combination of supply and demand factors.

Elevated corn prices over the past year have been driven, in part, by strong production levels of ethanol, a gasoline additive that consumes a significant portion of total U.S.

annual corn production.

Department of Agriculture forecasts point to U.S.

corn 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 a very healthy level to support strong demand for fertilizers.

Also supporting the strength in fertilizer prices has been the high cost of natural gas in Europe.

Natural gas is the primary feedstock for production of ammonia.

Natural gas prices in European markets have risen to levels that have negatively impacted the economics of ammonia production in that region, prompting producers to cease operations at some Europe-based facilities.

The resultant decrease in global production of ammonia has supported the strength in nitrogen-based fertilizer prices and benefitted U.S.

producers which have materially lower production costs given the significantly lower price of natural gas in the U.S.

Further contributing to increased fertilizer prices as compared to year-ago levels 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 has and is expected to continue to disrupt the nation’s corn production and exports in 2022 and 2023 .

This should translate into constrained global supply for corn and provide support for elevated corn prices in markets throughout the world .

As a result, corn farmers will likely be motivated to maximize yields by applying fertilizers, thus supporting nitrogen prices.

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.

Current economic sanctions against Russia by numerous countries around the world have further reduced the supply of ammonia flowing into the global fertilizer market, contributing to historically high prices.

Finally, the war in Ukraine has resulted in continued high prices for natural gas in Europe, which imports a large amount 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 during the first half of 2022, Russia’s aggression toward Ukraine is likely to have impacts on the global ammonia market far beyond when the conflict ends.

The factors discussed above collectively drove fertilizer prices higher over the course of 2021 and into the early part of the second quarter of 2022.

Since that time, while still materially above prior year levels, pricing has declined from peak levels as a result of wet weather throughout the Midwest during the spring planting season, which caused farmers to forego purchases of ammonia and UAN.

While this was a headwind to our fertilizer sales volumes in the second quarter, we believe that the limited fertilizer application during the spring may translate into a heavier than typical application of agricultural ammonia in the fall as farmers seek to replenish the nitrogen in their soil ahead of the 2023 planting season.

With respect to our industrial products, selling prices remain materially higher than a year ago largely as a result of the aforementioned factors pertaining to natural gas.

The Tampa Ammonia benchmark price declined over the past several months from the all-time high levels attained earlier in 2022 due to lower demand from Asian industrial suppliers coupled with the impact of increased supply following the commissioning of a new plant in Saudi Arabia and the restart of a plant in Louisiana that had been offline for repair.

However, the Tampa price remains well above its average price level of the past ten years.

This is favorable for our selling prices as many of our industrial contracts are indexed to this benchmark price.

Demand trends for our nitric acid, our largest industrial product category, have remained strong and we benefitted from the long-term nitric acid supply contract we commenced in 2021.

Although we are yet to experience a significant drop in demand for our industrial and mining products overall because of a slowing economy, we believe we have a meaningful degree of downside protection from the impacts of a potential economic recession given the nature of our contracts for these products.

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

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Additionally, changes in corn prices, as well as soybean, cotton and wheat prices, can affect the number of acres of corn planted in a given year and the number of acres planted will drive the level of nitrogen fertilizer consumption, likely affecting prices.

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:

According to the June 2022 USDA annual Acreage Report, farmers intend to plant 89.9 million acres of corn in 2022 down 4 percent compared to the 2021 planting season.

As it relates to the 2023 Crop as noted in the table below, the USDA estimates the U.S.

ending stocks will be approximately 37.3 million metric tons, a 3% decrease from the current estimate for the 2022 Crop.

The USDA also is estimating another record yield for the 2023 Crop matching the 2022 Crop of 177 bushels per acre.

The following July 2022 estimates are associated with the corn market:

(2022 Harvest)

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(2020 Harvest)

April Report (1)

July Report (1)

Area Planted (Million acres)

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World Ending Stocks (Million metric tons)

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.

Information obtained from WASDE reports dated July 12, 2022 (“July Report”) for the 2022/2023 (“2023 Crop”), 2021/2022 (“2022 Crop”) and 2020/2021 (“2021 Crop”) corn marketing years.

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

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The current USDA corn outlook for the U.S.

did not change production, food, seed and industrial use and unchanged ending stocks.

is for larger supplies and higher ending stocks in the report.

Corn beginning stocks are raised 25 million bushels, based on reduced feed and residual use for the 2022 Crop as indicated in the June 30, 2022 Grain Stocks report.

The USDA did not change production, food, seed and industrial use.

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.

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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.

These forward purchase contracts are generally either fixed-price or index-price 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.

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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 Cherokee Facility is currently on a three-year ammonia plant Turnaround cycle completing with the 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.

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Fixing the selling prices of our products months in advance of their ultimate delivery to customers typically causes our reported selling prices and margins to differ from spot market prices and margins available at the time of shipment.

Consolidated Results of the 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.

Consolidated Results of the Second Quarter of 2022

Our consolidated net sales for the second quarter of 2022 were $284.8 million compared to $140.7 million for the same period in 2021.

Our consolidated operating income for the second quarter of 2022 was $132.7 million co mpared to $26.5 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

Items Affecting Comparability of Results of the Second 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.

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.

For the second quarter of 2022, average selling prices for our key products increased approximately 96% to 160% compared to the second quarter of 2021.

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 2022, average industrial selling prices for most of our products were also higher compared to the same period of 2021, primarily driven by the $712 per metric ton increase in the Tampa Ammonia benchmark price, as many of our industrial contracts are indexed to the Tampa Ammonia benchmark price.

Settlement of Life Insurance (2022 only)

In June we recognized a settlement on our company owned life insurance resulting from the approval by our insurer of a death benefit relating to the death of J.

Golsen as discussed in Note 9.

Gain on Extinguishment of Debt – PPP Loan Forgiven (2021 only)

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.

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.

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.

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, 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.

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Net sales are reported on a gross basis with the cost of freight being recorded in cost of sales.

Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021

Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021

The following table contains certain financial information:

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Selling, general and administrative expense

Other income, net

Operating income (loss)

Other expense, net

Operating income

Interest expense, net

Non-operating other expense, net

Provision for income taxes

Net income (loss)

Loss (gain) on extinguishment of debt

Non-operating other expense (income), net

Provision (benefit) for income taxes

Other information:

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UAN Southern Plains

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.

Net sales of our primary products increased during the second 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.

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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.

Due to a shift in product mix to nitric acid volumes beginning in the second 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 remain robust 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.

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.

As noted in the table above, we recognized a gross profit of $142.9 million for the second quarter of 2022 compared to $35.0 million for the same period in 2021, or an $107.9 million improvement.

Overall, our gross profit percentage was 50.2% compared to 24.9% 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.

Our adjusted gross profit percentage increased to 57.2% for the second quarter of 2022 from 37.4% for the second 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 $7.15 per MMBtu for 2022 as compared to $2.78 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.

Our SG&A expenses were $9.6 million for the second quarter of 2022, an increase of $1.1 million compared to the same period in 2021.

The net increase was primarily driven by miscellaneous corporate related expense and professional fees.

Gain on Extinguishment of Debt – PPP Loan Forgiven

In June 2021, our 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 income for the second quarter of 2022 was $3.4 million primarily relating to a recognized settlement on our company owned life insurance resulting from the approval by our insurer of a death benefit relating to the death of J.

Golsen as discussed in Note 9 and interest income from to our short term investments.

For the same period in 2021, we had non-operating operating expense of $0.7 million which primarily related to the change in fair value of the embedded derivative included in the Series E Redeemable Preferred prior to its extinguishment through the completion of the Exchange Transaction during September 2021.

Provision (benefit) for Income Taxes

The provision for income taxes for the second quarter of 2022 was $20.4 million and the benefit for income taxes for the second quarter of 2021 was $0.2 million.

The resulting effective tax rate for the second quarter of 2022 was 16.5%.

For the second quarter of 2022, the effective tax rate is less than the statutory rate primarily due to the impact of valuation allowances.

For the second quarter of 2021, 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.

Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021

The following table contains certain financial information:

Six Months Ended

(Dollars In Thousands)

AN & Nitric Acid

Urea ammonium nitrate (UAN)

Total net sales

Gross profit:

Adjusted gross profit (1)

Depreciation and amortization (2)

Turnaround expense

Total gross profit

Selling, general and administrative expense

Other expense (income), net

Operating income

Interest expense, net

Loss (gain) on extinguishment of debt

Non-operating other expense (income), net

Provision (benefit) for income taxes

Other information:

Gross profit percentage (3)

Adjusted gross profit percentage (3)

Property, plant and equipment expenditures

Represents a non-GAAP measure since the amount excludes unallocated depreciation, amortization and Turnaround expenses.

Represents amount classified as cost of sales.

As a percentage of the total net sales.

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

Six Months Ended

Product (tons sold)

AN & Nitric Acid

Urea ammonium nitrate (UAN)

Six Months Ended

Gross Average Selling Prices (price per ton)

AN & Nitric Acid

Urea ammonium nitrate (UAN)

Six Months Ended

Average Benchmark Prices (price per ton)

Tampa Ammonia Benchmark

UAN Southern Plains

Agricultural product sales increased driven primarily by higher sales prices for all of our agricultural products partially offset by lower sales volumes of HDAN and ammonia resulting from the impact of wet weather which delayed the application of fertilizer products.

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.

As discussed above under “Recent Business Developments,” increased demand, higher corn prices and tighter supplies of nitrogen products contributed to the improved pricing.

Demand for our industrial and mining products remains strong even considering the recent decline in Ammonia benchmark price 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.

As noted in the table above, we recognized a gross profit of $233.7 million for the first six months of 2022 compared to $43.1 million for the same period in 2021, or an $190.6 million improvement.

Overall, our gross profit percentage was 48.3% compared to 18.0% for the same period in 2021.

Our adjusted gross profit percentage increased to 56.5% for the first six months of 2022 from 32.5% for the first six months of 2021.

The increase in gross profit was primarily driven by higher sales prices for our products partially offset by lower volumes for all of our products.

The improvement in gross profit was partially offset by overall higher average natural gas costs, which averaged $5.96 per MMBtu for the first six months of 2022 as compared to $2.96 per MMBtu for the same period of 2021.

Selling, General and Administrative

Our SG&A expenses were $20.6 million for the first six months of 2022, an increase of $3.2 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, $1.4 million in insurance and other miscellaneous fees.

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.

Interest expense for the first half of 2022 was $22.3 million compared to $24.7 million for the same period in 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.

Gain on Extinguishment of Debt – PPP Loan Forgiven

In June 2021, our 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 income for the first half of 2022 was $3.4 million primarily relating to a recognized settlement on our company owned life insurance resulting from the approval by our insurer of a death benefit relating to the death of J.

Golsen as discussed in Note 9 and interest income from to our short term investments.

For the same period in 2021, we had non-operating operating expense of $1.1 million which primarily related to the change in fair value of the embedded derivative included in the Series E Redeemable Preferred prior to its extinguishment through the completion of the Exchange Transaction during September 2021.

Provision (benefit) for Income Taxes

The provision for income taxes for the first six months of 2022 was $31.5 million compared to a benefit of $0.2 million for the same period in 2021.

For the first six months of 2022, the effective tax rate is less than the statutory rate primarily due to the impact of valuation allowances.

For the first six months of 2021, 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 three months ended March 31:

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

(In Thousands)

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Net Cash Flow from Operating Activities

Net cash provided by operating activities was $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 provided by operating activities was $220.8 million for first half of 2022 compared to $30.6 million for the same period of 2021, a change of $190.2 million.

For the first half 2022, the net cash provided is the result of a net income of $162.2 million plus adjustments of $33.9 million for depreciation and amortization of PP&E, $30.6 million for deferred taxes and other adjustments of $2.0 million net of cash used of $7.9 million primarily from our working capital.

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.

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 used by investing activities was $341.9 million for the first half 2022 compared to $14.5 million for the same period of 2021, a change of $327.4 million.

For the first half of 2022, the net cash used primarily relates purchases of short-term investments of $325.6 million and expenditures for PP&E.

For the first half 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.

C apitalization

Net cash provided by financing activities was $164.2 million for the first half of 2022 compared to net cash used of $14.7 million for the same period of 2021, a change of $178.9 million.

For the first half of 202 2 , 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 $ 15.9 million, payments for the acquisition of treasury shares of $ 15.3 million, payments of $ 4.

5 million for equity and debt - related cost and $ 0.1 million for other financing activities .

For the first half of 2021, the net cash used primarily consists of payments on other long-term debt and short-term financing.

Capitalization

The following is our total current cash, long-term debt and stockholders’ equity:

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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.

As of June 30, 2022, our Working Capital Revolver Loan was undrawn and had approximately $63.4 million of availability.

For the full year of 2022, we expect capital expenditures to be approximately $65 million.

This capital spending is planned for reliability and maintenance capital projects.

From time to time, when the Company exceeds the funding threshold in our natural gas purchase commitments the Company is required to fund cash collateral to our counterparty.

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.

As discussed in Note 4, the Working Capital Revolver Loan requires, among other things, that we meet certain financial covenants.

The Working Capital Revolver Loan does not include financial covenant requirements unless a defined covenant trigger event has occurred and is continuing.

As of March 31, 2022, no trigger event had occurred.

As of June 30, 2022, no trigger event had occurred.

Loan Agreements

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

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.

Working Capital Revolver Loan – At June 30, 2022, our Working Capital Revolver Loan was undrawn and had approximately $63.4 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.

Capital Expenditures – First Six Months of 202 2

For the first half of 2022, capital expenditures relating to PP&E were $16.4 million.

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

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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.

As a result, our expenses were $1.7 million during the first six months of 2022 in connection with environmental projects.

For the remainder of 2022, we expect to incur expenses ranging from $1.7 million to $2.2 million in connection with additional environmental projects.

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

As of 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.

As of June 30, 2022, 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 2022.

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Significant judgment is applied in evaluating the need for and the magnitude of appropriate valuation allowances against deferred tax assets.

It is also reasonably possible that the estimates and assumptions utilized as of March 31, 2022 could change in the near term.

It is also reasonably possible that the estimates and assumptions utilized as of June 30, 2022 could change in the near term.

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

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis