LSB INDUSTRIES, INC. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with a review of the other Items included in this Form 10-Q and our June 30, 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 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. ▪ 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. 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 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. • 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. 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. 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, 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 19 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 Reduced Cost of Capital through Debt Refinancing 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 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. Recent U.S. 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. 20 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, 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.” 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. 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. 21 The following July 2022 estimates are associated with the corn market: 2023 Crop 2022 Crop 2021 Crop (2022 Harvest) (2021 Harvest) Percentage (2020 Harvest) Percentage July Report (1) July Report (1) Change (2) July Report (1) Change (3) U.S. Area Planted (Million acres) 89.9 93.4 (3.7 %) 90.7 (0.9 %) U.S. Yield per Acre (Bushels) 177.0 177.0 — % 171.4 3.3 % U.S. Production (Million bushels) 14,505 15,115 (4.0 %) 14,111 2.8 % U.S. Ending Stocks (Million metric tons) 37.3 38.4 (2.9 %) 31.4 18.8 % World Ending Stocks (Million metric tons) 312.9 312.3 0.2 % 293.3 6.7 % 1. 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. 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 2023 Crop amounts compared to the 2022 Crop amounts. 3. Represents the percentage change between the 2023 Crop amounts compared to the 2021 Crop amounts. The current USDA corn outlook for the U.S. 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. 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 and for a fixed supply quantity. We are able to purchase natural gas at competitive prices due to our connections to large distribution systems and their proximity to interstate pipeline systems. The following table shows the volume of natural gas we purchased and the average cost per MMBtu: Three Months Ended June 30, 2022 2021 Natural gas volumes (MMBtu in millions) 7.4 7.5 Natural gas average cost per MMBtu $ 7.15 $ 2.78 22 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 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. 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 750,000 tons to 780,000 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 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 Second Quarter Selling Prices 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. 23 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 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. 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 June 30, 2022 Compared to Three Months Ended June 30, 2021 The following table contains certain financial information: Three Months Ended June 30, Percentage 2022 2021 Change Change (Dollars In Thousands) Net sales: AN & Nitric Acid $ 96,142 $ 56,739 39,403 69 % Urea ammonium nitrate (UAN) 76,986 29,899 47,087 157 % Ammonia 89,444 38,541 50,903 132 % Other 22,231 15,517 6,714 43 % Total net sales $ 284,803 $ 140,696 $ 144,107 102 % Gross profit: Adjusted gross profit (1) 162,865 52,656 110,209 209 % Depreciation and amortization (2) (16,646 ) (16,941 ) 295 (2 )% Turnaround expense (3,295 ) (707 ) (2,588 ) Total gross profit 142,924 35,008 107,916 Selling, general and administrative expense 9,638 8,545 1,093 13 % Other expense, net 628 6 622 Operating income 132,658 26,457 106,201 Interest expense, net 12,307 12,290 17 Loss (gain) on extinguishment of debt — (10,000 ) 10,000 Non-operating other expense (income), net (3,430 ) 745 (4,175 ) Provision (benefit) for income taxes 20,382 (248 ) 20,630 Net income $ 103,399 $ 23,670 $ 79,729 (337 )% Other information: Gross profit percentage (3) 50.2 % 24.9 % 25.3 % Adjusted gross profit percentage (3) 57.2 % 37.4 % 19.8 % Property, plant and equipment expenditures $ 8,177 $ 8,716 $ (539 ) (6 )% (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. 24 The following tables provide key operating metrics for the fertilizer and major industrial and mining products: Three Months Ended June 30, Percentage Product (tons sold) 2022 2021 Change Change AN & Nitric Acid 162,014 186,962 (24,948 ) (13 )% Urea ammonium nitrate (UAN) 130,561 121,995 8,566 7 % Ammonia 75,526 84,540 (9,014 ) (11 )% Total 368,101 393,497 (25,396 ) (6 )% Three Months Ended June 30, Percentage Gross Average Selling Prices (price per ton) 2022 2021 Change Change AN & Nitric Acid $ 593 $ 303 $ 290 96 % Urea ammonium nitrate (UAN) $ 590 $ 245 $ 345 141 % Ammonia $ 1,184 $ 456 $ 728 160 % Three Months Ended June 30, Percentage 2022 2021 Change Change Average Benchmark Prices (price per ton) Tampa Ammonia Benchmark $ 1,257 $ 545 $ 712 131 % UAN Southern Plains $ 612 $ 342 $ 270 79 % Net Sales 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. 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 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. Gross Profit 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 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. 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 $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. 25 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 June 30, Percentage 2022 2021 Change Change (Dollars In Thousands) Net sales: AN & Nitric Acid $ 167,942 $ 106,576 $ 61,366 58 % Urea ammonium nitrate (UAN) 133,555 47,537 86,018 181 % Ammonia 148,786 59,706 89,080 149 % Other 33,501 24,993 8,508 34 % Total net sales $ 483,784 $ 238,812 $ 244,972 103 % Gross profit: Adjusted gross profit (1) $ 273,282 $ 77,596 $ 195,686 252 % Depreciation and amortization (2) (33,802 ) (33,681 ) (121 ) 0 % Turnaround expense (5,826 ) (847 ) (4,979 ) Total gross profit 233,654 43,068 190,586 443 % Selling, general and administrative expense 20,573 17,338 3,235 19 % Other expense (income), net 452 (257 ) 709 Operating income 212,629 25,987 186,642 718 % Interest expense, net 22,262 24,662 (2,400 ) (10 )% Loss (gain) on extinguishment of debt 113 (10,000 ) 10,113 Non-operating other expense (income), net (3,408 ) 1,140 (4,548 ) Provision (benefit) for income taxes 31,497 (206 ) 31,703 Net income $ 162,165 $ 10,391 $ 151,774 (1461 )% Other information: Gross profit percentage (3) 48.3 % 18.0 % 30.3 % Adjusted gross profit percentage (3) 56.5 % 32.5 % 24.0 % Property, plant and equipment expenditures $ 16,431 $ 14,849 $ 1,582 11 % (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. 26 The following tables provide key operating metrics for the fertilizer and major industrial and mining products: Six Months Ended June 30, Percentage Product (tons sold) 2022 2021 Change Change AN & Nitric Acid 306,531 373,244 (66,713 ) (18 )% Urea ammonium nitrate (UAN) 230,714 231,239 (525 ) 0 % Ammonia 136,251 149,787 (13,536 ) (9 )% Total 673,496 754,270 (80,774 ) (11 )% Six Months Ended June 30, Percentage Gross Average Selling Prices (price per ton) 2022 2021 Change Change AN & Nitric Acid $ 548 $ 286 $ 262 92 % Urea ammonium nitrate (UAN) $ 579 $ 206 $ 373 181 % Ammonia $ 1,092 $ 399 $ 693 174 % Six Months Ended June 30, Percentage 2022 2021 Change Change Average Benchmark Prices (price per ton) Tampa Ammonia Benchmark $ 1,231 $ 447 $ 784 175 % UAN Southern Plains $ 603 $ 293 $ 310 106 % Net Sales 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. 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. 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. Gross Profit 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. 27 Interest Expense 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%. 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 six months ended June 30: 2022 2021 Change (In Thousands) Net cash flows from operating activities $ 220,813 $ 30,581 $ 190,232 Net cash flows from investing activities $ (341,934 ) $ (14,549 ) $ (327,385 ) Net cash flows from financing activities $ 164,208 $ (14,671 ) $ 178,879 Net Cash Flow from Operating Activities 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 $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 $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. 28 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: June 30, December 31, 2022 2021 (In Millions) Cash and cash equivalents $ 125.2 $ 82.1 Long-term debt: Working Capital Revolver Loan $ — $ — Senior Secured Notes due 2028 (1) 700.0 500.0 Secured Financing due 2023 6.1 7.7 Secured Financing due 2025 22.1 24.0 Secured Loan Agreement due 2025 — 5.3 Other 0.6 0.3 Unamortized discount and debt issuance costs (13.4 ) (9.7 ) Total long-term debt, including current portion, net $ 715.4 $ 527.6 Total stockholders' equity $ 609.6 $ 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 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 in Note 4, the Working Capital Revolver Loan requires, among other things, that we meet certain financial covenants. The Working Capital Revolver Loan does not include financial covenant requirements unless a defined covenant trigger event has occurred and is continuing. As of June 30, 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 4. 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 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 .” 29 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. See discussion above under “Capitalization” for our expected capital expenditures. Expenses Associated with Environmental Regulatory Compliance We are subject to specific federal and state environmental compliance laws, regulations and guidelines. As a result, 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. 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 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. New Accounting Pronouncements Refer to Note 1 for recently issued accounting standards. Critical Accounting Policies and Estimates See “Critical Accounting Policies and Estimates,” Item 7 of our 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 June 30, 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. 30