LSB Industries, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. The unaudited filing covers a manufacturer and seller of ammonia, nitrogen fertilizers, acids, and mining and industrial chemicals, operating facilities in Arkansas, Alabama, Oklahoma, and Texas.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $114.3 million | $184.3 million | $461.1 million | $668.1 million |
| Gross profit (loss) | $(3.4) million | $22.1 million | $74.3 million | $255.8 million |
| Gross margin | (3.0)% | 12.0% | 16.1% | 38.3% |
| Operating income (loss) | $(9.5) million | $13.1 million | $48.5 million | $225.7 million |
| Net income (loss) | $(7.7) million | $2.3 million | $33.3 million | $164.5 million |
| Diluted earnings (loss) per share | $(0.10) | $0.03 | $0.44 | $1.86 |
Cash flow: Nine-month operating cash flow was $120.5 million, down from $259.2 million. Capital expenditures were $41.1 million. Cash and cash equivalents were $46.8 million at September 30; short-term U.S. Treasury investments were $270.7 million, for combined cash and investments of $317.5 million.
Debt and liquidity: Total debt, including current maturities and net of issuance costs, was $582.7 million, versus $712.3 million at year-end 2022. The company had $575 million principal outstanding on 6.25% senior secured notes due 2028 and no revolver borrowings. The revolver had approximately $42.4 million available; its maturity is February 26, 2024, or earlier under specified conditions. Management said available cash, investments, revolver capacity, and operating cash flow should fund anticipated needs for the next 12 months. Approximate debt less cash and short-term investments was $265 million.
Changes and drivers
- Q3 sales fell 38% year over year; nine-month sales fell 31%. Lower selling prices across principal products drove the declines. Q3 average selling prices for AN/nitric acid, UAN, and ammonia declined 27%, 42%, and 68%, respectively.
- Q3 sales volume across those product groups increased 10%, including a 59% increase in ammonia and a 2% increase in UAN. Higher volumes and lower natural gas costs only partly offset price pressure.
- Management attributed weaker fertilizer pricing partly to renewed European production as natural gas costs fell, higher global supply, and softer demand in some markets. It said prices had strengthened in recent months amid international plant outages and low channel inventories.
- Q3 2022 included $19.2 million of turnaround expense and estimated lost production of 53,000 tons at El Dorado and Pryor; Q3 2023 turnaround expense was $1.7 million. Thus, the year-over-year operating deterioration occurred despite a less burdensome turnaround comparison.
- Interest expense declined to $7.2 million in Q3 from $12.2 million. During the second quarter, the company repurchased $125 million principal of notes for $114.3 million and recorded an $8.6 million gain on extinguishment of debt.
Outlook, plans, and risks
- For 2023, management targeted ammonia production of approximately 810,000–830,000 tons and expected full-year capital expenditures of $60–$65 million, primarily for reliability and maintenance.
- Management expected fertilizer demand to strengthen during the fall 2023 and spring 2024 seasons, with prices near or above historical averages. It cited corn prices and lower input costs as potential support; these expectations are subject to weather, supply, demand, and commodity-price risks.
- Strategic projects include evaluating plant debottlenecking and smaller capacity, storage, and product-quality improvements. The company was also developing low-carbon ammonia opportunities. An October 2023 announcement described a partner pre-FEED for a proposed Houston Ship Channel project targeting more than 1.1 million metric tons of annual capacity in a first phase by end-2027; this remains a development initiative, not operating capacity.
- The El Dorado carbon-capture project is subject to a pending EPA Class VI permit. A Pryor green-ammonia project is on hold because of uncertainty about tax credits and project capital costs.
- Principal risks include volatile fertilizer and natural-gas prices, plant reliability and unplanned downtime, transportation costs, seasonal demand, environmental permitting and compliance, and litigation. The company reported $3.4 million of environmental-project expense for the first nine months and expected another $0.8–$1.1 million in 2023.
Unusual items and contingencies
- After an October 18, 2023 appellate ruling in the Global Industrial litigation, the company reversed approximately $9.8 million of payables and accrued liabilities and derecognized approximately $7.4 million of related property and equipment. The adjustments included reversals of approximately $2.4 million of interest expense and $1.8 million of depreciation expense. The underlying cross-claims against Leidos remain unresolved.
- LSB continues to face litigation related to the 2013 West Fertilizer explosion; it reported no reserve and said it could not estimate a possible loss range. Environmental matters include the Pryor injection-well permit renewal, Hallowell-site remediation discussions, and potential EPA enforcement relating to Cherokee; potential penalties or remedial costs were not quantified for the latter matter.
- Fixed-price natural-gas purchase commitments totaled approximately $28.5 million for October–December 2023. The company also had $9.7 million of indemnity exposure to sureties under performance and payment bonds.
Key facts for investors to verify
- Whether nitrogen fertilizer pricing and margins recover as management anticipated, and how much of any recovery reaches realized selling prices.
- Progress toward the 2023 ammonia production target and the timing, cost, and expected returns of planned capital projects.
- Refinancing or repayment plans for the revolver ahead of its February 2024 maturity trigger, and continued access to liquidity if operating cash flow weakens.
- Permitting, funding, partner commitments, offtake agreements, and economics for the low-carbon ammonia and carbon-capture projects.
- Further developments and potential financial effects of the Global/Leidos, West Fertilizer, and environmental matters.